Embed Size (px)
Citation preview
The Competitive Effects of Joint Purchasing Arrangements
Adrian Majumdar
16 February 2011
2
Outline
� Context
� General principles
� Degrees of buyer power
� Theories of harm
� Concluding remarks
3
Context
JPA
End customers
SuppliersUPSTREAM: Suppliers sell input to buyers. Members of JPA purchase input in procurement market.
Other buyers
DOWNSTREAM: Input sold-on (or transformed into new product which is then sold-on) to end customers
<15%?
<15%?
4
General principles
� Agreements between sellers to increase price (or degrade service and quality)
are usually bad
� But, what about purchasing agreements to obtain better terms of supply? Far
less reason to be suspicious.
– Buyer power usually seen as a good thing in (say) merger analysis
– Economic theory indicates that there must be substantial buyer power before
most theories of harm would apply.
� Theories of harm tend to rely on special cases.
5
Different degrees of buyer power
� Members of JPA can resist attempts by suppliers to sustain higher prices (credible threats to switch supplier or self-supply) – usually seen as pro-competitive
� Members of JPA are a ‘gateway’ to market – can be pro-competitive although greater potential for harmful effects
– control access to downstream market or key sales channel
– suppliers cannot circumvent members of the JPA
– failure to sell through those JPA members means substantial lost profits (e.g. lost market, lost scale or network economies)
6
Theories of harm in the Guidelines
Direct harm to downstream competition
� Façade for explicit collusion [205]
� Collusive outcome [213-216]
Indirect harm to downstream competition
� Negative impact on range, quality and innovation [202]
� Input foreclosure [203]
� Customer foreclosure [210]
7
Indirect harm to downstream competition
JPA
End customers
Suppliers
Better terms?
Pass through?
‘Rival’ buyers
Worse terms?
Dampened competition?
8
� ABILITY?
– Does the JPA give rise to substantial buyer power?
– Approach to verticals implies that JPA would need to cover >30% of purchases.
� INCENTIVE?
– Buyers tend not to have the incentive to harm competition among their suppliers.
– Parties to JPAs may have trouble co-ordinating the desires of each member to harm rival buyers, making it harder to raise rivals’ costs under a JPA than for an individually powerful buyer
� EFFECT?
– Where JPA leads to better terms, consumers may still be better off. And if JPA does not secure better terms, query the incentive to engage in cost raising activities.
How likely are harmful “indirect” effects?
9
Does buyer power harm innovation?
� Example: JPA intensifies supplier competition with the effect that suppliers
face lower profits.
� This can increase incentives to invest in R&D (e.g. to ‘escape competition’).
� Lower funds can harm innovation (e.g. capital market asymmetries). If so:
– Do the JPA members have an incentive to let this happen?
– Do other ‘stronger suppliers’ still invest and innovate?
� Speculative concern? Risk that intervention harms ability of buyers to
secure better terms of supply?
10
Concluding remark
� 15% thresholds are low. Would Commission use higher thresholds for determining administrative priority?
� 25% screen should be ok for downstream market?
– Effect of JPA can be no greater than a horizontal merger (and coordination
issues mean the effect is probably weaker), where 25% combined share
unlikely to cause concern.
� 30% screen should be ok for upstream market?
– Indirect theories of harm rely on substantial buyer power.
– Harming upstream competition is unattractive to buyers, unless there is
very disproportionate harm to their rivals (special case theory).
– Compare approach to vertical agreements (cf foreclosure theories).
11
References
� Guideline on horizontal cooperation agreements (para numbers shown in
[square brackets] in the preceding slides)
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:011:0001:0072:EN:PDF
� “The Competitive Effects of Buyer Groups” A report for the OFT written by RBB
Economics.
http://www.oft.gov.uk/shared_oft/economic_research/oft863.pdf
12
Locations and contact
London Brussels
The Connection Bastion Tower
198 High Holborn Place du Champ de Mars 5 London WC1V 7BD B–1050 Brussels
Telephone +44 20 7421 2410 Telephone: +32 2 792 0000
Email: [email protected] Email: [email protected]
The Hague Melbourne
Lange Houtstraat 37-39 Rialto South Tower, Level 27
2511 CV Den Haag 525 Collins Street
The Netherlands Melbourne VIC 3000
Telephone: +31 70 302 3060 Telephone: +61 3 9935 2800
Email: [email protected] Email: [email protected]
Johannesburg
Augusta House, Inanda Greens54 Wierda Road West
Sandton, 2196, Johannesburg
Telephone: +27 11 783 1949
Email: [email protected]
