Merger: Antitrust: Competition: FTC:
Market definition:
Market (high market concentration):
Two competitors only:
Cluster market:
Targeted customers:
Price discrimination:
Hypothetical monopolist test:
Small but significant and non-transitory increase in price (“SSNIP”):
Brown Shoe Practical Indicia:
Herfindahl-Hirschmann Index (“HHI”):
Gross Upward Pricing Pressure Index methodology (“GUPPI”):
Injunctive relief:
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).
Cluster market:
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).
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