CEU eTD Collection Asymmetric with Product Differentiation: Product with Duopoly Asymmetric A Case of Retail Chain Concentration inSlovakia Concentration Retail Chain A Caseof In partial fulfillment of the requirements for the degree of Master of Arts in Supervisor: Professor Andrzej Baniak Central European University European Central Department of Economics Budapest, Hungary Kristina Poliakova Kristina Submitted to Submitted Economics 2008 By CEU eTD Collection welfare. ontheconsumer’s in effects detrimental result would merger the since ismodel justified, the to according merger the on ban the Second, measure. profitability the – variable the on of insubstitutability betweenthe duopoly.This is goods shown in of theanalysis model the level high the to due low very been have might Carrefour of profitability the First, question. findingsimportant two Tesco-Carrefour caseandanswer which explain research the the apply the theoretical results to analyze the case of Tesco and Carrefour in Slovakia. There (Shubikmodel Products Symmetricof and Duopoly Levitan, Ithen with Differentiated 1980). are asymmetry in with aduopoly products. The model differentiated isbasedanalyzed on the of study effects the answer question,I the to in order In Slovakia? leave the to Carrefour chain for hypermarket the reasons were the What arises: question the Therefore by a purchased hypermarkets were Carrefour the Later, prohibited. in 2008. owner new wasinvestigated by Antimonopoly the mergerCarrefour Slovak Office. Eventually, the was yearsbetween Recently, 2005andthe mergerundertakings Tescoand 2007,the between Abstract ii CEU eTD Collection economists from the Antimonopoly Office for consulting the topic of the thesis. thanklike the to thethesis. also Iwould of andguidance elaboration the during support First and foremost Iwish tothank my thesis advisor, Dr. Andrzej Baniak,for his help, advice, Acknowledgements iii CEU eTD Collection Bibliography...... 43 Appendix B: Proofs of Lemma 1, 2,3...... 40 Appendix A: The Formulas ...... 39 for the Figure 1 ...... 37 Conclusion 3. The Model...... 18 2. The Tesco-Carrefour Case in Slovakia...... 9 1. Merger Regulation within the ...... 3 European Union Introduction...... 1 3.4. The analysis ...... 28 Asymmetricof Case 3.3. The Welfare Analysis ...... 24 – Symmetric Case 3.2. Equilibrium...... 22 3.1. Demands ...... 20 in Equilibrium 2.2.1. The Conclusion of the Tesco-Carrefour ...... 16 Case 2.2. The Summary ...... 11 of the Slovak Case 2.1. The Parties...... 10 Concluding Remarks on 1.5. Merger Regulation...... 8 Horizontal 1.4...... 6 Mergers Referral 1.3...... 5 Procedure Purpose of the European 1.2. Merger ...... 4 Regulation Scope of Merger 1.1. Regulation...... 3 3.4.1. Simulation...... 31 Relevant 1.4.1 Market...... 6 Contents iv CEU eTD Collection Table 2 Simulation for high-cost firm – firm 2...... 34 Table 1 Simulation for low-cost firm – firm 1...... 34 Figure 4 The combination of costs feasible ...... 41 for the model Figure 3 The share of the profits and quantities and the profitability ...... 33 measure Figure 2 The demands after the merger for merger of type A ...... 28 and merger of type B Figure 1 The demand function for the Duopoly with Product Differentiation...... 21 List ofFigures and Tables v CEU eTD Collection 2003, so there since improvements steady experienced has in situation Slovakia hadmarket? The economic to be differentsuffermadefrom to low Carrefour did profitor Tesco ina fromway squeeze Carrefour the reasons for Wasit its incompared situation investors‘expectations. with badeconomic that Slovakia the the fall of themustcan be making arguedthathavebeen Carrefour in low profitas market Slovak the revenue. Or motive. from saleproceedings the Thus,it else –an investment of businesssomewhere the was it a strong intuition thata companysuggests leavedecides to themarketif it use can better financial the market? Economic tosellits Slovak andleave the Carrefour business which motivated reasons Whatwere the issue. arosethe following puzzling Therefore, there Slovak market. and hypermarkets sold leftthe year its 2008, one the merger,Carrefour ban the after on in Eventually, side. Tesco and Office the from both assessment of period the of prolongation a conclusion of prohibitingmergers in general, this case was widely discussed in the European Union. the bannedmerger, by the Slovakbecause was Tesco-Carrefour concentration the end, the In to. wasreferred problem competition Antimonopoly the case Office,amongjoined that Union the countries in the European 2004whichtheassessmentof a was and alsotoo becausecomplexcompetition authority by the European Commission. Moreover, Slovakia was the firstthere country areand not required involved.many bans on in were country the biggest chainstores retail In the two since interest, public which the raised addition, the examination of the concentration was referred to the national It took more than one year for the Slovak Antimonopoly Office to come to to Office SlovakAntimonopoly for the moreyear than one It took in of four hypermarkets announced Carrefour Slovakia, takeover In 2005Tescothe the Introduction 1 CEU eTD Collection compared to the other firm (Tesco). In conclusion I summarize the results. the high-cost firm (Carrefour) suffers from close that substitutability, showing is model realized, of simulation the the model.3.4.1. Section of In the aspects resulting in lower profits as 3first 3.Chapter of microeconomic the focusing model, presents the on setting Chapter in model of justify the setting presented the aims to Theexplanation of casein the Slovakia. 2 I In Chapter will details case is the set. explain which theCarrefour-Tesco into framework preferences. firms' the on influence has asymmetry of level the that show is its differentiation They competitor (2005) firms' foranalyzed. preferences product over example, in by Rajeev For paper and Tyagi in thesis. this discussed problem the resemble duopolistic with marketstructure differentiation product and some of them inits content the with deal that papers are there However, done. hasbeen – Carrefour Tesco concentration wanted to leavemarket. Carrefour Slovak the I Further, why explain puzzle, the to case Tesco-Carrefour the model with willlink the properly. differentiation withdescribe thecase can structure product duopolistic market asymmetric because this costs, different form of in the asymmetry the with extended Afterwards,authorities. I (1980) model Levitan will and Shubik analyzecaseusing the the withparticularly of dealing official competition case, this the decisions the sources in leave Slovakia. retail market chain the to for Carrefour reasons the might been have asks, what thesisthat this of research question the answering for assumption is the question latter the to answer positive The market? chain on retail andthe Carrefour) biggestplayers (Tesco thetwo between competition The thesis is divided into three chapters. The Chapter 1 outlines the merger regulation the 1outlines The Chapter chapters. three into is divided The thesis specific of the topic onthis noprevious research my knowledge, According to available from the in case Slovakia theI willTesco-Carrefour analyze first Therefore, 2 CEU eTD Collection 1 control on a lasting basis results from: results basis a lasting on control “wherea changeof arises merger concentration European policy, the to According regulation. merger presentEuropean fall the within a dimension with Community concentrations all Scope of Merger Regulation 1.1. Regulation No.4064/89. (EEC) Council the of adoption the to thanks concentrations the on ban and approval on decide with getto authority to the managed Commission European dealt Over time,the issues. competition the which body the was Department, Competition the namely Commission, European undertakings and state aid. According to the Treaty on European Economic Communities, thecompetition in the field of restricting agreements competition, abuse position by of dominant of theregulation Communities comprised Economic theEuropean Treaty the Establishing merger into framework. regulation the put theconcentration case Tesco-Carrefour Theexact ofname Mergerthe Regulation is “Council Regulation(EC) No 139/2004“. ¾ 1. Merger Regulationwithin theEuropeanUnion At the time of establishment of the European Economic Communities, the Articles of Articles the Communities, Economic European the of establishment of time the At According to the information from the portal site of the European Union from of information (europa.eu), portal European the the site According to In thisI chapter willmain explain merger of the European the aspects regulation undertakings or the merger of more mergerthe than of previouslyundertakings independent orparts two of 3 1 to CEU eTD Collection effective iseffective merger neededidentify control to why and when a merger be should prohibited. any that benefits resulting from them are outweighedignored. orshould Therefore, an be stated in 848), whichJones (2004,p. have such an adverseon impactcompetition society or tomakestart any business. owners of the assets should horizontal mergers, would beforbidden. they However, cannot be totally forbidden, asthe retain the right to sell mergers, especially itmight that many be and expected therefore, agreements, than market their business, the on change lasting and permanent more a create otherwise naturally mergers that claim they Further, they wouldone. into notbusinesses their consolidate or combine, merge, may companies commercial more by structure or two whether deciding changesinmarket toregulate competition authorities Purpose of the European Merger Regulation 1.2. Commission. European of decisions of the follow theconclusion to have parties the Moreover, (europa.eu). Commission totheirimplementation portal the prior according to Union European sitethe of the to notified be must dimension aCommunity with concentrations Also, threshold. given some exceed concerned alltheundertakings of worldwide turnover andindividual aggregate ¾ The task of the competition authorities is to identifyprohibit The mergers, competition the of isto task and as authorities those to Jones and Suffrin (2004, p. 847) assert that the purpose of merger control is to enable is merger 847) assert to of purpose the control that p. Jones and (2004, Suffrin more other undertakings“ (europa.eu) more undertakings“ other undertaking) or by one or more undertakings of direct or indirect control of one or Further, aconcentration has a Community combineddimension thatthe provided the acquisition by one or more persons (already controlling at least one 4 CEU eTD Collection supermarkets and hypermarkets with andsupermarkets hypermarkets marketshare largest the in Slovakia. achain of Tesco represents was that proposal for this reason Themain in market Slovakia. in the competition SAO, wouldsignificantly affect merger, to according this with case,as the (hereinafter asSAO Antimonopoly –Slovak SAOitselfOffice) proposed that would deal competent authorities of the member state. casetothe of the part whole or refer the orto regulation this itself under concentration then, Commission The followingstate. member that of market domestic a in competition affects significantly the notificationa concentration may that declare state member in a this lineapproach, is with it that explained ofaggrieved marketby concentration. Ontheportal site of the European the Union (europa.eu) the concentration, relevant the analyze best can which authority competition national such by handled be will has concentration the that ensures procedure simplified This subsidiarity. of principle basis of the to decide whether to deal with Referral Procedure 1.3. chapter. next inthe beexplained as it merger,will ban Tesco-Carrefour the to Office Antimonopoly Slovak the for reason the was This players. other the from independently act to players some othercompetitors.the However, the CommissionEuropean bans suchmergerswhich allow morefavorable position (thanks tothemerger),which allows themact independentlyto from geta more wantto players or (competitors) onwhich two watches (market) theplayground In the Tesco-Carrefour case the national competition authority Republic Slovak authority of the case national the competition Tesco-Carrefour In the In a simplifiedit way,could besaid thatthe European is thearbiterCommission that There is a system of referral procedure within the European merger regulation mergeron the within European regulation the There isa of procedure system referral 5 CEU eTD Collection of of merger.the relevant The marketis a combination of geographicthe dimension. andproduct impact the of analysis the for needed is which firms, between competition of boundaries the identifymarket market isbedefinition has mergers, a defined.In relevant to to of tool case Market Relevant 1.4.1 merger. a horizontal represents typical chapter, next inthe beexplained case,aswill Tesco-Carrefour the Therefore, merger. before the had partners the of either share than market hasalarger firm ordinarily post-merger 2) the market has onefirm less than before; after relevant themerger mergers:the 1) conglomerate saysmergers p. 494) not consequences two thatdo thatflow produce from vertical or agencies. travel of anda chain products of dairy producer a merger of a for example interconnected, whichdirectly more suchmarkets arenot undertakings in or thatpursue business of integration two merger the conglomerate comprises Lastly, a of products. dairy producers merger i.e. whichbe ormoretwo competitors, undertakings two of regardedasdirect could of integration an comprises hand, other the on merger, A horizontal like. the or distributor and their indifferent levels business i.e. of aretailproduction, shopandor producer distributor of integration more vertical two undertakingsmerger an economic or which comprises pursue Horizontal Mergers 1.4. When a competition authority evaluates a merger or other competition problem, the competitionWhen problem, a or other merger a evaluates authority competition involves firms Hovenkampin mergerBecause horizontal (1999, the market, two same In general, mergers can be divided into vertical, horizontal mergersA In general, canbevertical, andones. into horizontal divided conglomerate 6 CEU eTD Collection the duopolisticthe model with differentiation.product and characteristics. is Thisinformation structure products justification neededforthe the of identifiesmarketin its themarket and both dimensions relevant the geographic product of definition the because is that And chapter. following in the summarized analysis dimension the parties. Hence, the definition of the relevant market is crucial. professional associations) toenquire into their views or to carry out visits to the premises of competitors, (customers, parties relevant tothe requests written address or contact freeis authority to the competition Further, markets. of definitions the several establishes and the information submitted by the merging parties, the relevant competition authority inAlso, aredefined geographic guideline the follows: markets relevant as Market (1997). According guideline,the to productmarkets aredefined relevant asfollows: This section is needed for better understanding of and of understanding isbetter geographic This product the neededfor section areain marketcomprisesgeographic the "The undertakings the which relevant European Commission published guideline, on anotice definitionthe Relevantthe of During the evaluation period of the merger, on the basis of the preliminary information 372/03) 97/C Notice, areas."(Commission in those different appreciably competition are can beneighboringfrom distinguished becausetheconditions of areas which and homogeneous sufficiently are competition of conditions the which involvedconcerned orservices, of are inthesupply products and demand Notice, 97/C372/03). (Commission intendeduse." andtheir their characteristics, products' the by substitutable by consumer,the asinterchangeable orreason of are regarded and/or services which thoseproducts marketcomprises all product „A relevant 7 CEU eTD Collection as happened in March 2008 (The Slovak Spectator,2008). asecondsellinvestors, Carrefour took independent –to alternative therefore, its business to whichwasbanned,and Tesco, undertaking wasthemergerwith the Carrefour alternative for decreasing level itsof sales, which might been have for unpleasant its investors. The first from a suffered Carrefour is factthat the leave market the to Carrefour of decision the I reason The assume forgood. in Slovakia market leave the to wanted Carrefour reasons the of is of the explanation thesis themainthis 2.However, in contribution Chapter be described it will as forbidden merger was horizontal case,the Tesco-Carrefour given Inthe consumers. market, the possible behavior of the competitors and the possible effect of the merger onto the substantiate their decisions when they forbid a merger upon a detailed analysis of the shouldsell adequately authorities competition the theirbusiness), (asthey shareholders cannot relevant is themerger. analyzed beforeconsumers after and welfareof 3,the when inChapter themodel the assessing Therefore, of undertakings. the and weigh pros of cons the announcedmerger.the marketand therelevant of legal analysis and economic sufficient of basis the on merger the such a situation in themarket by assessing the planned mergers. They have carefullyto assess prevent to have power the therefore, authorities, The competition consumers. the of detriment the to increase of prices to and/or themarket blockingto entry the of leadto This may market. the from competitors smaller other, expel could which firms, dominant of formation to lead Concluding Remarks on Merger Regulation 1.5. However, as the ban on a merger of type Always restricts the ownership rights of the of rights ownership the restricts Always type of merger a on ban the as However, interests the promote to not and consumers the protect is to merger control of The goal Indubitably, merger control inafreeimportant merger is asfree market, Indubitably, control could competition 8 CEU eTD Collection concentration was allowed, since the decision for the Slovak market was referred to SAO. to 3 wasreferred market Slovak the for decision the since allowed, was concentration the where market, Czech the for only fully decision addresses decision this and Slovakia in Tesco-Carrefour 2 competent authorities ofitsSlovakia at end referral the the requested that declares decision of 2005 November to the part of the proposed COMP/M.3905 Case No in of decision the asstated concentrationshares, of purchase of way by Carrefour of relatingbusinesses Slovak and Czech the over control acquire to towanted Slovakia Tesco by undertaking the which mergerto European regulation concentration pursuant in Europe. Central its strengthen businesses move by of a strategic Tesco to stores and sitesTesco value inTaiwan, swapwasapart This of Euro132m. an 2 of enterprise 6 Carrefour would receive return, value In Euro189.4m. of for enterprise acombinedTesco 11 Carrefour stores in theof deal,the Aspart approvals. usual regulatory to the subject and Taiwan, Republic, Slovakia Czech Republic and 4 storesannounced in 2005an September asset swapinvolvingand stores operations in Czech the in Slovakia would be transferred to for retail sale of daily consumer goods in Slovakia. markets it the concerned extent the to SAO to referred was concentration the Consequently, Kosice COMP/M.3905,3). Bratislava,Slovakia of (CaseNop. cities Zilina and inthe for retail markets sale and products food of in in non-food andsupermarkets hypermarkets local in separate competition affectthree would notified transaction the that (SAO) considered view assessto it under the Slovak national . The Slovak Antimonopoly Office The part of the proposed concentration relating to Slovakia is denoted as denoted is Slovakia to relating concentration proposed of the part The Case No COMP/M.3905 from22 In November 2005, the Commission received a notification of anotificationa proposed of received In November Commission 2005,the and Carrefour Tesco (tescocorporate.com), webpage Tesco theofficial to According 2. TheTesco-Carrefour Case inSlovakia nd December 2005 is the decision of the European Commission on the case on the Commission European the of decision the is 2005 December 9 Slovak case hereinafter. 2 . Furthermore, the 3 with a CEU eTD Collection the Czech the stores in and4large-format Republic Slovakia. in large-format 11 stores operated Carrefour As formats. largeDecember 2005, of developed Slovakia andtheCzech Republic targeted Carrefour had largeonly towns andhad only retailing worldwide.non-food andfood in operating11,000stores Moreover, more and than 31 storesin Slovakia (including 5departmentstores and less 8stores of than 3,000 sqm). 27storesin Republicand owned and Czech the Decemberoperated towns. As 2005,Tesco of 4 developed stores largeformat Tesco in where markets 1996, Slovak Czechand the entered Tesco formats. of variety retailing.andnon-food stores had Further, Tesco worldwide over2,300 includinga wide “parties“ is used,both undertakings, Tescoand Carrefour, are meant. word whenever in the thetext, Lateron market. on the of hypermarkets the description Parties 2.1. The Czech) will be discussed in Section the 2.2.1. and mainbetween however,difference cases(Slovak the the within discussed this thesis, Large format stores were defined as having net floorspace in excess of 7,000 sqm. 7,000 of excess in floorspace net having as defined were stores format Large 2) 1) The following short summaries of Tesco and Carrefour follow in order to give economic In decisionthe wasdescribedCase NoCOMP/M.3905,Carrefour as being in active The summary of the Slovak case follows in Section 2.2. The Czech case is not is case Czech The 2.2. inSection follows case Slovak the of The summary In the decision Case No COMP/M.3905, Tesco was described as being active infood being active wasdescribed as COMP/M.3905, Tesco No In the Case decision Carrefour Tesco 4 in the larger towns and smaller format stores in the smaller 10 CEU eTD Collection document available that deals with the Tesco-Carrefour case. deals Tesco-Carrefour with the that available document broadest is the cited, since thisdecision befrequently 2006,will on 29th the December wasreleased which SAO), asdecision of 2006/FH/3/1/146(hereinafter No. decision SAO of such a is in thereasoningThe model based 3 The SAO.the on conclusion. Chapter of led to that reasons were the explain what I on, Later will to merger. try prohibit the decide to year SAO latter one in to regulations. about wordingfrom Ittook 2001, February of the 21st Coll. 136/2001 ActNo. is law the competition Slovak under the merger regulation with the dealsThe Act that chapter. beginningof the in at this mentioned it goods as was Slovakia, consumer of daily sale retail for markets it the concerned extent merger tothe the on decide 6 5 Case Slovak of the Summary 2.2. The Carrefour. meansuntil that in 2008 Carrefour wasownedSlovakia and by operated multinational the Chile S.A.,which Carrefour of Franceand shareholder with Carrefour affiliated corporation market. AccordingindeedleaveB.V. was in Nederland willing operating to the Slovak under Carrefour Slovakia to a report frombusiness Carrefour brandThis underthe Carrefour agreement). (franchising means,that Securities Information,consortium of comprisingcompanies ECMGroupand will ICSthat run continue to the Carrefour arethe innew investors The hypermarkets Slovakia. 4Carrefour wasfoundowner the for Nederland B.V. is a newswire, on 1 on the newswire, The Slovak case is the part of the proposed concentration from November 2005 relating to Slovakia. to relating 2005 November from concentration proposed of the part the is case Slovak The SITA is the Slovak Information and Press Agency. The Slovak case The Slovak SITA the 2008)that referred to Spectator, (The Slovak thepressrelease According to st March 2008, hence more than one year after the ban on the merger, a new 6 was referred by decision Case No COMP/M.3905 was by SAO tothe referred CaseNo decision to 11 5 CEU eTD Collection Tesco, where Tesco was trying to promote a broader definition of the relevant market. relevant of the definition abroader promote to trying was Tesco where Tesco, 8 7 basket of Tesco customers. detriment of the to eliminated been have might competition effective wasthat merger the of concern bySAO,the Asstated market. the entry to barriers of existence simultaneous the with rival, important most and closest concentration on the of horizontal type is a This concentration Kosice. and Zilina Bratislava, towns the to related local market, i.e. when local markets on by independent Tesco three 4 hypermarkets acquisition entrepreneur the of a markedly dominant player connects with its competition (antimon.gov.sk, Article 2007). of a violation about concerns Office's the remove would that obligations and conditions informed Tescoas to come aboutto a common the view competition of the case. concerns. induces shouldmerger competition bemarkets asthe done, relevant Finally, the of definition the all, of first needed: is case risks. the of analysis on detailed more a that claimed the 2 At theSAO Moreover, wasstated. markets relevant the of definition preliminary the review, where same time, competition the thepreliminary of about outcome and representatives Carrefour Tesco SAO asked to propose Before the definition of product basket was established, there was a rich communication between SAO and between communication a rich was there established, was basket ofproduct definition the Before representative“. “legal just simply be denoted will of Tesco representative legal the on, now From ¾ 8 wasdefined as: The SAO started to deal with the case in todeal December2005,after legalrepresentative the The with started case the SAO of consequences concentration the sum with dealtand Tesco Carrefour To up, According to the decision of SAO, in the notice from in from 2 notice the decision of SAO, tothe According so legal representative SAO the a and was there between correspondence Afterwards, frequently purchased by needs (this frequently household andmeettheirconsumers recurrent purchased includes basket andThe productsfood which thoseconsumable product non-food are 7 officially registered the merger in Slovakia. On March 2006 SAO informed both informed March2006SAO in On Slovakia. merger the officially registered 12 nd June 2006, SAO 2006, officially June nd June 2006,the product CEU eTD Collection there was created a specific segment of the market oriented to customers sensitive to price. to customers to sensitive market oriented of aspecificthe segment wascreated there that decrease, which suggests in not 2004did market on Slovak (discounters) the competitors new of entry the after Tesco of revenue the is that SAO of decision the from information important Another income. of level higher a with and education of level higher a with persons asyoung middle aged thetypical anddecision of hypermarkets of presents SAO customers consumers spend 50%of around their overall spending onfood in Further, hypermarkets. the in Bratislava, Forexample, upmost ofthemarket. which take by hypermarkets, enforced pressure high competitive is there where forexample), Bratislava or (Kosice off regions sized products. Moreover, offood supermarkets providers are less inpopular the more well- by andhypermarkets supermarkets reaching thelevel pushing28%, smaller-of the out 69%, food between and 2004inthe increasedtheirspending for namely,2003 consumers the Slovak case. Slovak the 9 This citation comes from the definition of the product basket forthe Czech case, howeverit was the same as for Also, the product market product Also, the feature importantbehavior consumerIn theof presented, an SAO, of the decision was products andproducts disposable hygienic paper products) such products astoiletries, and cleaning non-food products would food includeall Likewise, geographic the market discounters. followedby supermarkets, arethe tohypermarkets competitor closest the said that with was anddiscounters spacein 1000sqm.a floor supermarkets 400 or excess of It ¾ (hypermarkets, supermarkets(hypermarkets, and by wasdelineated discounters) boundariesthe a of ¾ A product market forA market daily goodsincludingproduct consumer hypermarkets, The geographic market for the retail sale of for saleof consumer retail goods daily the market The geographic was defined in decision of SAO as follows: was defined as: 13 9 (Case No COMP/M.3905, p. 5). CEU eTD Collection inferred from SAO’sconclusion: from the inferred remaining lagging entities business in substantially Thismarkets. behind the be relevant can rival, withCarrefour the beingitsclosestmarkets, and local beforethe relevant defined three Tescowas compared Carrefour, even marketmarket.or the shares of gaining the to of much less was losing Tesco and that markets inall the decreasing were Carrefour shares of shares in Zilinawouldhave55-70 reached%.From about onecan these, concludethe that joinedbe shares decreasing. of The seemed slightly of Carrefour the and Tesco to decreasing 50-60 joined %.In about sharesinKosice would reach local the of Zilina, sharesmarket the The slightly bedecreasing. Carrefour sharesof the decreasing and seemed to shares of Tesco Kosice,50 the %. In local market of reachabout the would inBratislava parties shares of the joinedseemed be decreasing. The increasingTesco slightly sharesof to the Carrefour and of the relevant stores, will be approximations. In theconclusions local from the tables marketpresented in the decision of SAO,of which Bratislava,present the market shares the shares of numbers were yearly market shares from the period 2003-2005 11 market. local each 10 Zilina (1 Carrefour store and 2 Tesco store). (2 Carrefour stores andwould by beinfluenced in mergerwerethelocal markets the cities: following the Bratislava 3 Tesco stores), Kosice (1 Carrefour store and 1 Tesco store) and It is a business secret, therefore the precise number was omitted, however, the range is still helpful. The helpful. still is the range however, omitted, was number precise the therefore secret, abusiness is It for turnover total the over firm of one ofturnover reatio the as defined were as defined were shares market The The conclusion from the decision of SAO was that Tesco had the leading position in position had leading the Tesco that was SAO of decision the from The conclusion The market shares The market These definition helped SAO to identify the local markets. Thus, the local markets that easily by consumers - a radius of at most 20 minutes driving time. be reached can of the merging parties) hypermarkets (the stores the where territory 10 of the parties were presented only in only ranges of werepresented parties the 14 11 , and therefore, my CEU eTD Collection Tesco. on capablecompetitivebe pressure would of there exerting nonewpotential competitors business to be transferred.in doing the andinterest experience, resources, adequate werenoundertakings with there that Therefore, conclusion the and aninvestigation cameto conducted beConsequently, SAO transferred.to it was deduced a thatremedy the sale of certain operations.Also, Tesco suggestedif potential buyers of the businessthe merger was allowed, then it potentialinvestigation,the contacted as buyers and competitors. informationrelevant concerning the remedies.Moreover, SAO its own conducted the submitting SAO the with communicating hadbeen time, Tesco that months. During 4.5. after decision the madeSAOrelease This times. three limit of time the an extension Obligations toSAO on 20 The conclusion is summarized as follows: as is summarized conclusion The as proposed Tesco for theSAO, in Conditions, Final the to According Proposal According to SAO Tesco submitted the Final Proposal for the Conditions and suppliers, consumers, and competitors“ (antimon.gov.sk, Article, 2007). and, itsit economic given independentlycould strength, its act with respect to substantial competition be subjectto not plc. would undertaking Tesco the Tesco plc would establish or strengthen its dominant position. Consequently, undertaking the out, carried were concentration if the competitors, of potential so forth), saturation of and market, for entry into the entry, necessary time to barriers administrative the individual relevant requiredwhen advertising andmarketing support the market, entering markets, and the nonexistencethe related to sunk costs investments, andforced entry direct to (considerable “In view of the existing structure of the individual local markets, high barriers th October 2006. Further it is said that legal requested isit said that representative 2006.Further October 15 CEU eTD Collection well. as development market of the evolution the or resources of distribution traditions, culture, situation, economic the on depends and issue a complex is behavior consumer the Moreover, very isdifferent. case andCzech Slovak inmeans situation the the Itthat Czech Republic. tothe related European the Commission approved entrepreneurs concentration these of which to players,market according of higher number and andCarrefour Tesco entrepreneurs by the reached sharesbeing lower market the regarding particularly in situation the Slovakia, (antimon.gov.sk, Article,situation 2007),the on Czech marketwas diametrally from different Case Tesco-Carrefour the of The Conclusion 2.2.1. 17 force into on the came Decision within 15 days after decision tothe have appealed could theThe parties bediscussed. will consumers welfare of the delivery of the decision, the merger on of the effects 3the inChapter model the In consumers. the to detrimental but they did not wouldbe the changeinthemarketstructure on because Protection of Competition, exert their rights, so the 12 by decision and Carrefour Tesco between It is the same decision as the decision of SAO. Comparing the two cases in Slovakia and Czech Republic, according to SAO In consequence of the above mentioned facts, SAO prohibited the concentration the prohibited SAO facts, mentioned above the of consequence In proposed transfer of business in this case.“ (antimon.gov.sk, Article, 2007) for the existed buyer appropriate whether an to high risk as a was there that conclusion the at arrived Office the plc., Tesco undertaking bythe proposed saleto the as subject of business the and character the markets relevant of the theexisting structure in view and of information obtained „Based on the th January January 2007. 12 of 29 16 th December 2006 in 2006 December accordance Act with the CEU eTD Collection firm to stay firm to andit marketon the prefersdisinvest. to high-cost firm suffered from very low profits and therefore it is no longer profitable for the the substitutes, arevery close since goods is the intuition that My leavemarket. the wanted to focus theMyinterest changesis of of profits the high-cost. explainon the to whyCarrefour By I market. goods will analysis of the asymmetric model the with duopolistic differentiated largerof isthe part a contrary, getting Tesco,on salesandthe other, the sharesof decreasing duopolistic marketwith products.Onedifferentiated of suffersCarrefour, them, from it atasa look can one Therefore, market. the of share asubstantial thattake competitors main two are there markets I relevant Slovakia. three allthe on that fact the will use The model I model The in case the Tesco-Carrefour on isbased 3 in Chapter present will 17 CEU eTD Collection follows (Shubik andLevitan, 1980,p.69): analysis. in the wherebe thenotation firm is parts used intuition beingto isthe preferred whereas explained, is areinterchangeable. notation The to be usedinhypermarket hypermarket, preferred the asfirmbeing denoted asfirmand Carrefour being1 denoted firm thewords 2. Besides, and Tesco numerical, also is firms the of notation the chapter this In costs. unit higher with firm differentiated products, like in model.Shubik-Levitan with asaduopoly structure market the consider can one Therefore substitutes. are close offer they products the that means which ones, closest the are competitors two the addition, In market. the asubstantial share of take that and - Carrefour –Tesco main competitors two in are there Slovakia markets local three before 2,onthe mentioned end Chapter of the the mentioned at AsI in case Slovakia. describe Tesco-Carrefour the to suitable especially firms. offered form by between goods is the the Moreover, demandfunctions two the of substitutability ameasure of it incorporates is that model the of characteristic The important model by in Levitan Tesco case,Iwill thecosts. extend asymmetry theShubik and adding – analyze In order to the Carrefour (1980). Levitan by and Shubik Differentiation” developed 13 U Iwill consider consumers to be the same as customers.

