Tuesday, October 27, 2009
Posted by Wentong Zheng
In my previous post on China’s Antimonopoly Law (“AML”) (see here), I provided a brief overview of the AML and the new developments that happened since the AML went into effect last year. Today I will focus on China’s new merger review regime under the AML.
Prior to the AML, an antitrust review process was in place for foreign acquisitions of Chinese companies. No comparable process existed for mergers and acquisitions among domestic companies. The framework for a new merger review regime is laid out in Chapter 4 of the AML. By not limiting its reach to foreign acquisitions, as the previous regulation governing merger reviews did, Chapter 4 of the AML brings within its purview mergers and acquisitions among domestic companies.
More importantly, Chapter 4 of the AML specifies a list of the substantive factors that will be considered in merger reviews: (1) the market share of the undertakings (meaning business operators or parties) involved in the relevant market and their ability to control the market; (2) the degree of market concentration in the relevant market; (3) the effect of the concentration on market entry and technological progress; (4) the effect of the concentration on consumers and other undertakings; (5) the effect of the concentration on national economic development; and (6) other factors affecting market competition as determined by the antimonopoly enforcement agency. In the meantime, Chapter 4 of the AML provides that a merger that otherwise would be prohibited may be allowed if it has competitive effects that outweigh its anticompetitive effects. In addition, a merger that otherwise would be prohibited may also be allowed if it is “in the social or public interest.”
Chapter 4 of the AML, however, only provides a sketch of the mechanics of the new merger regime. The details of the merger review regime are expected to be fleshed out in subsequent regulations. In March 2008, China’s State Council released a draft merger notification and review regulation for public comments, to which the ABA’s Antitrust Section and International Law Section responded with extensive comments (see here—you will need to scroll down to the middle of the document to see the comments in English). The regulation that was eventually promulgated in August 2008, however, was a stripped-down version containing only notification threshold provisions. Separately, in May 2009, the Antimonopoly Commission (the inter-agency body charged with antitrust policymaking under the AML) issued guidelines on market definition under the AML, after soliciting public comments (see ABA comments here). Four other regulations pertaining to the other aspects of the merger review regime (including merger notification procedures, merger review procedures, investigation of mergers not notified as required by law, and investigation of mergers not reaching the notification thresholds) are currently going through the rulemaking process.
What emerges from this hodgepodge of regulations or proposed regulations is a merger review regime that in some respects resembles those of Western countries and in some other respects does not. On one hand, China’s new merger review regime follows many of the common Western practices, such as the adoption of the SSNIP test for market definition and the utilization of notification thresholds based on the size of the parties to the transactions. On the other hand, the factors considered in merger reviews in China are apparently broader and less predictable than those considered in Western countries. The factors considered in China are broader because the merger authority can consider factors other than the effects of the merger on competition, including the effects of the merger on “other undertakings” (does it imply that China may want to protect the competitors, not the competition?) and the effects of the merger on “national economic development” (does that give industrial policies a role in merger reviews?). The factors considered in China are less predictable because the merger authority can consider any factor that it may determine affects market competition, and factors as amorphous as “social or public interest.”
As is true perhaps with every merger review regime, what is more important than the texts of the merger review laws and regulations is how merger reviews are actually conducted. The Antimonopoly Bureau of MOFCOM has assumed responsibility for merger reviews under the AML. As of now, MOFCOM has blocked one transaction (Coca-Cola/Huiyuan), and approved four transactions with conditions (InBev/Anheuser Busch, Mitsubishi Rayon/Lucite, Pfizer/Wyeth and GM/Delphi).
The five merger cases that MOFCOM has blocked or approved with conditions involve different types of merger: horizontal merger (InBev/AB, Mitsubishi Rayon/Lucite, and Pfizer/Wyeth), vertical merger (GM/Delphi), and conglomerate merger (Coca-Cola/Huiyuan). Unfortunately, the published decisions for those cases tend to be very cursory. And the decisions generally are focused more on remedies than on the evidence that would support a conclusion of competitive harms. For two analyses of MOFCOM’s decisions in InBev/AB, Mitsubishi Rayon/Lucite, and Coco-Cola/Huiyuan, see here and here. One thing that is clear from those cases is that MOFCOM has demonstrated its readiness to impose both structural remedies (such as the divestitures ordered in Mitsubishi Rayon/Lucite and Pfizer/Wyeth) and behavioral remedies (such as the restrictions on the acquisition of additional equity stakes in Chinese beer companies imposed in InBev/AB). But in terms of how MOFCOM would evaluate available evidence to draw inferences about competitive harms, I don’t believe that MOFCOM has arrived at—much less revealed—a pattern of thinking in the decisions it has published so far.
Well, some believe that there is a pattern—a pattern of using the merger review process as a protectionist tool against foreign investors. This argument is bolstered by MOFCOM’s decision to block the Coca-Cola/Huiyuan deal. You may also have noticed that all of the transactions blocked or conditionally approved by MOFCOM involve foreign investors. That surely smacks of protectionism—or does it? I will offer my takes on these issues in my next post.
