Merger: Antitrust: Competition: FTC:
Market (high market concentration):
Two competitors only:
Hypothetical monopolist test:
Small but significant and non-transitory increase in price (“SSNIP”):
Herfindahl-Hirschmann Index (“HHI”):
Gross Upward Pricing Pressure Index methodology (“GUPPI”):
Prima facie case:
(…) Pursuant to a Share Purchase Agreement dated April 27, 2017, WMS proposed to acquire 100% of Drew’s voting securities for approximately $400 million. Am. Compl. ¶ 25. The FTC then conducted a ten-month investigation, after which it “found reason to believe that the proposed Acquisition violates Section 7 of the Clayton Act and Section 5 of the FTC Act.”
Section 7 of the Clayton Act prevents mergers or acquisitions where “the effect . . . may be substantially to lessen competition, or to tend to create a monopoly” in “any line of commerce or in any activity affecting commerce in any section of the country.” 15 U.S.C. § 18. As the Supreme Court has noted, Section 7 concerns “probabilities, not certainties,” Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962), and thus the FTC need not demonstrate certainty that a proposed merger will produce anticompetitive effects—only that a “substantial lessening of competition will be ‘sufficiently probable and imminent’ to warrant relief.” FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 115 (D.D.C. 2004) (citing United States v. Marine Bancorporation, 418 U.S. 602, 618 (1974)).
Section 13(b) of the Federal Trade Commission Act empowers the Federal Trade Commission to seek preliminary injunctive relief in order to prevent a merger until it can adjudicate the merger’s legality in an administrative proceeding, provided the agency has “reason to believe” that the merger will violate the antitrust laws. 15 U.S.C. § 53(b).
(…) The ultimate determination of the legality of a merger involves an assessment of the new firm’s market power (…) It is appropriate to begin a merger analysis by defining the “relevant product and geographic boundaries of the market in question.” (…) (“defining the relevant market is critical in an antitrust case because the legality of the proposed mergers in question almost always depends upon the market power of the parties involved.”)
The “relevant market has two components: (1) the relevant product market and (2) the relevant geographic market.” (Op., p. 11-12).
In this case, there is no dispute regarding the relevant geographic market—the parties agree it is global.
Relevant product market:
The Supreme Court has long maintained that “the outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and the substitutes for it.” Brown Shoe Co., 370 U.S. at 325. Accordingly, the touchstone is demand substitution—“market definition focuses . . . on customers’ ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as reduction in product quality or service.” 2010 Merger Guidelines § 4 (…) Lastly, antitrust markets can be based on targeted customers. Section 4.1.4 of the Merger Guidelines—described by the court in Sysco as providing “the clearest articulation of a targeted customer approach to product market definition”—states that “if a hypothetical monopolist could profitably target a subset of customers for price increases, the Agencies may identify relevant markets defined around those targeted customers, to whom a hypothetical monopolist would profitably and separately impose at least a small but significant and non-transitory increase in price.” Merger Guidelines § 4.1.4; Sysco, 113 F. Supp. 3d at 27. In other words, a targeted customer market may exist when “a price increase for targeted customers may be profitable even if a price increase for all customers would not be profitable because too many other customers would substitute away.” Merger Guidelines § 3 (Op., p. 14).
Hypothetical monopolist test:
(…) The application (…) is frequently the subject of “testimony from experts in the field of economics,” and the “practical indicia” described by the Supreme Court in Brown Shoe. Sysco, 113 F Supp. 3d at 27. In determining the bounds of a relevant market, courts often opt “to ask hypothetically whether it would be profitable to have a monopoly over a given set of substitutable products . . . . If so, those products may constitute a relevant market.” H & R Block, 833 F. Supp. 2d at 51–52; see also 5C PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW (hereinafter, “Areeda & Hovenkamp”), ¶ 530a, at 237 (4th ed. 2014) (“A market can be seen as the array of producers of substitute products that could control price if united in a hypothetical cartel or as a hypothetical monopoly.”). This hypothetical inquiry is referred to by courts and in the merger guidelines as the hypothetical monopolist test. See Sysco, 113 F. Supp. 3d at 27; Merger Guidelines § 4.1.1. The test essentially asks whether a “hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products . . . likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”) on at least one product in the market, including at least one product sold by one of the merging firms.” Merger Guidelines §4.1.1. A SSNIP is usually defined as five percent or more. Id.
