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Ex-post Evaluation of Competitive Pressure from Imports in the Review of Business Combination (170223)

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Asia-Pacific Economic Cooperation (APEC) WORKSHOP ON ECONOMICS OF COMPETITION POLICY CPLG 02 2016A (Nha Trang city, Vietnam)
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Ex-post Evaluation of Competitive Pressure from Imports in the Review of Business Combination (170223)

  1. 1. Ex-post Evaluation of Competitive Pressure from Imports in the Review of Business Combination Workshop on Economics of Competition Policy CPLG 02 2016A (23 February, 2017) Mitsuru KIKKAWA (吉川 満) Japan Fair Trade Commission/CPRC mitsuru_kikkawa080f@jftc.go.jp/apec-jftc@jftc.go.jp Disclaimer: the views expressed in this presentation is solely those of the speaker and do not necessarily reflect those of the JFTC/CPRC. All errors in this presentation are mine.
  2. 2. Agenda 1. Competition Policy Research Center 2. The JFTC’s Business Combination Reviews (1) Basic Concept (2) Flowchart 3. Economic Analysis (ex-post evaluation of competitive pressure from imports/related markets in the review of business combination) (1) From Imports (Merger between Furukawa-Sky Aluminum Corp. and Sumitomo Light Metal Industries, Ltd.) (2) From Related Markets (Capital Tie-up of Kirin Group and Kyowa Hakko Group) 4. Conclusions/Suggestions for Japanese Business Combination Reviews 2 /13
  3. 3. Competition Policy Research Center (CPRC) • Project’s Member: • Ohashi, Hiroshi (Economics, The Univ. of Tokyo/ CPRC Chief Researcher) (Chief) • Nakagawa, Akihiko (Law, Hokkaido Uni./CPRC Visiting Researcher) • Nakamura, Tsuyoshi (Economics, Tokyo Keizai Univ./ CPRC Visiting Researcher) + JFTC’s Staff Member(7) • CPRC was founded in 2003 as an internal research center of the JFTC • Director(an economics professor), Chief Researchers (2 economics professors and 2 law professors), Visiting Researchers + staff members of the JFTC • Major Activities (1) CPRC Reports/Joint Research (Recent Topics: Bundle Discount, Big Data, …) (2) Discussion Papers (Recent Topics: Sharing Economy, Quantifying Antitrust Damage,… ) (3) Workshops/Seminars (international symposium, BBL) 3 http://www.jftc.go.jp/en/cprc/index.html /13
  4. 4. The Basic Concept of Business Combinations Regulations 4 • Chapter 4 of the Antimonopoly Act (AMA) • To prohibit business combinations (ex. stockholdings, mergers, etc.) “having the effect that may be substantially to restrain competition” allowed in cases where measures that will remedy the concerns from AMA is implemented FY 2010 2011 2012 2013 2014 2015 Notifications 265 275 349 264 289 295 Primary review 263 270 340 257 275 281 Secondary review 1 4 6 4 3 6 Cease and desist order 0 0 0 0 0 0 With remedies 2 2 3 1 2 1 Source: Annual Report(JFTC) Safe harbor Horizontal Vertical/Conglomerate in a particular field of trade substantial restraint to competition business combinations + + Business Combinations are prohibited (Ex. import, entry, related markets, …) (i) HHI ≦1500 (ii) 1500 < HHI ≦ 2500 and Δ HHI ≦ 250 (iii) HHI > 2500 and Δ HHI ≦ 150 (i) Market share ≦10 % (ii) HHI ≦ 2500 and Market share ≦ 25% /13
  5. 5. Flowchart of Business Combinations Review (reference) 5 For detailed information please see the JFTC's website at the link below. http://www.jftc.go.jp/en/pressreleases/yearly_2004/may/2004_may_31_001 .files/2004-May-31_002.pdf Consultation prior to notification (Voluntary) Receipt of notification of business combination plan Prior notice Notification to the effect that cease and desist order will not be issued - Request for report, etc. required for review - Acceptance of third parties’ opinions Receipt of reports, etc. Prior notice Opportunity to state opinions and submit evidence Notification to the effect that cease and desist order will not be issued Cease and desist order Cease and desist order not issued (Demand for a trial) Decision (Dismissal of demand) Decision (Rescission or change of order) Action to rescind the decision (Case) Final and binding Note: When a notifying corporation requests explanations about issues, etc. during the reviewing period, the JFTC will explain the current issues. Notifying corporation can also submit to the JFTC written opinions or any other materials it believes necessary for the review (including offers to take remedies for solving the issue in question). (Primary review) (Secondary review) Within 90days Within 30days (Note) Source: http://www.jftc.go.jp/en/legislation_gls/imonopoly_guidelines.files/pcbr.pdf /13
