Competition
Merger
Relevant Market
Geographic Market
Hypothetical Monopolist Test
SSNIP
Critical Loss Analysis
Arbitrage
Correlation and Co-Integration Analyses
Price Elasticity of Demand
Where suppliers can set prices based on customer
location, and customers cannot avoid targeted price increases through arbitrage
(by purchasing at a lower price from a seller in one geographic area and then
transporting the product to another geographic region), the relevant geographic
market may be defined around the locations of customers. Polypore, 2010
WL 9549988 at *16 (applying Merger Guidelines § 4.2.2). Under the Merger
Guidelines, “if price discrimination based on customer location is feasible as is
often the case when delivered pricing is commonly used in the industry, the
Agencies may define geographic markets based on the locations of customers. . .
.” Merger Guidelines § 4.2.
Courts apply the “hypothetical monopolist test”
to ask whether a “hypothetical profit-maximizing firm . . . that was the only
present and future seller of the relevant products . . . likely would impose at
least a small but significant and non-transitory increase in price (‘SSNIP’). .
. .” FTC v. Sysco Corp., 113 F. Supp. 3d 1, 33 (D.D.C. 2015) (quoting
Merger Guidelines § 4.1.1). “If buyers would respond to the SSNIP by shifting
to products produced outside the proposed geographic market, and this
shift were sufficient to render the SSNIP unprofitable, then the proposed geographic
market would be too narrow.” FTC v. Arch Coal, Inc., 329 F. Supp. 2d
109, 123 (D.D.C. 2004).
The evidence shows that Respondents set prices
on a regional basis; that the North America region includes the United States
and Canada, but not Mexico; that chloride TiO2 manufacturers deliver their
product to their North American customers’ locations; and that North American
customers could not defeat a price increase through arbitrage. Therefore, the
relevant geographic market is North America, defined as the United States and
Canada.
Respondents’ documents and testimony confirm
that they charge different prices to customers depending on the region in which
the customer is located (“regional pricing”).
(…) “Pricing in the four regions; U.S. [United
States], LATAM [Latin America], EMEA [Europe, Middle East and Africa] and APAC
[Asia Pacific] are not comparable. . . . There is no global price.”
(…) Under the Merger Guidelines, a region forms
a relevant geographic market if a SSNIP would not be defeated by arbitrage,
e.g., customers in the region travelling outside it to purchase the relevant
product and transport it back. Merger Guidelines § 4.2.2. Arbitrage between
customers at different geographic locations may be impractical due to
transportation costs. Merger Guidelines § 3. The evidence in this case shows
that North American customers have not engaged in arbitrage despite higher
prices in the North America region and that they would not engage in arbitrage
to defeat a SSNIP.
(…) Correlation and co-integration analyses look
only at prices. They do not address the relevant antitrust question of whether
customers change their purchases in response to relative price changes. “The
mere fact that the prices of two goods move upward or downward together need
not mean that they are substitutes.” Preliminary Injunction Opinion, 2018 U.S.
Dist. LEXIS 155127, at *21.
(…) Dr. Hill conducted the hypothetical
monopolist test several ways. Dr. Hill conducted a critical loss analysis using
three different measures to determine whether it would be profitable for the
hypothetical monopolist to increase the price by at least a SSNIP. F. 183-185.
First, Dr. Hill used his estimate of North American customers’ willingness to
switch from chloride TiO2 to sulfate TiO2 (the “price elasticity of demand”
measure) to determine whether enough North American customers would switch to
another product to defeat a SSNIP by the hypothetical monopolist. F. 186. That
measure showed that demand for chloride TiO2 by North American customers was
inelastic (-0.45). F. 186. As a result, switching to other products by North
American customers would prove inadequate to defeat a SSNIP. F. 186. Second,
Dr. Hill used a “substitution components” measure, using data from Respondents,
to ascertain whether increased imports or repatriated exports responding to a
SSNIP, combined with lost sales, would render the SSNIP unprofitable for the
hypothetical monopolist. F. 187. Using this approach and data, Dr. Hill found a
SSNIP would be profitable. F. 187. Third, Dr. Hill relied on Tronox’s estimate
of the maximum North American sulfate TiO2 demand to determine whether a
sufficient number of North American customers would switch to sulfate TiO2 to
defeat a SSNIP and found that they would not. F. 188. In each of his three
critical loss analyses, Dr. Hill found that the predicted loss is lower than
the critical loss, and thus opined that the market passes the hypothetical
monopolist test. F. 186-188. (Critical loss analysis is a standard tool used to
implement the hypothetical monopolist test to determine whether a candidate
market constitutes a relevant antitrust market. Merger Guidelines § 4.1.3. A
critical loss analysis has two stages: (1) calculation of the critical loss,
which means the percentage of sales a hypothetical monopolist would have to
lose to keep its profit unchanged if it increased its price by a small amount;
and (2) calculation of the predicted loss, which means the percentage of sales
that the hypothetical monopolist would likely lose given a particular price
increase and keep its profit unchanged. If the predicted loss is smaller than
the critical loss, then the price increase will increase the hypothetical
monopolist’s profit. F. 183.)
In addition, Dr. Hill used the measure of price
elasticity of demand for chloride TiO2 in North America to determine whether
demand would remain inelastic if prices increased by a SSNIP. F. 189. Dr. Hill
found that it would, and thus opined that the sale of chloride TiO2 to North
American customers passes the hypothetical monopolist test. F. 189. Based on
these calculations, Dr. Hill concluded that the relevant market consists of
North American chloride TiO2 sales. F.190.
(FTC, Office of Administrative Law
Judges, In the Matter of Tronox/Cristal USA, Dec. 7, 2018, Docket No. 9377)
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