D E The demands can be derived from The demands canbefrom consumer aggregate the derived I will assume that Tesco is a firm with lower unit costs (low-cost firm) and Carrefour a The follows isanalysis model that based onthe “Duopoly with Product q  2 1 E q 2  ( 2 q E 1 (  1 q  2 J ) ) 2  p 1 q 3. TheModel 1  p 2 q 2 , 18 13 utility function, defined as CEU eTD Collection 16 15 14 asminor competitors those consider might as well, one competitors are other there that fact the Despite market. common the on asbeing interrelated hypermarkets two the consider one might Therefore, factor. includes thesubstitutability that partition as aspecial individual wecandepend substitutability. thinknotSo about does on demands measureof the prices of the products are equal, the sum of the demands is a classical demand function, which the that condition Underthe function. utility from the demandsderivedbut the case, Carrefour interpreted. linear andcanbe demandsform, easily are sothe pay for goods.Furthermore, the another useful of property utilitythe function is its quadratic having from to disutility the or goods forcheaper the preference the function represent utility are products independent. As where crowded, itis better for customersmove to theto “empty” one is since in hypermarkethas nocustomers if the other in and hypermarkets two, one both ishigherbrings to divide same,it for the utility consumers amount purchased products the of substitutability consuming for preference same the isof inamount products the incorporated measureof the consumersthat fact the represents model, this for one crucial the preferfunction, utility the of element to consume Thethird substitutes. as wereperfect if they products, the of of sum function the concave the same amount of each of the product. Thedemand, so level of the Minor not just in size and turnover,but also as what regards the degree of substitutability. At least from the time point of view, consumers prefer shorter queue. Clearly, the good 1 is produced by the firm 1 and good 2 is produced by the firm 2. q However, it is utilityit is function Tesco- However, analogous aggregate to the not the that The first two elements of the aggregate utility function of the consumers represent of consumers utilitythe function of aggregate the elements two The first 2 is the demand for the good 2 qqq  J . To interpret it for the Tesco-Carrefour case, if the size of hypermarkets if of the size the case, it Tesco-Carrefour for the interpret . To 12 and J J t of 0 is themeasure of of substitutability goods.If the , the become products perfectsubstitutes. 14 , q 1 19 is the demand for the good 1, for good the is demand the 15 . The last two elements of the q is the overall the is 16 ones with J

