Short Answers

Question 1

The SSNIP test?

Answer 1

INCLUDE DIAGRAM

• small but significant no transitory increase in prices
  
  • Used to define a market in an area using a hypothetical monopolist test by
  • Used by competition agencies to help with their assessment of the market power of firms within a market
• You would initially identify all products that are close substitutes
  
  • Select a few and suppose a hypothetical monopolist holds these stores, could it sustain a SSNIP of 5-10%
    
    • If yes then stores are owned by a hypothetical monopoly
    • if no then there must be competitive pressure so the market definition is wider
      
      • include next closest substitute and repeat until SSNIP could be sustained
    • Relevant market = smallest product group such that SSNIP profitable for a hypothetical monopolist
      *

Question 2

The Herfindahl-Hirschman Index?

Answer 2

• HHI is an indirect measure of market power and is calculated by finding the squared sum of the market share in the company
  
  • it is preferred over the concentration ratio as it gives an indication of the spread of the market across different firms
  • Pure monopoly = 1 in EU and 10000 in US
  • Whereas Symmetric Oligopoly HHI = n(1/n)^2 = 1/n or 10000/n
• It is also used as a screen for unilateral effects by the US Department of Justice
  
  • Give example that ends in Delta(HHI) = 2s2s3
• A merger is unlikely to have adverse competitive effects
  
  • Moderately concentrated
    
    • Post HHI -1500-2500
    • D(HHI) > 100 –> potential competitive concern
  • Highly concentrated - post HHI above 2500
    
    • D(HHI) 100-200: potential competitive concerns
    • D(HHI) >200 points presume market power enhanced

Question 3

Coordinated Effects?

Answer 3

• prohibited under article 101: prohibit cartels (explicit collusion)
  
  • Merger controls: prevents coordinated effects (increased likelihood of tacit collusion)
• A result of a potentially anticompetitive merger then leads to a substantial lessening of effective competition
• Why is coordinated effects bad
  
  • a merger may increase the likelihood of tacit collusion
• tacit collusion is when other firms (usually price takers or smaller firms) usually follow the prices set by a larger more dominant firm
  
  • normally
• Why would an agency want to stop this
  
  • Example of it being used in the prohibition of the ASDA-Sainsbury merger
    
    • Background case
      
      • In which they created a framework for the likelihood of increased collusion
    • They found increased likelihood of coordinated effected due to a merger in the online groceries market

Question 4

Gross Upward Pricing Pressure Index?

Answer 4

• it is used to measure the size of the unilateral effect that may be a cause for concern in a merger
• GUPPI is an indicator that assess the incentive for firms to raise prices as a result of a merger
  
  • an estimates the increase in i’s price-cost ratio i.e. Lerner index due to the merger
• How it is calculated
  
  • Used by deriving the difference between the Lerner index of a firm and the combined firms after the merger
• What each of the points means
  
  • The advantage of GUPPI is that market definition is not important
  • A disadvantage is that it does not take account of efficiencies that may be created

The competition and Market Authority used in 2018-2019 to help assess whether the ASDA-Sainsburys merger would be welfare-enhancing or create potential inefficiency or be anticompetitive

• Relative price -used a basket of goods
• Price cost-ratio - used firm-level own-price elasticity of demand pre-merger
• Diversion ratio - used customer survey –> national 100 supermarket survey if prices raised by 5-10% what would you do
  
  • Problem was that GUPPI was used as a threshold indicator in this case to

Question 5

Vertical Restraints?

Answer 5

• in a Supply chain their is usually have contracts to ensure the continuous supply of inputs to firms further down the chain
• These contracts will have clauses (vertical constraints) to affect the behaviour of those further down it
• this is because a firm decision at the start of the chain can have a causal effect on the profits of those further down it
  
  • These clauses can have both pro and anti-competitive effects
• Examples include
  
  • Linear tariffs
  • Non-linear
  • Resale Price Maintenance
    
    • illegal, good for consumers but minimises prices but bad for the seller
      
      • good in the US
  • Exclusive territory
    
    • eliminate intrabrand competition but can be anticompetitive
      
      • unless firms invest more in quality service
  • Exclusive dealing
    
    • Interbrand competition eliminated
  • Selective distribution
  • Integration
• Article 101: Prohibits agreements between firms, unless welfare-enhancing
  
  • typically not per-se illegal and a safe harbour if suppliers market share <30%
  • RPM is blacklisted (with few exceptions e.g. the book industry)
• Example where they are used
  
  • 1979-2000 Impulse ice cream market
    
    • Monopolies and mergers commission investigation
      
      • the market for wrapped and impulse icecream
      • retailers were independent shops
      • need to preserve the cold chain from manufacturers to sales
        
        • Outlet exclusivity –> anticompetitive
        • Freeze exclusivity –> good and bad
      • Remedy