The Brown Shoe Practical Indicia:
Courts also determine the boundaries of a relevant product market by examining “such practical indicia as industry or public recognition of the relevant market as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Whole Foods, 548 F.3d at 1037–38 (Brown, J.) (quoting Brown Shoe, 370 U.S. at 325). The Brown Shoe “‘practical indicia’ of market boundaries may be viewed as evidentiary proxies for proof of substitutability and cross-elasticities of supply and demand.” H & R Block, 883 F. Supp. 2d at 51 (quoting Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986)). (Op., p. 14-15).
The court concludes that the FTC’s use of the cluster market approach is appropriate in this case. Although BWT and CWT products are distinct products intended for distinct uses, they are also indisputably similar. Both are specially blended chemicals that are injected into water systems using special equipment, in order to prevent corrosion and erosion in critical systems (…) While both products make up a “small fraction of the cost of managing a ship,” PX80014 ¶ 3, the cost of system failure in the absence of these products is high. JX-0135 at 002. The fact that these products are low cost, highly critical, and heavily dependent on precise chemistry means that maritime companies strongly prefer consistency in their use, so as to avoid the risk of adverse chemical reaction and the resulting temporary or catastrophic system failure. Moreover, BWT and CWT products are frequently sold together as part of an overall management program that includes a number of additional product-related services. Deckman Hrg. Tr. at 475: 4–14. These similar characteristics matter because they factor into customers’ decisions regarding the quantity of products they purchase, the timing of those purchases, as well as where they make their purchases. In other words, similar product characteristics—including function and risk—produce similar needs and constraints for shipping companies, which in turn affects supplier strategies and, accordingly, promotes similar competitive conditions across these product categories.
Defendants’ argument regarding the lack of interchangeability between BWT and CWT—i.e., the alleged product market’s “overinclusiveness”—is at odds with the concept of a cluster market as a doctrine that “allows items that are not substitutes for each other to be clustered together in one antitrust market for analytical convenience.” Staples II, 190 F. Supp. 3d at 117 (f. 2, p. 18).
(…) The law on cluster markets requires only similarity in competitive conditions—not indistinguishability. See Staples II, 190 F. Supp. 3d at 117 (op., fn. 3, p. 19).
“Global Fleets” as Targeted Customers:
As defined by the FTC, “Global Fleets are fleets of 10 or more globally trading vessels—vessels above 1,000 gross tons in size that have traded at two ports that are at least 2,000 nautical miles apart in the preceding 12 months.” Mot. Prelim. Inj. at 18, ECF No. 45-3. The FTC argues that it is appropriate to define the relevant product market around this group because “Global Fleets have distinct characteristics and requirements that limit customer choice, as compared to local or regional fleets,” thus making them susceptible to price discrimination as a distinct customer group. ECF No. 45-3 at 19. In particular, the FTC points out that Global Fleet customers have “particular needs as it relates to centralized negotiation of contracts for delivery to geographically dispersed locations, product consistency, and product availability.” The FTC also argues that Defendants have the ability to price discriminate because they “individually negotiate prices with each customer, and customers have a limited ability to arbitrage.” (…) The construct purports to isolate a relevant subset of the market and measure how the result of a merger would affect customers within that subset. It follows that the construct is a useful way to discuss and predict economic conditions only if its key aspects correspond to elements of the existing marketplace that would make it possible to “profitably target a subset of customers for price increases” post-merger. Sysco, 113 F. Supp. 3d at 38. The FTC, relying on the analysis of its economic expert, Dr. Aviv Nevo, has carried its burden to show that the construct is useful here.
Price Discrimination Against Global Fleet Customers is Possible Post-Merger:
The court finds that the FTC has carried its burden to demonstrate that price discrimination is possible post-merger because: (1) Global Fleets are a distinct group of customers with distinct needs; (2) negotiation with Global Fleets typically occurs on an individualized basis; and (3) documentation reveals that Defendants have contemplated pricing differentials based on size and trading pattern.
(…) While customers retain the freedom to purchase outside of framework agreements, they typically choose not to do so with products for which consistency is valued (Op., p. 30).
(…) In sum, based on (a) the lack of pricing transparency in a marketplace characterized by individualized negotiations, combined with (b) evidence that Global Fleets constitute a distinct segment of the market with distinct preferences, (c) evidence that WSS recognizes the potential benefits of price discrimination, and (d) the lack of any evidence suggesting arbitrage, the court concludes that price discrimination is possible post-merger.
In sum, the court concludes that “the supply of MWT products and services”—including BWT chemicals, CWT chemicals, and associated products and services—to Global Fleets constitutes a relevant antitrust market (Op., p. 33).