0 the CEU eTD Collection the same way. The consumers choose demands choose consumers sameway.the The differentiation. In both the symmetric and the asymmetric case, the demands are Equilibrium in Demands 3.1. derived in surplus. asthe consumer same is the consumers of the welfare actually the value of their aggregate utility function and from the economics point of view, the for both for both areproducts derived by solving the first orderconditions for utilitythe maximization: case is reasonable. Carrefour model Tesco- for the of duopolistic the analysis the Therefore importance. negligible constraints: prices the holdin model: need to the that constraints several are there Moreover, asgiven. demands the take they so consumers, the of behavior the know firms The maximized. is utility their that so pp pp q q ww ww 12 1 21 2 UUq qq   12   Ÿ 111 244 244111 EJ J E D EJ J E D This with thedemandsfor duopolisticsection derives the market product It is important to emphasize that the welfare of the consumers, denoted as denoted consumers, the of welfare the emphasize that to isimportant It Assuming that the prices are not too far away from each other, the demand functions the far other, not from each pricesthe too away are Assuming that Moreover, the previous two equationsMoreover, theprevious two onlyhold under following the Solving for pp 12 pqq p 0 , 212 1 ,,,0 (2) (2) and the demands D E J EEE qq 12 , t in thedemands are: previous equations, the qq , because there can not be negative prices on the market or a (1) 12  qq 12 , p 1 and have to be non negative. non be to have D EEEJ 20  qq q 12 , knowing prices the qq (1) 12   p 2 pp 12 , of of goods, the W , is , CEU eTD Collection this is not relevant for the case Tesco-Carrefour. case the for relevant not is this 17 assumed. constraints capacity no are there price the negative consumption Figureof goods. the 1illustrates demandthe for goods firm of 1 taking equal - are prices the demand when the 1. rangeDD`represents The is pricegood of vertical axis the Appendix A. In book the of Shubik andLevitan (1980), the capacity constraints were analyzed to a large extent. However, In Figure 1 the horizontal axis is goods the demandthe for offered byfirm 1 and the p p p p p d 1 u 2 * 1 p

