MarketDefinitionPresentationtotheCompetitionCommissionofIndiaUSChamberofCommerceOctober26,2010MarketDefinitionPresentation0OverviewMarketpowerMarketdefinitionRelevantproductmarketRelevantgeographicmarketCasestudiesOverviewMarketpower1MarketPower“Mergersshouldnotbepermittedtocreate,enhance,orentrenchmarketpowerortofacilitateitsexercise.”(Source:HorizontalMergerGuidelines)MarketPoweristheabilityofafirmoragroupoffirmsinamarkettoprofitablyraiseprices,reducequality,orslowdowninnovationforasignificantperiodoftimecomparedtotheseoutcomesinacompetitivemarketMarketpowerandmonopolypowerareoftenusedinterchangeablyMarketPower“Mergersshouldno2AnalysisofMarketPowerMarketstructureapproach/IndirectapproachMarketdefinitionMarketsharesMarketconcentrationBarrierstoentryandexpansionPerceptionofmarketparticipantsCompetitiveeffectsanalysis/DirectapproachPredictpost-mergerpriceeffectsElasticityofdemandAnalysisofMarketPowerMarke3MarketDefinitionIndeterminingwhetheratransactionwillcreateorenhancemarketpower,theagenciesandthecourtslookattherelevantmarketswithinwhichthecompetitiveeffectsaretobeassessedMarketDefinitionIndeterminin4RelevantMarkets:

TwoComponentsGeography NewYorkMiamiChicagoLosAngelesProductRelevantMarkets:

TwoCompone5ImportanceofMarketDefinitionSpecifiestheproductandgeographicscopeinwhichthecompetitiveconcernmayariseMaybedifferentfromhowindustrymembersusestheterm“market”Identifiesmarketparticipants,shares,andconcentrationAllowsonetoidentifythecompetitivealternativesavailabletocustomersImportanceofMarketDefinitio6MarketDefinitionJustbecausetwoproductsareusedforsimilarpurposedoesnotimplythattheyareinthesame“antitrust”marketOreven…MarketDefinitionJustbecause7RelevantProductMarketIdentifiesaproductorasetofproductssuchthatfirmsproducingthoseproductscandefeateachothers’attemptstoraisethepriceabovethecompetitivelevel

DemandsubstitutionCustomers’abilityandwillingnesstosubstituteawayfromoneproducttoanotherinresponsetoanincreaseinpriceorareductioninqualityRelevantProductMarketIdentif8DemandSubstitution:

SSNIPTestHypotheticalMonopolist/SSNIPTest:“Ahypotheticalprofit-maximizingfirm,notsubjecttopriceregulation,thatwastheonlypresentandfuturesellerofthoseproductslikelywouldimposeatleastasmallbutsignificantnon-transitoryincreaseinpriceonatleastoneproductinthemarket,includingatleastoneproductsoldbyoneofthemergingfirms”DemandSubstitution:

SSNIPTe9DemandSubstitution:

SSNIPTestSSNIPisamethodologicaltoolIdentifiesasetofproductsthatarereasonablyinterchangeablewithaproductsoldbyamergingpartyEnsuresthatmarketsarenotdefinedtoonarrowlyThemostcommonlyusedpriceincreasethresholdis5%DemandSubstitution:

SSNIPTe10DemandSubstitution:ImplementationofSSNIPExtenttowhichcustomerswillsubstituteawayfromtheproductinquestionExaminehowcustomershaveshiftedtheirpurchasepatternsinthepastSurveyonhowthebuyerswouldrespondtoapricechangeInterviewcustomersandcompetitorstoassessviewsonalternativeproductsandcompetitorsIdentifytheexistenceofswitchingcostsIncrementalprofitmarginsontheproductEstimateincrementalcostusingmergingparties’dataand/ordocumentsIncrementalcostismeasuredoverthechangeinoutputthatwouldbecausedbythehypotheticalpriceincreaseDemandSubstitution:Implement11DemandSubstitution:

CriticalLossDoesimposingaSSNIPraiseorlowerthehypotheticalmonopolist’sprofits?HigherprofitsonsalesmadeathigherpricesLowerquantitydemandasconsumerssubstituteaway“CriticalLoss”isthenumberoflostunitsalesthatwouldleaveprofitsunchangedPriceincreaseisprofitableif:“PredictedLoss”<“CriticalLoss”DemandSubstitution:

