ACE-Panel-Magna-Karmann-2010

ACE Annual Conference 2010

Merger analysis in the market for convertible roof-top systems: 4-to -3? Feel free! But 3 -to -2 can’t do!

11 November 2010 UEA, Norwich Christian Ewald Bundeskartellamt HoU „Economic Issues“ (G3) www.bundeskartellamt.de 10.12.2010 Outline

2 Some basic facts Assessment framework Focal points of discussion Theory of harm Assessment of countervailing (buyer) power of OEM Evidentiary issues – Relevance of OEM’s views / submissions – Experimental evidence

www.bundeskartellamt.de 10.12.2010 Some basic facts

Two mergers in convertible roof-top systems (CRTS): Webasto / Edscha (4-to-3): Unconditional clearance 12/2009 Magna / Karmann: (3-to-2): Prohibition 5/2010 (review in court still pending) Relevant market concerned: European-wide market for CRTS (soft tops, RHT); uncontested by parties (two-stage) bidding market demand-side: car manufacturers (OEMs)

www.bundeskartellamt.de 10.12.2010 Assessment framework

Coordinated effects / collective dominance in both cases Legal background: dominance test in German ARC; clear-cut unilateral effects cases (“gap cases”) covered? Approach of the Bundeskartellamt: Standard assessment framework (as established in case law of the German Supreme Court which i.a . explicitly refers to the “ Airtours ” and “Impala” decisions of European Courts) First step: Assessment of whether structural features of the market facilitate (tacit) collusion Second step: Assessment of “incentive constraint” by analyzing – potential focal points of collusion – market transparency / ease of detection of cheating – retaliation / deterrence mechanisms – countervailing factors (i.a. countervailing buyer power) Plus: Assessment of market reality ( “Wettbewerbsgeschehen”)

www.bundeskartellamt.de 10.12.2010 Focal points of discussion - Theory of harm -

5 Facilitating structural market features Low number of players / high market concentration; HHI / ∆: 3.800 / 600 (Webasto / Edscha) > 5.000 / 1.100 (Magna/Karmann) Barriers to entry (i.a. reputation; high sunk cost) Repeated interaction: sufficient (2002 -09: 53 contracts) Stable/predictable demand, no leap-frog innovations Products heterogeneous (but : two-stage bidding procedure; production tenders based on detailed specifications of OEMs) High market transparency Symmetry of players (assessed differently in both cases) Possibility to pass-on price increases No countervailing factors / buyer power of OEM

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Some facts concerning bidding behavior: Number of bidders 2002-2009: no clear nexus between number / volume, but 2 or more for high volumes – 1 bid: 7 tenders (small volumes: i.a. Ferrari, Maybach) – 2 bids: 21 tenders (i.a. A4, BMW 3xx, C70; also RR) – 3 bids: 21 tenders (i.a. A3, 207 CC, E-Class; also Bentley) – 4 bids: 4 tenders (i.a. Mini, Fiat 500 C) Activity rate of bidders: Magna (84%); Webasto (65%); Edscha (52%); Karmann (37%) Meeting of players / winners in tenders:

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Key arguments for clearance of 4-to-3 No indication of collusive behavior in the past (i.a. Magna quite aggressive in recent years; pressure on prices) In most tenders (90%) only up to three bidders Assessing core competences as well as bidding behavior: closest competitors Magna / Edscha resp. Magna / Karmann Edscha in insolvency; indications for faltering reputation of Webasto (“Edscha lacks money but has good reputation, for Webasto it’s just the other way round”) In a nutshell (paraphrasing i.a. Selten 1973; Huck et al. 2004): “4 are many, 3 (asymmetric) are enough” Aside: German Monopolies Commission (government’s advisory body on competition matters) modestly criticized clearance decision (“4-to-3 merger already creates very tight market structure”)

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Key arguments for prohibiting 3-to-2 Karmann in insolvency, but failing company defense not applicable (alternative acquirers available; confirmed in 11/2010: sales agreement with Valmet) Main reason for negative impact – Reduction of players – Creation of symmetric duopoly Assessing the incentives for (tacit) collusion – Promising focal point: market / customer sharing – High transparency, detection of cheating easy – Incentive to deviate and retaliation mechanism: Irregular high volumes / long-term contracts create quite strong incentive to cheat, but capacity constraints in production do not impede aggressive bidding strategy post deviation significantly (project-specific production facilities; long-term contracts) – No countervailing (buyer-)power of OEM

www.bundeskartellamt.de 10.12.2010 Focal points of discussion - Countervailing (buyer-)power -

9 Parties / ESMT accentuated three different aspects Cost control / knowledgeable customers Sponsored entry Credible outside option / threat of (re-)in-sourcing Main reasons to reject this view Information symmetry regarding cost unlikely / not confirmed Sponsored entry very costly i.a. due to quality risk (preeminent role of quality reputation / reliability) and time consuming Credibility of threat of in-sourcing limited: – History of the sector (spin-offs / out-sourcing) – Significant economies of scale / scope; high sunk cost – Cost calculations / estimations submitted by OEM (>10% per unit, exclusive of R&D)

www.bundeskartellamt.de 10.12.2010 Focal points of discussion - Evidentiary issues - 10 Inferior weight given to overall assessment by OEM Opinions shouldn’t replace / reverse in depth analysis Main focus of statements on security of supply; sometimes ambiguous statements depending on level of hierarchy General background (Farrell 2004; Heyer 2007): Listening to customers bears significant risk of (type -II / false -negative) bias in final assessment if – intermediate customers concerned – low share in total cost of final product (here: ∼10%) – low price elasticity for final product / ability to pass-on price increase for input – Further aspects to be considered: Fear of retaliation Reluctance to disclose weak bargaining position

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Role of results of experimental economics Bundeskartellamt did not consider results of experimental economics to be hard factual evidence, but … results conceptually strengthen core arguments of the theory of harm at stake – confirm highly robust theoretical results concerning preeminent role of number of players (Huck et al. 2004) – confirm significant risk of coordinated effects if number of players decreases from 3 to 2 with more symmetric firms (Fonseca/Normann 2008)

Aside: Interesting point of discussion whether and to which extent the experimental setting in Fonseca/Normann 2008 (Betrand-Edgeworth competition) fits the relevant market at stake (bidding market; relevance of capacity constraints)

www.bundeskartellamt.de 10.12.2010 ACE Annual Conference 2010

Thank you very much!

Christian Ewald Bundeskartellamt HoU “Economic Issues” (G3)