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Barriers to Exit – JOHNSON – December 2019 OECD discussion

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This presentation by Matthew Johnson, Partner OXERA, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.

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Barriers to Exit – JOHNSON – December 2019 OECD discussion

  1. 1. Barriers to exit OECD Competition Committee round table 4 December 2019 Matthew Johnson, Partner © Oxera, 2019.
  2. 2. 24 December 2019 Overview Part I: why are barriers to exit often not assessed in competition cases? Part II: wider economic/ competition policy perspective Part III: final thoughts/ areas for further discussion
  3. 3. 34 December 2019 Overarching points for this presentation • focus on barriers to exit that are not simply a type of barrier to entry; barriers to entry are already well understood and often discussed in competition cases • candidate definition of an anticompetitive exit barrier: something that reduces market exit by inefficient firms • focus on the fundamental competition policy objective of increasing efficiency through a process of rivalry between firms • candidate definition of exit: a firm leaving a market along with its inefficient assets • but welfare impact may depend on whether any efficient assets remain in the market under new ownership • focus on the binary idea of exit, but in reality efficiency benefits can be achieved if inefficient firms shrink or sell their assets to more efficient uses
  4. 4. Part I: why are barriers to exit not assessed in competition cases? 44 December 2019
  5. 5. Mergers • standard merger control theories of harm could be affected by the presence of exit barriers (unilateral effects, coordinated effects, vertical foreclosure, conglomerate effects) • but many merger regimes focus on the incremental impact of a merger on competition, compared to the counterfactual in which the merger did not occur • rare that a merger would in itself increase or decrease barriers to exit so these barriers are often taken as a given in both factual and counterfactual scenarios example: Statoil Fuel and Retail / Dansk Shell EUMR (2016) The failing firm/exiting firm defence (FFD) • strict application could in itself be a barrier to exit if it deters inefficient firms from exiting • but the impact is very hard to judge as it depends on a number of factors • if the counterfactual is that the target firm … • and its inefficient assets would exit the market…it may be better to block the merger • and its efficient assets would exit the market…it may be better to clear the merger • would exit but inefficient assets stay in the market…it may be safe to clear the merger 54 December 2019
  6. 6. Article 101/102 cases 64 December 2019 • framework for assessing horizontal agreements (and horizontal effects of vertical agreements) focuses on competition between firms that are actual or potential rivals • barriers to exit are rarely considered • often not pertinent to the assessment as the comparison is the factual situation with the agreement in place compared with a counterfactual without the agreement • most barriers to exit would be present in both the factual and the counterfactual unless specific to the agreement (e.g. a crisis cartel) • framework that focuses on market definition, market power, and abuse of market power • exclusion of rivals is the most common concern in such cases • in principle, the ‘as efficient competitor’ test (if used) ensures that Art. 102 does not in itself act as a barrier to exit for inefficient firms • in reality, the test allows the dominant firm’s own costs to be used, so cases rarely need to consider the efficiency of the actual competitors that may be excluded from the market by the behaviour of the dominant firm Article 101 Article 102
  7. 7. Other types of competition cases 74 December 2019 • examples of barriers to exit concerns, but almost always framed as barriers to entry • UK groceries: controlled land order, prevented land banking by large supermarkets, essentially forcing them to exit if they were not actively using the asset (land) • UK private motor insurance: sunk cost of advertising (which would be lost on exit) was seen as a barrier to entry for firms considering launching new price comparison websites • clear risk of aid creating barriers to exit, reflected in guidance and decisional practice • rescue and restricting aid: ‘first time, last time’ principle, to avoid inefficient firms being continually bailed out • remedies designed to ‘shrink’ aid recipients even if not causing them to exit, e.g. Lloyds, Royal Bank of Scotland; in line with the principle of markets punishing inefficient firms and rewarding efficiency • Oxera 2017 ex post assessment for DG Comp considered aid as a barrier to exit • in the cases studied little or no evidence of aid preventing exit for aided firms versus a no-aid counterfactual, but some evidence of other, non-aided firms exiting Market investigations State aid
  8. 8. Part II: wider economic/ competition policy perspective 84 December 2019
  9. 9. How do barriers to exit fit into the wider competition policy framework? Why are exit barriers potentially bad for competition? • competition increases efficiency as efficient/innovative firms gain market share and inefficient firms decline; end result is that least efficient firms exit the market • 2014 OECD Factsheet on competition policy and macro outcomes • highlights importance of ‘external restructuring’ for driving productivity • ‘internal restructuring’, i.e. competition disciplining firms to behave more efficiently with their existing structures, is less important • when exit barriers prevent these competitive mechanisms from working, limits benefits in terms of market efficiency and productivity Are exit barriers always bad? • complementary products—may be efficient for firm to provide product that is not standalone profitable if leads to increased overall profitability, e.g. ‘loss leaders’ 94 December 2019
  10. 10. Part III: final thoughts/ areas for further discussion 104 December 2019
  11. 11. Final thoughts/further discussion Insolvency/administration is a double-edged sword; ideally it needs to: • ease the exit of firms and assets that are fundamentally inefficient • ensure that efficient assets do not exit and are redistributed to the most efficient user • prevent the accidental exit of firms that are fundamentally efficient but have suffered a temporary issue Do any current regimes get close to this standard? 114 December 2019 Look beyond market definition boundaries: e.g. a barrier to exit for a high street clothes shop, such as a long-term rent agreement with exit penalties, may prevent more efficient use of that space by a restaurant Think separately about inefficient firms and inefficient assets • market for corporate control
  12. 12. Contact: Matthew Johnson matthew.johnson@oxera.com +44 (0) 1865 253026 Oxera Consulting LLP is a limited liability partnership registered in England no. OC392464, registered office: Park Central, 40/41 Park End Street, Oxford OX1 1JD, UK; in Belgium, no. 0651 990 151, branch office: Avenue Louise 81, 1050 Brussels, Belgium; and in Italy, REA no. RM - 1530473, branch office: Via delle Quattro Fontane 15, 00184 Rome, Italy. Oxera Consulting (France) LLP, a French branch, registered office: 60 Avenue Charles de Gaulle, CS 60016, 92573 Neuilly-sur-Seine, France and registered in Nanterre, RCS no. 844 900 407 00025. Oxera Consulting (Netherlands) LLP, a Dutch branch, registered office: Strawinskylaan 3051, 1077 ZX Amsterdam, The Netherlands and registered in Amsterdam, KvK no. 72446218. Oxera Consulting GmbH is registered in Germany, no. HRB 148781 B (Local Court of Charlottenburg), registered office: Rahel-Hirsch-Straße 10, Berlin 10557, Germany. Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, Oxera accepts no liability for any actions taken on the basis of its contents. No Oxera entity is either authorised or regulated by the Financial Conduct Authority or the Prudential Regulation Authority within the UK or any other financial authority applicable in other countries. Anyone considering a specific investment should consult their own broker or other investment adviser. Oxera accepts no liability for any specific investment decision, which must be at the investor’s own risk. © Oxera 2019. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission. www.oxera.com Follow us on Twitter @OxeraConsulting

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