Critical12SupplySubstitutionSupplysubstitutionSuppliers’abilityandwillingnesstosubstituteawayfromtheirexistingproductionfacilitiestomakecompetingalternativeproductsinresponsetoanincreaseinpriceorreductioninqualityoftheproduct(s)atissueUsefulforidentifyingmarketparticipants,analyzingcompetitiveeffects,andpotentialentrySupplySubstitutionSupplysubs13SupplySubstitution:ImplementationIdentifypotentialsuppliers(“rapidentrants”)thatarelikelytoproviderapidsupplyresponsewithoutincurringsignificantsunkcostsInterviewpotentialsuppliersaboutfeasibilityofsubstitution,costsofswitchingbetweenproducts,andthetimeitwouldtaketoswitchAnalyzewhetherthepotentialsuppliershaveidlecapacityorreadilyavailable“swing”capacityDeterminewhetherthecustomerswouldusethepotentialsuppliers’productsSupplySubstitution:Implement14RelevantGeographicMarketIdentifiesageographicareasuchthatfirmsinthatareacandefeateachothers’attemptstoraisethepriceabovecompetitivelevelBothsupplierandcustomerlocationscanaffectthescopeTheprinciplebehinddefiningageographicmarketissimilartothatusedfordefiningaproductmarket…SSNIPTestThescopeofageographicmarketdependsontransportationcost,language,regulation,tariffbarriers,amongothersThegeographicmarketmaybelocal,regional,national,continent-wide,orevenworld-wideRelevantGeographicMarketIden15MarketDefinition:RecentCasesFTCv.StaplesU.S.v.OracleFTCv.WholeFoodsMarketDefinition:RecentCase16FTCv.Staples:BackgroundStaples—thesecondlargestofficesuperstoreintheU.S.withalmost500storesin28statesandDCOfficeDepot—thelargestofficesuperstorechainintheU.S.withmorethan500storesin38statesandDCOnSeptember4,1996,StaplesandOfficeDepotenteredintoamergeragreementFTCv.Staples:BackgroundStap17FTCv.Staples:FTC’sClaimsTheproposedmergerwillresultincompetitiveharmasaresultofthelossofcompetitionBetweentheonlyofficesupplysuperstores(OSS)inmanymetropolitanareas(mergertomonopoly)Betweentwoofonlythreeofficesupplysuperstoresinmanyotherareas(3-to-2merger)FTCv.Staples:FTC’sClaimsTh18FTCv.Staples:MarketDefinitionFTCdefinedtherelevantproductmarkettobethesaleofconsumableofficesuppliesthroughofficesuperstoresFTCv.Staples:MarketDefinit19FTCv.Staples:MarketDefinitionPartiesarguedtherelevantproductmarketwassimplytheoverallsaleofofficesuppliesthroughallvenuesStaplesandOfficeDepotaccountforonly5.5%ofsalesFTCv.Staples:MarketDefinit20FTCv.Staples:MarketDefinitionTherewasnodisputeaboutthelocalizedgeographicmarketConsumersareunwillingtotravelveryfartopurchaseofficesuppliesFTCv.Staples:MarketDefinit21FTCv.Staples:EvidencefromDocumentsStapleschargesmorethan5%higherwhereithasnoofficesuperstorecompetitionthanwhereitcompeteswiththetwoothersuperstoresPricecheckingandtrackingentryfocuseslargelyonOSSandnotothertypesofstoresStaplescutpriceswhenanOSSentered,butdidnotdosowhenanon-OSSenteredFTCv.Staples:Evidencefrom22FTCv.Staples:EmpiricalEvidencePricesatStaplesstoresare13%higherinone-firmgeographicareasthanthoseinthree-firmareasPricesatOffice-Depotstoresaremorethan5%higherinone-firmareasthaninthree-firmareasFTCv.Staples:EmpiricalEvid23FTCv.Staples:Court’sFindingsFunctionalinterchangeabilitydoesnotmeanthattwoproductsareinthesamerelevantmarketAllcompeteatsomelevelbutnotenoughtoconstrainpriceLowcross-priceelasticityofdemandbetweenofficesuperstoresandotherretailsourcesofofficesuppliesSlightincreaseinpricedoesnotcauseconsumerstoswitchtoWal-Mart,BestBuy,Quill,Viking,etc.TheappropriateproductmarketdefinitionisthesaleofconsumableofficesuppliesthroughofficesupplysuperstoresFTCv.Staples:Court’sFindin24U.S.v.Oracle:BackgroundOracle—anintegratedbusinesssoftwarecompanywithofficesin80countriesandsellsproductsinover120countriesPeopleSoft—anotherbusinesssoftwarecompanywithofficesinEurope,Japan,Asia-Pacific,LatinAmericaandotherpartsoftheworldandsellsproductsinmostmajormarketsOracleinitiateditstenderofferforthesharesofPeopleSoftonJune6,2003U.S.v.Oracle:BackgroundOrac25U.S.v.Oracle:BackgroundEnterpriseresourceplanning(ERP)softwareintegratesmostofanentity’sdataacrossallormostofitsactivitiesERPsoftwarearelicensedtoend-usersalongwithmaintenanceandupgradesTherangeofactivitieshandledbyERPsoftwareHumanresourcemanagement(HRM)Financialmanagementsystem(FMS)Consumerrelationsmanagement(CRM)Supplychainmanagement(SCM)ProductcyclemanagementU.S.v.Oracle:BackgroundEnte26U.S.v.Oracle:DOJ’sClaims“HighfunctionHRMandFMS”soldbyOracle,PeopleSoft,andSAParetheonlyHRMandFMSproductsTheproposedmergerwouldconstrictthishighlyconcentratedoligopolytoaduopolyofSAPAmericaandamergedOracle/PeopleSoftU.S.v.Oracle:DOJ’sClaims“H27U.S.v.Oracle:MarketDefinitionDOJdefinedtherelevantmarkettobe“highfunctionalsoftware”intheU.S.Basedonthismarketdefinition,themergerwouldbea3-to-2mergerOracledidnotproposeaproductmarketdefinition,butclaimedthatDOJ’sdefinitionwastoonarrow:Therelevantproductmarketalsoincludes“mid-marketvendors,”“outsourcing,”and“bestofbreedsolutions”Therelevantgeographicmarketisworldwide,orattheveryleast,theU.S.andEuropeThebasicapproachusedbybothsidesfordefiningmarketswasSSNIPU.S.v.Oracle:MarketDefinit28U.S.v.Oracle:EvidenceCustomertestimonyonpurchasingdecisionsplayedakeyroleinsupportingDOJ’smarketdefinitionTencustomerwitnessesFiveindustrywitnessesthreesystemintegrationwitnessesOtherevidenceOracle’sdiscountapprovalformsMarketresearchstudyU.S.v.Oracle:EvidenceCustom29U.S.v.Oracle:Court’sFindingsCustomerevidenceofferedinsupportoftheclaimwaslargelyunhelpfulandonlystatedpreferencesTherelevantissueiswhatcustomerscoulddointheeventofananticompetitivepriceincreasepost-transactionUnsubstantiatedcustomerapprehensionsdonotsubstituteforhardevidenceWithoutaproperlydefinedrelevantmarket,theCourtcouldnotpursuemarketshare,marketconcentrationanalysesDOJproposedaveryrestrictedproductmarketdefinitionU.S.v.Oracle:Court’sFindin30FTCv.WholeFoods:BackgroundWholeFoods—thelargestgrocerychainspecializinginpremiumnaturalandorganic(PNO)foodswithmorethan190storesinmorethan30statesandDCWildOats—thesecondlargestPNOsupermarketchainoperating74storesin24statesOnFebruary21,2007,WholeFoodsexecutedanagreementproposingtoacquireWildOatsFTCv.WholeFoods:Background31FTCv.WholeFoods:BackgroundNaturalfoodsareminimallyprocessedandlargelyfreeofartificialingredientsandpreservativesOrganicfoodsareproducedusingagriculturalpracticesthatpromotehealthyecosystemNogeneticallyengineeredseedsorlong-lastingpesticidesHealthyandhumanelivestockmanagementpracticesAllproductslabeled“organic”mustbemeetUSDAstandardsFTCv.WholeFoods:Background32FTCv.WholeFoods:FTC’sClaimsTheproposedmergerwillincreasepricesandreducequalityandservicesinanumberofgeographicmarketsthroughouttheU.S.EliminatedoneofonlytwoorthreePNOsinanumberofgeographicmarketsEliminatedsignificantprice-andnon-pricecompetitionResultedintheclosingofnumerousWildOatsstoresFTCv.WholeFoods:FTC’sClai33FTCv.WholeFoods:

MarketDefinitionTheFTCdefinedtherelevantproductmarkettobe“premiumnaturalandorga