Part2 Case Studies 7/2/03 12:51 PM Page 1 DTI ECONOMICS PAPER NO. 1 Bundling, Tying, and Portfolio Effects PART 2 - CASE STUDIES BY PROFESSOR BARRY NALEBUFF YALE UNIVERSITY AND DAVID MAJERUS CHARLES RIVER ASSOCIATES FEBRUARY 2003 DTI ECONOMICS Part2 Case Studies 7/2/03 12:51 PM Page 2 Part2 Case Studies 7/2/03 12:51 PM Page 1 DTI ECONOMICS PAPER NO. 1 Bundling, Tying, and Portfolio Effects PART 2 - CASE STUDIES BY PROFESSOR BARRY NALEBUFF YALE UNIVERSITY AND DAVID MAJERUS CHARLES RIVER ASSOCIATES FEBRUARY 2003 1 Part2 Case Studies 7/2/03 12:51 PM Page 2 2 Part2 Case Studies 7/2/03 12:51 PM Page 3 Table of contents I Introduction .........................................................................................6 II Tetra Pak International ....................................................................7 1 Background ..............................................................................................7 2 Case allegations and issues .....................................................................7 3 Market definition and dominance.............................................................8 4 European Commission findings ...............................................................8 5 Analysis of issues...................................................................................12 6 Predatory pricing ....................................................................................15 7 European Commission remedies ...........................................................16 III Tying and the HILTI case study.................................................17 1 Background ............................................................................................17 2 European Commission’s analysis of the case........................................18 3 Economic analysis..................................................................................19 IV GE-Honeywell merger ..................................................................22 1 Introduction ............................................................................................22 2 Background ............................................................................................22 3 The case against the merger .................................................................23 4 Why bundle ............................................................................................25 5 Negotiating bundles ...............................................................................30 6 Empirical evidence of dominance and bundling.....................................33 7 The (im)practicality of bundling engines.................................................37 8 Evidence that bundling would lead to exit by rivals...............................38 9 Conclusions ............................................................................................38 3 Part2 Case Studies 7/2/03 12:51 PM Page 4 V GECAS and the GE-Honeywell merger: is the Archimedean theory of leverage Kosher? ...............40 1 Introduction ............................................................................................40 2 Aircraft leasing and a history of GECAS.................................................41 3 Market shares ........................................................................................43 4 How does the leverage work? ...............................................................44 5 Would GECAS extend its policy to Honeywell?.....................................47 6 Reasons why GECAS has this policy.....................................................50 7 Empirical support....................................................................................52 8 Should we be concerned?......................................................................60 9 Conclusions ............................................................................................61 VI Independent Service Organisations v Kodak ......................63 1 Background ............................................................................................63 2 Discussion ..............................................................................................68 3 Conclusion..............................................................................................71 VII Aspen case........................................................................................72 1 Background ............................................................................................72 2 Court decisions.......................................................................................74 3 Economic analysis..................................................................................75 VIII Guinness and Grand Metropolitan merger ..........................79 1 Background ............................................................................................79 2 European Commission decision.............................................................80 3 Analysis ..................................................................................................83 IX Interbrew and Bass merger .......................................................87 1 Background ............................................................................................87 2 Competition Commission analysis .........................................................89 3 Analysis of issues...................................................................................91 4 Part2 Case Studies 7/2/03 12:51 PM Page 5 X SMG SRH - Scottish Radio case ..............................................94 1 Background ............................................................................................94 2 OFT analysis...........................................................................................95 3 Analysis of issues...................................................................................96 XI Foreign package holidays and insurance ..............................98 1 Background ............................................................................................98 2 MMC report............................................................................................99 3 Current market conditions....................................................................103 4 Economic analysis................................................................................105 XII BT telephone and internet bundling .....................................107 1 Background ..........................................................................................107 2 Oftel’s analysis .....................................................................................108 3 Economis analysis................................................................................112 XIII Mobile telephones .......................................................................114 1 Background ..........................................................................................114 2 Analysis of pricing plans.......................................................................116 3 Analysis of terminating access.............................................................119 4 Conclusion............................................................................................121 XIV Jefferson Parish Hospital ..........................................................122 1 Background ..........................................................................................122 2 Case history..........................................................................................123 3 Economic analysis................................................................................125 XV References ......................................................................................127 5 Part2 Case Studies 7/2/03 12:51 PM Page 6 I Introduction In this volume we present thirteen case studies from the United Kingdom, Europe, and the United States. These cases provide us with the opportunity to apply the issues that are discussed in the theory volume to real world situations. For each case, we present the background, the decision reached on the case, and an analysis of the relevant economic issues. Generally we are not analysing all of the issues that were relevant to the case but focusing on those with relevance to the issues of bundling, tying, and portfolio effects. With the exception of the GE/Honeywell case and the mobile telephones case, we were not involved in any of these proceeding, and thus we do not have complete information on the cases.1 At times we reach conclusions that are counter to the ones reached by the competition authorities. We present these conclusions not to be critical of the competition authorities but to present what we believe would have been the appropriate methodology for analysing these particular issues. That our conclusions are different from the competition authorities could be due to our reliance upon public information (as opposed to having the full set of information, including confidential information) or it may be due to the fact that we address only some of the issues in the particular case. Finally, we may differ in our conclusions because of different interpretations of the relevant economic theory. 1 Our analysis of the cases we were involved in, GE/Honeywell and mobile telephones, do not rely on confidential information. 6 Part2 Case Studies 7/2/03 12:51 PM Page 7 II Tetra Pak International There