2 * d D of of goods the offered by firm the 2 asgiven in market, duopolistic wherethis p 2 * . Range DF represents the joint demand if both demands are positive. Range positive. are demands both if demand joint the represents DF Range . Figure1 The demand function for theDuopoly withProduct Differentiation s 17 The formulas for The theFigure formulas included 1are in the D` 21 d` F` F q 1 CEU eTD Collection hypermarkets could so satisfy hypermarkets demands, 19 zero. is 2 good the of quantity the given 18 areconstant.Thus the costs Iwill considered. - costs model by the extend different assuming lower than , the demand for good 1 lies on the interval DF`. 2is Therefore,for prices for zero. below 1is Similarly,good demand ,the good price zero. when 2is the positive. forAbovequantity good demanded price the also for the demand leaves orin themarket, hypermarket firm words, the other hassecond justzerodemand. DF` firms firms are: Shubik and Levitan model, only Equilibrium 3.2. Price the symmetric case demandsthe are defined asin rangethe dd`. with thecurve joining dsd`F`. the points Assuming that the prices setby differ firmsthe donot alot, same costs substitutes. are becoming perfect J c To remind, firm 1 is Tesco and firm 2 is Carrefour when making the analogy between the model and the case. the and model the between analogy the making when Carrefour 2 is firm and Tesco 1is firm remind, To The demand for this range was calculated when maximizing the aggregated utility function of the consumers 2 o t 18 c f represents represents iffor demandthe by offered thegood firsthypermarket second the the 1 19 The basic condition that is assumed in the whole text is that inin is is whole that , text the the assumed that The basic condition The distance between the points F F`is and points the between The distance Atpoints both prices areequal. interval describes good1 thedemandfor The dd` To sum To sum 1, demandup, the givenforfor good 2,is good price the described bythebold This section derives the price-quantity equilibrium. In the original version of the , F` approaches F. Further, as F.Further, , F`approaches . J o D f  , the range dd` becomes horizontal as the goods 22 E c i ! 0 for 2 D  J i