Probable effects on competition:
Having defined a relevant antitrust market, the court must “consider the likely effects of the proposed acquisition on competition within that market.”
“Market concentration . . . is often measured using the Herfindahl-Hirschmann Index (“HHI”).” Heinz, 246 F.3d at 716; Swedish Match, 131 F. Supp. 2d at 167 n.11. As the court explained in Swedish Match: “The HHI calculates market power by summing the squares of the individual market shares of all the firms in the market. The HHI takes into account the relative size and distribution of the firms in a market, increasing both as the number of firms in the market decreases and as the disparity in size among those firms increases.”
(…) Sufficiently high HHI figures establish a prima facie case of anticompetitiveness. H & R Block, 883 F. Supp. 2d at 71 (citing Heinz, 246 F.3d at 715 n.9). (Op., p. 34).
The merger guidelines consider markets with an HHI above 2500 to be “highly concentrated,” and state that “mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power.” Merger Guidelines § 5.3; Heinz, 246 F.3d at 715 (citing Baker Hughes, 908 F.2d at 982) (noting that significant increase in market concentration “establishes a ‘presumption’ that the merger will substantially lessen competition.”).
The FTC may also bolster its prima facie case by offering additional evidence. Relevant to this case, courts generally recognize that “a merger that eliminates head-to-head competition between close competitors can result in a substantial lessening of competition.”
(…) Market shares: WSS: 47%, Drew: 40%. Post-merger HHI: 7,214, with an increase of 3,563, indicating extremely high market concentration and a very large increase in concentration.
Two competitors only:
However, the court does not understand the FTC to contend that the current market is noncompetitive—rather, the FTC contends that the market is competitive, and that the continued competitiveness of the market depends on aggressive competition between the two existing global suppliers with high market shares. A head-to-head competition theory is not inconsistent with the presence of lower prices in the current market (Op., p. 42).
A GUPPI analysis is essentially a bargaining framework that quantifies a firm’s change in incentive to raise prices following a merger—i.e., the “upward pricing pressure.” PX61000 ¶¶ 318–19. The model takes as a premise that, when WSS (or Drew) bids for business in the current market, higher prices increase the chance that customers will choose another supplier, and that given the closeness of competition between WSS and Drew, Drew (or WSS) will usually be the alternative supplier. PX61000 ¶ 317. In this model, the firm that chooses to raise or lower prices must balance the potential for increased profits at a higher price against the potential to lose profits but gain business at a lower price. PX61000 ¶ 317. The optimal price lies somewhere between these points. PX61000 ¶ 317. The model hypothesizes that without Drew or WSS as a check, the need for balancing disappears. PX61000 ¶ 317. The incentive to raise prices depends on the size of the fraction of diverting WSS customers that go to Drew (or vice versa) and the size of the margin that Drew or WSS earns. PX61000 ¶ 320. To estimate these variables, Dr. Nevo used a number of values drawn from market share estimates based on revenue data, market share estimates based on WSS’s PSM tool, WSS salesforce data, and WSS win-loss data. PX61000 ¶ 321. For margins, Dr. Nevo used invoice data and variable cost margins. PX61000 ¶ 323. Dr. Nevo’s results across multiple trials, accounting for variations of these inputs and calculated from the perspective of both Drew and WSS, produced percentages consistently over 20%, indicating strong incentives for post-merger price increase. Nevo Hrg. Tr. at 658:20–660:23.
(U.S. District Court for the District of Columbia, Sept. 28, 2018, FTC v. Wilhelmsen, Civil Action No. 18-cv-00414-TSC)
La décision (62 p.) est disponible par le lien suivant :
Ses aspects les plus pédagogiques ont été repris ci-dessus.
Elle est d’intérêt notamment en ce qu’elle applique et explique les notions de « cluster market », « hypothetical monopolist test », ainsi que les outils d’analyse économique tels le « Gross Upward Pricing Pressure Index (« GUPPI ») », le « Small but significant and non-transitory increase in price (“SSNIP”) », et le « Herfindahl-Hirschmann Index (“HHI”)”.
La cour de district fédérale juge ici que la FTC est parvenue à établir prima facie l’existence d’effets anticoncurrentiels qui découleraient de l’acquisition d’une compagnie par l’autre, lesquelles sont principales concurrentes sur leur marché ; ces compagnies détiendraient une large majorité des parts de ce marché en cas d’acceptation de l’opération d’acquisition (abandonnée suite à la présente décision).