Posted by D. Daniel Sokol
Lia Vitzilaiou (Lambadarios Law Offices) & Constantinos Lambadarios (Lambadarios Law Offices) explain The Slippery Slope of Addressing Collective Dominance Under Article 82 EC.
ABSTRACT: Article 82 EC Treaty is the instrument used by European and National Competition Authorities to address the issue of dominance in the market and its abuses by undertakings holding such positions. While this Article was primarily intended to address the issue of “single dominance,” the wording “abuse by one or more undertakings of a dominant position” allowed the interpretation that “collective dominance” (“CD”) may also be addressed by Article 82.
This approach may appear very effective from a theoretical point of view, but its application in the real world has proven so complex as to render it inoperative or even perilous.
Monday, October 26, 2009
Posted by D. Daniel Sokol
Doh-Shin Jeony (Toulouse School of Economics, Universitat Pompeu Fabra) and Domenico Menicucci (Università degli Studi di Firenze) write on Bundling and Competition for Slots: Sequential Pricing.
ABSTRACT: In this paper we study, as in Jeon-Menicucci (2009), competition between sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. This paper considers sequential pricing and complements our main paper (Jeon- Menicucci, 2009) that considers simultaneous pricing. First, Jeon-Menicucci (2009) find that under simultaneous individual pricing, equilibrium often does not exist and hence the outcome is often inefficient. By contrast, equilibrium always exists under sequential individual pricing and we characterize it in this paper. We find that each seller faces a trade-off between the number of slots he occupies and surplus extraction per product, and there is no particular reason that this leads to an efficient allocation of slots. Second, Jeon Menicucci (2009) find that when bundling is allowed, there always exists an efficient equilibrium but inefficient equilibria can also exist due to pure bundling (for physical products) or slotting contracts. Under sequential pricing, we find that all equilibria are efficient regardless of whether firms can use slotting contracts, and both for digital goods and for physical goods. Therefore, sequential pricing presents an even stronger case for laissez-faire in the matter of bundling than simultaneous pricing.
Posted by D. Daniel Sokol
Prabal Roy Chowdhury (Indian Statistical Institute, Delhi Center) explains Free Entry Bertrand Competition.
ABSTRACT: This paper examines Bertrand competition under free entry, when firm size vis-a-vis market size is exogenously given. A free entry Bertrand Nash equilibrium (FEBE) exists if and only if relative market size is sufficiently large. Further, there is a unique coalition-proof Nash equilibrium price that corresponds to the minimum FEBE price, leads to average cost pricing for all active firms and is decreasing in market size.
Posted by D. Daniel Sokol
Mina Baliamoune (University of North Florida - Econ) and Stefan Lutz (U. Manchester - Econ) write on Preemption, Predation, and Minimum Quality Standards.
ABSTRACT: We present a model of vertical product differentiation and exit where a domestic and a foreign firm face fixed setup costs and quality-dependent costs of production and compete in quality and price in the domestic market. Quality-dependent costs are quadratic in qualities, but independent of the quantities produced. The domestic government may impose a minimum quality standard binding for both foreign and domestic firms. In the presence of an initial cost advantage of the domestic firm, a sufficiently high minimum quality standard set by the domestic government will enable the domestic firm to induce exit of the foreign firm, i.e. to engage in predation. However, the same standard would lead to predation by the foreign firm, if the foreign firm had the initial cost advantage.
Posted by D. Daniel Sokol
The DOJ/FTC Final Report on Charting the Future Course of International Technical Assistance, which is based on the February 6, 2008 Workshop is out. As some of you may know, I participated as panelist. See my comments here.
Collective Dominance Through Tacit Coordination: The Case for Non-Coordination Between Article 82 and Merger Control "Collective Dominance" Concept
Posted by D. Daniel Sokol
ABSTRACT: Intervention in oligopolistic markets or—to be more precise—oligopolistic markets in which firms appear to be coordinating their actions, is a multifaceted topic; aspects of which have sparked some of the most intense debates in competition policy.
The oligopoly problem, as it is often termed, refers to firms acting in a parallel manner in the market in such a way that competition between these firms is dampened with the ultimate effect of the consumer being harmed. Oligopolies may be targeted by EC competition laws through the application of Article 81 (where behavior is explicitly coordinated), Article 82 (where behavior is explicitly or implicitly coordinated) or, prospectively, through the application of merger control rules to concentrations which are likely to enable or further facilitate coordination in a given market. The analytical issues surrounding competition law intervention in oligopolistic markets entail theoretical and practical difficulties; it is notable that the Commission's new guidance on Article 82 has explicitly excluded collective dominance from the ambit of its application.
This article will briefly outline the application of EC competition law to oligopolistic markets, with particular focus on tacit collusion between firms, the relationship between Article 82 and merger control in this respect, and the judicial pronouncement in Airtours of the conditions under which tacit coordination exists. The recent European Court of Justice (“ECJ’) Impala judgment will be examined; in particular, as regards the implications for the standard of proof in collective dominance cases and whether a different approach to collective dominance is required for merger control and Article 82 following the decision. In addition, the application of the Airtours criteria to collective dominance under Article 82 where exclusionary abuses are concerned will be discussed.