, so if so , 1,2 . The profit functions of the of functions profit The . J

0 then F`=D`. And if And F`=D`. then cc 12

was CEU eTD Collection The followingimplications for important understandingare of model:the substitutes, the coefficient of is: condition order first conditionsholdfirst order in needto the equilibrium: following the Therefore, maximize profits. their as to so prices the choose The hypermarkets 0    3      3   o 1 112 1 11 111 1 2 221 2 22 222 2 ¾ ¾ ¾ ¾ ¾ 1 3 ) )(2)()() ) )(2)()() c cpp p pc pcq c cpp p pc pcq , the coefficient of coefficient , the To interpret theprices, concerning interpret To If If of Bertrand Duopoly. If the costs are the same, the solution to both models is identical. If independent. are demands individual the where monopoly, the for cc cc p p 21 1 12 2 J J   ccc o 12

of 244 12 12 244

0     74). where , then KK KK KKK KKK , then D E D E , then K pc ii

pcc  ji i c ©¹ ¨¸ §· 2  11 2 22 111 244 ©¹ ¨¸ §·  J moves from 22 p 22 D 12 33 EJ J 111 E D 244 E i J EJ J E D

D , if E DEJ moves from 1/2) / (1 / J for Ÿ /2 2  for 00  c J i 23 12

ij , 1,2 , o p K 1,2 1 23 for example, as products are becoming closer

. This means, that the solution is the same as . 1 2 , for and o J ' ! 0 GG GG i 0 , the coefficient of 33 , ij pp

and if and 12 12 . z 1,2

0,0 . This is analogous to the model (Shubik andp. Levitan, 1980, J ofŸo . The solution to the to solution The . K c 1 moves from 1 CEU eTD Collection Case A) there were no efficiency costs assumed, Idecided not to analyze it here. costs might lower as a result of the efficiency. However, since in the Tesco-Carrefour case derived from derived from function aggregateutility the with second demandthe 0. equal from marketas having not possible, the while anyclosercompetitor, the demand isagain isleft,as much whichjusttakes morejust hypermarket probably, one case Tesco–Carrefour 21 20 andmaximizegoods just prices soasto joint setthe their profit. differentiated their about anything change not might firms merged the Intuitively, change. mightmarket how the asto assumptions be set to need clear. There is not merger the after has positive effects on consumers, but negative on the firms. substitutability of coefficient Case –Symmetric Analysis Welfare 3.3. The At the same time, the welfare of consumers the welfare of the sametime, the At This is the case B) analyzed hereafter, denoted A. of type as merger the as the merger denoted of hereafter, type analyzed A) B. case the is This The market structure might change after the two hypermarkets join, but situation the join, hypermarkets two the changemight after structure The market substitutability of as thecoefficient is higher profitthe can be that seen, It In this section equal costs areassumed: costs In thisequal section qc 1  /2 1 1 /2 2 2 () DE   J J J , so the equilibrium profit is profit equilibrium so the , ishigher. Thismeans, measure the that of substitutability 24 ccc 12 W

1 2 © ¨ ¨ § , so in equilibrium the demands are: ( D 3  E i E ( c 4 ©¹©¹¨¸¨¸§·§· ) 20  /2 1 2 Alternatively, and for the for and Alternatively, (  J 2 /2 2 2 DE J ) EJ  2 J ) 2 ¹ ¸ ¸ · 21 is higher as the In addition, the addition, In  J c is lower. is 2 J CEU eTD Collection smallest possible possible casefor as in smallest pre-merger the casewhen to the equivalent are actually that monopoly prices set firm newwould Therefore, to. demandisthe related priceof the on just good the same, theindividualdemands depend symmetry of the market, it is certain that the prices will be the same. As the prices are the is actually similar to the case when the second hypermarket decides to leave the market – as if leave themarket to decides hypermarket second the casewhen to the similar is actually Case B) consumers. of the welfare the of part away a substantial taking before prices than wouldfeel mergedhypermarket the any pressure andtherefore set much competition higher consumers ismaximized. almost if hypermarkets However, merge, the newfirm wouldnot the of welfare the and in prices strongly compete hypermarkets then identical, almost strong players on the market - ifTesco behind itis justtwo that intuition merger.The the arebiggerafter consumers are there and Carrefour - and if customers see their products as market, where the profits of as the firmsincrease the is for merger merging favorable the firms. always this so firms, pre-merged the of profits the of sum the than higher always is firm merged J

0 . Therefore, for merger of type A, the results are as follows: The conclusion is, as The conclusion In this case the merged firm sets the prices so as to maximize the joint profit.From the W Iit can be seen from above that In merger of In merger of istype Bthere justonefirm marketsellingleft goods.It on homogeneous pc W A A is the welfare of the consumers after the merger of mergerA. of type is Profit the consumersthe after welfare the of  was increasing in was increasing 11 22 D E , 3  A J J ©¹ ¨¸ §· . It is obvious that the welfare of the consumers decreases and becomes higher, the detrimental effects on the welfare of of the on welfare the effects detrimental the higher, becomes 2 1 E J becomes higher.

DE W A c does notdepend on

25 2 J and

0 . Recall that for both hypermarkets on the W A

8 1 ( D  E E J c ) , so this welfare is the 2 for all for J 3 possible, A of the of CEU eTD Collection the same as in merger of A, type inmergerof same the as profit its than choosing Denote zero. of consumers. utility the function from aggregate the there was nomerger. Still, this does not weaken the analysis because the whole analysis stems for the firms to merge. Interestingly, the result does not depend on any of the coefficients andmonopolisticIt canbe market.for algebraically which valuescomputed of almost the from benefit already they since merge, to firms the of initiative no be would means that for a small case B will be two times smaller because one firm is out of business. The profit of the firm for merged hypermarkets became perfect substitutes. became perfect merged hypermarkets in words, the inA is other situation samein situation of the B,since asthe pre- the goods the W J p B B



0 DJ EEJ after the merger is actually lower than the sum of the profits before the merger. This 8 1 q In the aggregate utility function of the consumers, the demand for good 2 is set to be On the other hand, if hand, other the On ( A D , depending on sizeof the , depending on 3  q q  B E BB B B E 1 2 ( given qq c 2   1 ©¹ ¨¸ §· )  2

1 2 ( J 1  , so ,  )  B J J , J qp ) p pp )()( J DE BB B . It is interesting to observe that if that observe to interesting is It . 1 . The first order condition for this maximization problem is problem maximization this for condition order first The . , it is not profitable to perform the merger of type B and so there  ©¹ ¨¸ §· J 1 2 B ppc  . The consumers maximize . Theconsumers 

J J 0 pc , both the quantity and the welfare of the consumers in the B () DE  11 22 D E , and the solution for the price in this case will be 26 . Knowing this, the merged firm will maximize will firm merged the this, Knowing . J . Yet, the quantity . The welfare of the consumers is consumers . Thewelfareof the pq q U J of  DJ EJ E , q BB B qq B BA will be always smaller always be will q 21

B 2 ©¹ ¨¸ §· and J 2   it is beneficial it W A

W B by or, CEU eTD Collection and after the merger: the and after before the merger, before the 22 higher than the demand from the merger of type B. demandthe merger from of B.type Apparently, joined the demandmerger from of Ais type becan interpreted. it because not point of view, from is economic relevant not welfare the of values of relative the comparison the However, type B. algebraically, for merger profit of the firms. of the profit merger This number is a solution to the following problem: Figure 2 shows Figure merger comparisonthe demandsfrom 2 shows of of A equilibrium the andtype To sum up, welfare ¾ ¾ W W / / J W W W ! B A , will be always higher than higher always be will , 3

