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Tomtom / Tele Atlas 2008 ACE Conference Budapest TomTom / Tele Atlas Raphaël De Coninck,* Chief Economist Team DG COMP, European Commission *The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission. 27/11/2008 M.4854 TomTom / Tele Atlas 1 I. Background Information II. Theories of Harm III. Economic Analysis IV. Conclusion 27/11/2008 M.4854 TomTom / Tele Atlas 2 I. Background Information Purely vertical merger (backward integration) Upstream: Downstream: 27/11/2008 M.4854 TomTom / Tele Atlas 3 • Supplier of navigable digital map databases • Main competitor: • Main customer: TomTom 27/11/2008 M.4854 TomTom / Tele Atlas 4 • Portable Navigation Devices (PNDs) • Introduced in 2003/2004 • Leading position in the EEA • Main competitors: Garmin, Mio, Medion • Develops own navigation software 27/11/2008 M.4854 TomTom / Tele Atlas 5 Navigable digital maps are used in… In-dash navigation Smart phones PDAs PNDs 27/11/2008 M.4854 TomTom / Tele Atlas 6 Sources of digital map data: Satellite photography Aerial Photography Mapping vans Government agencies 27/11/2008 M.4854 TomTom / Tele Atlas 7 Digital maps •Core database : main geographical information •Add-on features : Points of Interest (restaurants, gas stations, hotels) , 3D visualisation, phonemes, postal codes, etc. Software 27/11/2008 M.4854 TomTom / Tele Atlas 8 Stated Merger Rationale • Improve Tele Atlas’ maps using TomTom’s large customer base: TomTom collects error reports from users TomTom keeps track of its customers’ travels (probe data) 27/11/2008 M.4854 TomTom / Tele Atlas 9 II. Theories of Harm • Foreclosure (§ 33 NHMG) – Total: refusal to deal with TomTom’s competitors. – Partial: price increase, quality degradation. • Abuse of confidential information (§ 78 NHMG) – TomTom could access information about future behaviour of TA’s customers (pricing, innovation, new business models). • Coordination (§ 79 NHMG) 27/11/2008 M.4854 TomTom / Tele Atlas 10 Foreclosure Merged company gives up sales upstream… Increased market power Foreclosure? Higher map prices … to win sales downstream through increased market share and/or higher prices? Result: Higher prices for PND consumers? 27/11/2008 M.4854 TomTom / Tele Atlas 11 III. Economic Analysis • Would the merged entity have an incentive to foreclose its downstream competitors? Trade-off between the upstream losses and the downstream gains associated with a foreclosure strategy. • Will there be anticompetitive effects on the downstream market? Estimation of impact on downstream prices 27/11/2008 M.4854 TomTom / Tele Atlas 12 Total Foreclosure • Would the merged entity have an incentive to stop supplying maps to its downstream competitors? Simple profit test: Commission calculated the critical price increase by Navteq that would make input foreclosure profitable for the integrated company (econometric estimation of elasticities using a nested logit model) Commission found that Navteq would need to increase prices very significantly for Tele Atlas to recoup these losses downstream (small share of the map in PND price, limited cross-price elasticities, Garmin’s long-term contract), which was considered unlikely. Note: • Not an equilibrium strategy • Questions regarding ability to commit were left open (concerning both commitment à la OSS and commitment à la Hart and Tirole) 27/11/2008 M.4854 TomTom / Tele Atlas 13 Partial Foreclosure • Would the merged entity increase the price of maps to its downstream competitors, thereby significantly increasing PND prices? Considered several scenarios, including Navteq matching Tele Atlas’ price increases Found limited impact of an increase in the map price on downstream market (small share of the map in PND price, long-term contracts) Considered product degradation unlikely given Navteq’s presence on the upstream market 27/11/2008 M.4854 TomTom / Tele Atlas 14 Efficiencies • Elimination of double margins: Direct result of profit maximization Merger specificity (likelihood that the double margin would be eliminated through non-linear pricing?) Overall effects of the transaction estimated with very simple linear demand model (taking into account the elimination of double margins) => Small average price decrease for PNDs • Other efficiencies: “better maps, faster”: Merger specificity: likelihood of achieving efficiencies via contract? (investment specificity, incomplete contract) Quantification issues 27/11/2008 M.4854 TomTom / Tele Atlas 15 Confidentiality Concerns • Confidentiality concerns would reduce the value of a map database to customers (similar to product degradation) • The extent of information exchange in this case (e.g. for product development) • Merged entity’s incentives to safeguard the confidential information/solve the confidentiality concerns of its customers. 27/11/2008 M.4854 TomTom / Tele Atlas 16 Coordinated effects • Vertical mergers may increase scope for coordination (Nocke and White, AER , 2007): Integration diminishes the non-integrated firm’s incentive to deviate (outlets effect); But integration also limits the possibility to retaliate against the integrated firm (punishment effect). • In this case, coordination between Navteq and Tele Atlas was considered unlikely (in view in particular of the absence of signs of pre-merger coordination and market characteristics not prone to coordination, such as the absence of price transparency). 27/11/2008 M.4854 TomTom / Tele Atlas 17 IV. Conclusion • Often strong complaints from customers/competitors in non-horizontal cases • Economic analysis thus plays a crucial role (importance of early economic submissions) • Integrated rather than checklist approach to NHM guidelines 27/11/2008 M.4854 TomTom / Tele Atlas 18.
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