. 150770243 4 ( ( 4 ( 4 2 4   (  J W 2 J J )  ) B 2 ) 2 ( will be always smaller than welfare than smaller always be will J 2 1 ) is between 1 and 4for all  3 22 J it is always beneficial for the firms to do a merger of ) is between 2 and 4for all 3 27 B  2 W 3 A i . When comparing the welfare before welfare the comparing . When

0 , where the second profit is the pre- the is profit second the where , J t 0 J t 0 W A and the welfare CEU eTD Collection The equilibrium profit is therefore: profitThe equilibrium 3.4. The analysis of Asymmetric Case ofAsymmetric analysis 3.4. The cc c c q pp ji i j i 12 ,  112 2442(2) 4 4 22 from the Section 3.2. Thus, the demands are: ©¹ ¨¸ §· Assuming 2 DEEE D E  p  A 2 c KKKK , B c c 2 Figure 2 The demands after the merger for merger of type A and merger of type B ! K c 1 22 , in , be using equilibrium, demandscancomputed the prices the q A 3 i

1 2 q ( D B 28 ( 2  2 J K q  A E K () ( 4 2 )   K E 2 c ) i ( 2 , where 2 ( 1   K K 2 ) ) ij  1,2 , E

c j K D ) and 2 . ij z q . CEU eTD Collection 23 substitutability might happen that one firm is pushed out of the market. It expressesis crucial formy thesis and I will come backthat to it in the Section 3.4.1. as the measure of the market –Carrefour simply might have made low profit compared to the revenue. Thisfact firms some expect level profit.the of This factmightexplain, decidedCarrefour why toleave to pay forinvestors in the form of dividends or the firms might have some fixed costs. In fact, sinceenough, inis need not firms profit positive profit the reality However, microeconomics. that every firm which sells on the market, makes profits. This is an expected result in the equilibriumthe quantity forwhich asymmetric case it can happen that the equilibrium price equilibrium the it happen can that asymmetric case symmetric case, this did not cause any concerns (the constraints held), however, in the In the Figure 3, the crossed area (upper triangle) forsome Lemma 3 The second result, Lemma 2, says that if the costs of two firms are different, then it then firms aredifferent, two of if costs the says that 2, Lemma result, The second Proofs of Lemmasthe can be foundin AppendixB.The firstresult, Lemma 1,says, does not make negative profit, for it that was assumed beginning, Atthe Lemma 2 The isproof in Appendix 2. Lemma 1 c 2 q 2 is zero, so at the end the firm with the lowercosts can profit from monopolistic market structure. ( 2  ( J 2 : If : If in: If equilibrium, demand the for good the K increases the space of costs the of space the increases : There will be two firms operating on the market  )( K c 1 2 2  ) ! K q c ) 2 1 would benegative. Thefollowing three results hold: D and E  2 c  2 K K 2 ( 2 c 1  ( , where i 2 K

 )( 1 K 29 , 1 2 2  ) p K c J 1 c 2 ) , 1 actually represents such acombination of costs, ! p , D E c 2 c 2 ,  1 q , under which there are both firms on firms both are there which under , 1 2 , p q  2 K 2 would be less than its cost K t 2 i 0 c is positive, then the firm 1 . When I analyzed the full the analyzed I When . then p 2 23 ! if and only if only ifand p 1 c 2 or i CEU eTD Collection there should exist such a combination of the variables the of such acombination exist should there this thesis. this 24 necessary is analysis morecomplicated isprofitable, firms for merger the the mergedfirms.the ThecaseBis abitsuspicious andin tofind order values out the for which for bringsmerge higherprofits Mergeroftype not. for Acertainly firms the or to profitable effects detrimental on have certainly would themerger the hand, other the On merger. the consumers. after left is firm Still, just one areequal – since costs casewhenthe tothe bevery similar itwould hand, one the it is necessary However,to at this pointcome with different costs, thereback is no need to conduct the analysisto again.the On problem whether firm than prices the higher with costs. lower equilibrium the it is can be very not large if firmstheir differencebetween costs stay the both are to market. the on the market, narrows as a consequence of higher competition. Intuitively,if two firms compete, model, Iwill showin the next section, that if two goods are close substitutes, hence business in andSlovakia investing usethemoney gained for else. somewhere Thus, using the sell preferredCarrefour low to enough became that the profitsthe assumed for Carrefour that profits for Carrefour were going down and for Tesco firms mergefor the versa.to andvice they were rising. Therefore, it can be difference between quantities the between difference bigis there not that fact firm the despite cost lower for the profit the much lower than intheirdifference costs, if aslightis just then there Using the software Maple, the solution would be the root of the 6th order equation – this is above the scope of In the Section 3.3 I analyzed welfare effects of the merger when the costs wereequal. merger costs of when the the effects Ianalyzed welfare 3.3 Section In the The third result, Lemma 3, says, that the firm with higher unit costs charges in Coming back to the Tesco-Carrefour case, it was mentioned in the Chapter 2 that the 2that in the Chapter mentioned case, itwas Tesco-Carrefour the back to Coming q 1 , q 2 . 30 c 1 , c J 2 , , the profitfor the higher cost firm is c 1 , c 2 , for which it is not profitable 24 . Intuitively, . J is high, CEU eTD Collection 2. the measure of substitutability of measure2. the goods the of substitutability of 1. results the for which I chose proper coefficientspresent andwill IwillI relate itThen to the Tesco-Carrefourmodel. case. the to solution general a and satisfy to has model base Simulation 3.4.1. over the shares of the demand, so andhigher profits alargermarket.part of takes the of the equilibrium demands one can see demandsonecan that of equilibrium the 3. 3 3 3 p 1 1 1 2 c c



2 2

3 1 2

1 2 1 2  From the difference of the profits, it is obvious, that is: solution The Assumptions: This section presents asimulation of model.the First, I define the assumptions that the The equilibrium profits aretherefore: profits The equilibrium Let  c 2 ( (( (( 1 2 K K

D D   ( 2 M 2 1 D H  E  K  i 4 E , where E be the )(  K K c  c E 1 1 2 1  )( (  2 K )( 4  ) 1 1 2 E 2 K 2  K  ( (  ) K 4 2 H profitability measureprofitability c D K E D K  1 2 ! )( )( )    K 2 1 0 1 ( 4 2 2  2 1 is small,  E )    K K 2 K K c K ( 1 K K 1 ) )   2  2  ) EH H c E K EH 1 K and , where ) ) H ( H M 2 ) , i 2  p

q , K 2 1 3 

of firm i 2 q K i )) J 31 q i 1 2 /( /( 2 is defined asbefore: 2 is high, q   3 q 1

and K i K ! i 1 2   q D , as the ratio of the shares of the profits E ( q 3 2 K , so the firm with the lower costs has j  ) E j  ) 2 ( , where 2 K  1 )( 3 K  K 1 1 c ! )  1 1 3  ) i H 2 4 , K and from andfrom differences the .  j 2

K 1 J 2 , 2 J  H and . 2 . i z j . This CEU eTD Collection share of quantities the share of of the firm to the share of the quantities sold. It can be understood as follows: if firm on the same market. I will use this profitability measure profitability I this use will market. same the on firm second the with itself compare to firm the for serve can that profitability of measure of kind settings for the base model as follows: for base model the settings firm for the increases much measure share higher the how reveals of profitability firm of profitthe represents the measure of measuresubstitutability of the represents firmlow-cost line – the highest and measure profitability the firm second the for of profits the the share represents as follows: leavemarket. be willingto tothe Carrefour the of very madeowners the low, mighthad which havefactor Carrefour this – Carrefour, Tesco the profitability profitability the measure then costs, in difference slight is there if even that formulas the from see to possible isnot It M 1 of the low-cost firm. However, this becomes apparent when simulating the model, using model, the simulating when apparent becomes this However, firm. low-cost the of ¾ ¾ ¾ ¾ The properties of the profitability be reasoning can asimple after summarized measure The properties of profitability the Figure 3 shows the result of the simulation for the base settings. The vertical axis If always M M 1 1 M , M  1 i 2 M

exerted on the market andmarket the on exerted t 2 1 M then there just firmandmarketjust 1on the then there 0

1 as an implication of the Lemma 1,  2 M if 2 i q d q the better for firm the better the 1 2 2 M

/( , 2 q q of high-costthe firm is muchlower than profitabilitythe measure 2 2 and this is true just for  q 1 ) - the second lowest line, the profitability measureline, -the second profitability lowest the D 3

i 10 /( J 3 32 , . i E i  and itsand investors. In words,itother is some

3 5 j , ) H c is the pay-off of the firm the of pay-off isthe 1

M 3

0 2 2 0 , which means

/( . 1 0 3 , . H 2 M  i

to show, that in the case 3 M 0 . 1 q 2 01 ) i . The horizontal axis horizontal The . - thelowest line, the /( . q c i 1  i

q is as compared as is j c ) 2 is the effort i , then as then M 1 for M i CEU eTD Collection 25 margin put muchfirm has lower profit to thehigh-cost substitutes, closer arebecoming goods the as firms. both Second, measure of profitability on effect negative has andthis arebecoming pricesthe decrease asthegoods substitutes, closer First, measure. influencingthe profitability effects two following are because isthere concave, shape the firm low-cost the For compare. to interesting is measure profitability the of shape the Also, is muchsharply decreasing than shareof the quantities,the ascan be seenin theFigure 3. necessarily zero. not measure, profitability lowof reached level some Carrefour probably discussed, case concentration the What stay anymore since themarket. isto firm profitable regards market, for the 2 it noton firmis one there the on just market) the on is price competition strong there substitutes close Profit margin is the difference between the price and the cost of the good. of the cost the and price the between difference the is margin Profit shares and prof. measure 0,00 0,20 0,40 0,60 0,80 1,00 1,20 1,40 As goods are becoming close substitutes, the share of the profits for the high-cost firm high-cost for the profits of the share the substitutes, becoming close are As goods For this specific setting of the base model, for model, base the of setting this specific For 1 The share of the profits and quantities and the profitability andthe quantities and profits the of share The 0 0 0 0 0 0 0 0 0 011101 1001 901 801 701 601 501 401 301 201 101 profitability measure for high cost firm cost high for measure profitability the share of profit of high cost firm Figure3 The share of theprofits and quantities and the profitability measure measure of substitutability of measure measure 33 J profitability measure for low cost firm cost low for measure profitability the share of quantity of high cost firm ! 1141 (when the goods are very 25 compared to the to compared CEU eTD Collection are in Table 1 for the profitability measure in profitability are Table1forthe results The simulation. new single each in direction in one just – them halving or coefficients firm. low-cost the of measure profitability the on effect positive firm, measurefirm of low-cost negative has but effecton high-cost profitability the the which - described to the left of leftvalue tothe of the described represent for measure values the 800, model thesetting profitability of modifiedthe the as of measure set up of which is defined on the left part of the table. J

D H c E D 300 H c E Further I analyzed the model adding some slight changes – doubling each of the each of doubling changes – slight some model adding the analyzed Further I In both In both tables, the bolded values of under themeasure substitutability, is which 300 or M , J 2 of firm 2. In both tables just the results for the specific measure of substitutability

base 800 0,01 base 0,01 0,1 10 0,1 10 5 5 - are presented. - are J J 0.20 0.68 / 1.14 1.18 800 300 / 800 300 M M 2 1 double double double double D D 0.02 0.02 H H -20 -20 - - M 2 J J J J or 0.36 0.59 0.86 1.19 1.20 1.11 / / / / 800 300 800 300 800 300 800 300 M M M M 2 2 1 1 0 M 1 1 . The modification is made for the base model, the 0.005 D halve halve D 0.005 halve halve H H M -5 34 -5 - 1 - Table 2 Simulation for high-cost firm – firm 2 of firm 1 and in Table 2 for the profitability Table 1 Simulation for low-cost firm – firm 1 J J J J 1.19 1.20 1.11 / / 800 300 800 300 0.58 0.85 0.33 / / M M 800 300 800 300 M M 1 1 1 2 2 0 double double double double E 0.2 c 10 E 0.2 c 10 - - - - J J J J 1.19 1.19 1.12 / / 800 300 800 300 0.16 0.67 0.33 / / M M 800 300 800 300 M M 1 1 1 2 2 0 halve halve 0.05 halve halve E 2.5 0.05 c E 2.5 c - - - - J J J J / 1.11 / 1.18 1.15 1.20 / / 800 300 800 300 0.21 0.69 0.59 0.86 M M 800 300 800 300 M M 1 1 2 2 CEU eTD Collection shape of the profitability measure shape of profitability the substitutes, the merger would increase the profits of Tesco, but at the same time the mergerat sametime the but the Tesco, theprofitsof increase merger would the substitutes, wereclose goods their since Moreover, be would advantageous. competitor biggest the profitability so they decided toleave market. From the pointthe view of of leaveTesco, the of expected their of threshold some under went probably that profits lower much face to –had Carrefour them– oneof competitors, closest werethe hypermarkets the seen. Because left Slovakthe marketby selling its four in hypermarkets March 2008. of SAOthe prohibit to concentration.the year one Still, since after prohibition,the Carrefour argument an was which consumers, of the welfare the on effects has detrimental competitors closest two of the theconcentration However, market. leave the willing to Carrefour Carrefour might demand),set the (as that perceived bythecustomers were very substitutes close that products have sufferedmodel from is thethe lowfollowing. share ofnegligible. is not measure theprofitability Sinceprofit thethat costs, the between difference when the Accordingly, lot. hypermarkets made the ownersby the same amount forwereof both firms, the competitivethe increase costs pressure when isthe because so This measure. profitability the on effect any significant onclosest both firms does not change a competitors coefficient sensitivity market, of the size the of multiplication sellingsame forthe the asymmetricdifferentiation, with product model effect measure on profitability the the is the inhigh-cost measurediscussed), profitability the firm Further, of the specific this decreases. concentration the of case inthe itwas (as substitutes closer arebecoming products the as that Results presented in the Table 1 support the hypothesis about the concavity of concavity the of the about thehypothesis 1support in Table the Results presented At this point, the analogy between the Tesco-Carrefour case and the model model caseand the can be Tesco-Carrefour the analogy Atthe between point, this from the implication resulting important the discussed, case In theconcentration E by the same number. Also, the change in the price the in change the Also, number. same the by M 1 for the low-cost firm. It can be seen from 2 Table from the can be firm. seen It low-cost the for 35 D , and the division of the price H , increases, the effect on the on effect the increases, , c does not have not does CEU eTD Collection discussed. 26 market. toleave Carrefour the make enough tostay profits on market.the Inmyopinion, this reasoning explains will the of preferences consumer the of nature a is also disinvest andinvest. Thatis, there is involved always a risk in investmentthe decisions and it company makes low profits and wants to leave the market. ( substitutes value these benefitssomuch forand them goodsfromthe Tesco and arevery Carrefour close standards, more staff working there etc. The suspicion is that customers in Slovakia do not i.e.providing illumination, better fresh vegetable, higher higher standards, always sanitation is famousfor in in world the my everywhere that, brandopinion, to the Carrefour connected parties were notconvincing, since noinvestor was found at that time. the welfare of the consumersconsumers. This was shown in the Section 3.3. Therefore the merger from the point of viewshould of not be of the welfare onthe effects have detrimental it would andtherefore allowed. prices increase would The remedies offered by the merging Consumer preferences are reflected in the measure of substitutability which is a crucial variable in the model the in variable crucial a is which ofsubstitutability measure the in reflected are preferences Consumer The retail chains as multinationals might be facing obstacles when they decide to decide they when obstacles facing be might multinationals as chains retail The One may wouldargue whyCarrefour unit havehigher Thecosts. reasonmightbe J is quite high). This makes the prices to go down, but to such a level, that one that level, a such to but down, go to prices the makes This high). isquite 36 26 that influences whether the retail chain can CEU eTD Collection shown on shown on in variable the Section measure – profitability the lowvery been the high between levelsubstitutability of dueto as goods the of parties the have might Carrefour of profitability The solved: was puzzle the Second, welfare. consumer’s onthe effects in result would detrimental merger the since is justified, model the to According Differentiation. Product was extensionthe Shubikthe of andLevitan (1980) model with Duopolisticof Market low unitcosts. This leads to the asymmetry of the model. Therefore, the methodology used andfirm Tesco the with costs higherfirm unit isCarrefour the with assuming that costs, of the investors‘ pointview,neitherof was from production the which and inequality nestedin the be equal, not can chains theretail Also, products. model differentiated with the which leadsto were the closest they Further, model. the of setting duopoly the to leads competitors,which Carrefour, and Tesco namely and also themarket, relevant the players on important just two were there wasthat observation model. The customers in Slovakia for settingwere crucial in upthe that caseresulted Carrefour several observations Tesco- are rather price sensitive, market. leavebe Slovak willingto tothe made that Carrefour profits shares of the I model,low have itmight beenthe microeconomics about that showed the lastchapter the in Finally, in Slovakia. chains retail of market the leave to Carrefour of motivation the been have might what namely thesis, the of question research the on concentrating framework, I introduced behind framework the the mergerregulation, Iputthis then specificthis caseinto Two important conclusions can be drawn. First, the ban on the merger of type of merger the on ban the First, be drawn. can conclusions important Two of Theanalysis of my inThe modeling isthe of case. the the contribution thesis First I in Slovakia. thesis case in this conclude, To Tesco-Carrefour the analyzed Conclusion 37 Simulation . CEU eTD Collection . thesis presents a good example of a duopolistic model set in the real case. this economists, for Moreover, model. the by sufficiently is explained case the behind puzzle factor. important price asthemost the take mostly consumers the was that fact casethe in Tesco-Carrefour Yet, the consumer. consumers, the of or“price-sensitiveness” it different the account into mighttake might function utility new include a new factor utility other mightfunction befrom used, more demands would realistic which - bederived. A the distance among claimingin behave might aggregatethey Still, insome that specificway becontested. some the retailand tastes, different have chains and homogeneous not are consumers the However, and function. utility the cumbersome. be thealgebratoo would behind goods differentiated three just andevenwith complicated much more model this makethe would between However, them. of each substitutability demandsthe asbefore. size the reflect soasto coefficients different into Thisof by twoequal be themarket demandsactually the parts. could adjusted divides definition the First, case. Tesco-Carrefour the reflect better as to so more explanatory, model However, despite the fact that there are ways to render the model more specific, the more model specific, the ways to render are fact there the that despite However, Third, of formulas the usedinthis demands the thesis aggregate were derivedthe from measure of included bya firms might there moreSecond, unique characterized be make the to mightbe extended model that of the someaspects are there However, of (inof hypermarkets the of sqm), keepingthe sum 38 CEU eTD Collection Appendix A: TheFormulas fortheFigure 1 The range dd`: The rangeDF`: The rangeDF: The rangeDD`: The price The price p p u d : : pp q qp qp qp pp pp 12 1 11 11 11 u d        ©¹ ¨¸ §· () 111 244 1 )/(1)( DE )/ ) ((1 2 2 1 DJJ E EJ J E D ()  DE  J J DJ J 22 22 () DE 2 * (2) 2 * 39 E * CEU eTD Collection measure of the substitutability goods, the of measure of substitutability the where there does not exist such a combination notexistsuch of a combination does there time: same the at hold conditions mentioned previously holds: nothold:does following the that prove if Iwill so contradiction, the on based be will proof The generality. : expression: mathematical following firm the then positive, this point I provedthis point Lemma1. the p s I am interested into the fact, whether there exists such a combination of costs andthe costs of combination a such exists there whether fact, into the interested I am Both inequalities for(1. and 2.) good the for of in Lemma1is:“If demand the the equilibrium The statement 1. losing 2without for just demandand ofthe the price makeon I will proof good the The proof of the Lemma 1: equivalently after after substituting equivalently for The complement of has inequalities the followingthe form: 2. 2 is the coefficient of q p 2 c 2 2 ! and Appendix B: Proofs ofLemma 1,2,3 cc q 0 c 21 2 2 implies

implies, when using some simple algebraic operations, that ! q (2)(1) 0 2 š  ! 2)( ) (2 ) (2 i c KKK 0 does not make negative profit.” This statementis equivalent to the 2  DEEE Thus, I am interested that for which combination of . ! KK 2(2) 4 4 2 p 22 D  12 2 KKKK , then Lemma 1is proved. / E  D E and isbetween 0and1.This in isalways depicted relation  q i c K ! 2 differ in the direction of the sign, which means that 0 J 22 cc Ÿ cc c c , 12 40 12 2 1 ,, c 2 p i J t ( that 2 J c i  , that in equilibrium the following the in equilibrium , that ( for 2 K  p )( K 2 i 1

 2 ) 1 c K , 2 2 ) and D E J  q 2 c 2  2 K )0 ( !

K 0 2 s would hold. At D c 1 / E

cc  12 ,, ( or 1  J s i the ) c is 1 , CEU eTD Collection Section Section 3.4. are feasible as mentioned in the section in the mentioned as feasible are 27 if market the on operating Having the Lemma proved proof is1, the of Lemma 2 There are straightforward.firms two second firm puts (the market of the is firm out which for second the costs, of suchacombination represents the Figure 4 Actually the interesting part of the space c c D E 2 The analysis of Asymmetric Case 0 27 The proof The proof of Lemmathe 2: for K=0,K=1 some and Kbetween 0 and1.ThehashedareainFigure4 q 2

0 ) for some q 2 ! Price Equilibrium 0 J and 1 . , c 2 is just that one in the square (0,0), ( q 1 Figure4 The combination of costs feasiblefor the model ! , Iassume 41 0 . at the same time. More, as I stated in the D / E c 2 K=1 ! c 1 . K D E  ,

D E 0 , 1 ), where the costs

K=0 c 1 CEU eTD Collection then the difference between prices the between difference then the equilibrium, in c c c c q 1 1 2 2 2 ! ! ! ( ( c c 0 2 2 1 1 and , which proves the Lemma 2. , then Assuming The proof of the Lemma 3: Moreover, in the last equivalence I used the fact Iusedthe in equivalence last the Moreover,   ( ( 2 2 K K   )( )( K K 1 1 (   2 2 2 q ) ) 1  K K ( p 2 1 ! ) ) K c 

2 D D 0 E E )( K ! and 1 2 1    2 c   1 ) 2 2 K K K and   K K ) D E K K D E c 2 2  2 c  c c 2 2 ! 2 2 2 , since when using the basic assumption and  c 1  1 K ( K 2 K  c ( p 2 œ 1 2 2 K c   c 2  )( 2 4 K ! 1 p ! c  1 2  42 K ( 2 ) 2 c K

K 1  ( H 2 ) œ 2 ( K H /( D 2 E  2 and )(  ( c K  2 1 2  K  2  2 K ) )(  K K p K ( ) 1 2 2 K ) ! 2   ) c

( 2 0 K 2 1 K c 1 2 , which proves the Lemma 3.   ) 1  )( I will denote  D E 2 K 1 K K   2  K ) K D E K 2 2  )  K c D E K 1 2

2   1 c c 2 K 1 1 ,  c H c K 1 c 1 K

2 q  2 1 ! c D 4 c ! 2 c 1 /   1 and 0 E 2 K c and 1 and 2 , so , Ÿ H , CEU eTD Collection Tesco 30Sep2005, Slovak Antimonopoly 2007, Office Slovak Antimonopoly Office 2007, Slovak Antimonopoly SlovakOffice Antimonopoly 2006, Shubik, M., Levitan,Shubik, M., R.1980, Securities Information, Securities http://europa.eu/scadplus/leg/en/lvb/l26096.htm [Accessed 7June 2008]. Portal site of the European Union, Jones, A.,Jones,B. 2004, Suffrin, European Commission 2006, Hovenkamp, H.1999, European Commission 1997, Collection136/2001 Coll.Act ofLaws No on protection the of competition, Slovak language, on on June 5th 2008, Available at: http://www.antimon.gov.sk/eng/article.aspx?c=135&a=2537 [Accessed7 June 2008]. http://www.antimon.gov.sk/eng/article.aspx?c=135&a=2537 J. natural market”„Unnatural effort from for Horváthová articles from the January 11, 2007 „Economical Darwinism“ from R.Ba Darwinism“from articles theJanuary 11, 2007„Economical from [Accessed7June2008]. http://www.antimon.gov.sk/eng/article.aspx?c=451&a=2607 Tesco andCarrefour June 2008]. [Accessed 7 Availablehttp://www.antimon.gov.sk/files/28/2007/146.rtf Bratislava,at Cambridge, MA. http://www.secinfo.com/dsvr4.2Dsp.htm 7June[Accessed 2008]. Foreign Ussuer, retrieved2008, Available 5th onJune at: Oxford University Press. Second Edition,Publishing, West St.Paul, Minnesota. 2008]. 7June [Accessed http://www.legaltext.ee/text/en/T71346.htm Availableat 09.12.1997. Community the purposes of competition law en.pdf en.pdf 7June2008]. [Accessed http://ec.europa.eu/comm/competition/mergers/cases/decisions/m3905_20051222_20310_ and Slovakia) ústredných orgánov štátnej správy Slovenskej republiky vzneníneskorších Slovenskejrepubliky predpisov. ústredných orgánov štátnejsprávy Slovenskej národnej rady Slovenskej národnej 136/2001 Z.z.z 21.2.2001 o ochrane hospodárskej sú [Internet] Available at [Internet] TESCO - CARREFOUR ASSET SWAP Federal Antritrust Law Policy:The of Competitionand its Practice Registration in the Securities RegistryNo.0593 Registration intheSecurities [Internet], Available at: EC Competition Law, Text, case and materials Text, case EC CompetitionLaw,and Case NoCOMP/M.3905 –TESCO /Carrefour (Czech Republic Commission notice on the definition ofthe RelevantMarketon thedefinition for Commission notice þ Market Structure and Behavior . 347/1990 Zb. o organizácii ministerstievaostatných Zb. . 347/1990 Control ofconcentrations between undertakings Bibliography Prohibition oftheconcentration between theundertakings The AntimonopolyOfficeof theSRreaction toTrend Rozhodnutie Rozhodnutie 43 [Internet], Official[Internet], Journal C 372 of ý íslo 2006/FH/3/1/146 [Internet], Press Release, retrieved Ģ aže aozmene adoplnenízákona , Harvard University Press, [Internet], Available at [Internet] , Report of , Second Edition, [Internet] [Internet], Ģ o and ,. CEU eTD Collection Tyagi,Rajeev, (2005), 10Mar2008, The Slovak Spectator Bulletin, Vol. 12, No. 17 pp. slovakia.html 7June[Accessed 2008]. http://www.spectator.sk/articles/view/30981/3/new_owner_for_carrefour_retail_chain_in_ [Internet], Press Release, Available at: 617A5 [Accessed7June2008]. http://www.tescocorporate.com/page.aspx?pointerid=79A56E192507442AB81121B8991 On Firms' Preferences for ProductPreferencesOn Firms'for Differentiation New owner forCarrefour retailchaininSlovakia 44 , Economics