  6. 6. 3. Economic Analysis (1) Competitive Pressure From Imports 6 Market share of pure copper tube products in fiscal year 2011 Rank Company name Market share 1 Company H Approx. 35% 2 Sumikei Copper Tube Co., Ltd. Approx. 25% (3) (Company I) Approx. 15% 4 Furukawa Electric Co., Ltd. Approx. 10% Imports Approx. 15% Total 100% (Company I, with the third market share, has withdrawn from the market as of March 2012.) Source:http://www.jftc.go.jp/en/pressreleases/yearly-2013/feb/Furukawa_Sumitomo.files/130403Attachment.pdf In the official statement (P16): “… users recognize imports as having the same level quality as products from Japanese pure copper tube manufacturers … the JFTC recognizes that there is effective import pressure.” [Case] Merger between Furukawa-Sky Aluminum Corp. and Sumitomo Light Metal Industries, Ltd. (2013) → If the users have the ability to easily switch from a product of the company group to an imported product and the switchover becomes more likely if the company group raises the price of the product, the company group would be unlikely to raise the price on the grounds of a potential loss of sales to the imported goods. (Guidelines, P24) the shipments of domestic manufacturers 0 2 4 6 8 10 12 14 16 18 20 The shipments of domestic manufacturers and imports Oct., 2013Jan, 2003 (kt) Imports Green line ‐exports Source:Current Survey of Production/Trade Statistics of Japan Merger the shipments of domestic manufacturers To find key factors/methodologies from past business combinations /13
  7. 7. (1) Imports (i) Price Correlation Analysis 7 600 650 700 750 800 850 900 950 1000 600 650 700 750 800 850 900 950 1000 DomesticPrice(weightedmean)(1000yen/t) Import Price (1000yen /t) 2012. 1 ~2013. 9 2013.10 ~2015. 5 2013.11 The factors Time Lag (import) Copper Price Trend Time period Rate Regression residuals Pre-merger Post-merger* Mean 0.920 0.923 0.758 0.813 0.936 0.035 Median 0.937 0.927 0.793 0.840 0.943 -0.028 Weighted mean 0.912 0.917 0.722 0.826 0.936 0.271 * Outlier ”2013.11” Pre-merger: The correlation coefficient is larger Post-merger : The correlation coefficient gets smaller The difference of the price level between domestic and imported goods gets smaller (same level ?). /13
  8. 8. (1) Imports (ii) Estimate the demand function 8 • The relationship between competitive pressure from imports and markup rate (derived) (no competitive pressure from imports) HHI: Herfindahl-Hirschman Index (only domestic company) η: Price elasticity of demand (including imports, absolute value) ε: Price elasticity of supply for import (absolute value) S: the domestic market share =1 – the import market share S → 1 -4 -2 0 2 4 6 8 10 12 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Markup rate (Linear demand function) 推計(圧力なし)上限 推計(圧力なし) 推計(圧力なし)下限 実測値 (MC=銅価格) merger (%) Estimation (no pressure) upper limit Estimation (no pressure) lower limit Estimation (no pressure) Observation (MC=Copper Price) Competitive pressure The another demand function, log linear function, quadratic form are examined as well. /13 [model] Under the residual demand (the market demand function minus imports), Cournot oligopoly game with the domestic firms
  9. 9. (1) Imports (iii) Merger simulation 9 Merger simulation: the rate of price raise is 16.7% (the comparison of pre-merger with post-merger) Observations: 3.0% -500 0 500 1000 1500 2000 2500 3000 3500 4000 4500 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 2013 2014 2015 (1000yen /t) Case : Demand function: Linear,Marginal Cost : Copper Price 合併あり 合併なし 合併あり・上限 合併あり・下限 合併なし・上限 合併なし・下限 実際の値 merger Price The effects of merger import pressure ? Observations Merger No Merger Merger/upper limit Merger/lower limit No Merger/upper limit No Merger/lower limit /13
  10. 10. 10 3. Economic Analysis Rank Company Share 1 Kyowa Hakko Food Specialities Approx. 25% 2 Mercian Corporation Approx. 15% 3 Company E Approx. 15% 4 Company F Approx. 5% 5 Company G Approx. 5% 6 Company H Approx. 5% 7 Company I Approx. 5% 8 Kirin-Food-Tech Approx. 5% Others Approx. 25% (Top) Total of companies concerned Approx. 45% Total 100% Source:http://www.jftc.go.jp/en/pressreleases/yearly-2008/dec/individual-000066.html In the official statement (P4) : “… there are sake, sake compound, mirin and mirin-like seasonings (for sake-type and mirin-type fermented seasonings) and low- price wines (for wine-type fermented seasonings) for adjacent markets and these products can serve as a brake on rising of prices for sake-type and mirin-type fermented seasonings and wine-type seasonings.” Source:http://ajibana.jp/closeup /2015/05/151414.html (Guidelines, P28) Mirin (rice cooking wine) [Case] Capital Tie-up of Kirin Group and Kyowa Hakko Group (2008) → If there is vigorous competition in neighboring markets, or when the probability of competitive products replacing demand for such goods is high in the near future, it will be evaluated as a factor stimulating competition in the particular field trade. (3) Sake-type and mirin-type fermented seasonings (2) Competitive Pressure From Related Markets 75 80 85 90 95 100 105 110 115 120 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 The average price みりんタイプ発酵調味料 (料理用)日本酒 みりん風調味料 (料理用)清酒 (料理用)合成清酒 みりん Source: The Distribution Economics Institute of Japan, NPI Point of Sale Data (grocery store, etc) (April, 2008 = 100) Mirin-type fermented seasonings Sake (for cooking) Mirin-like seasonings Seishu (for cooking) Sake compound (for cooking) Mirin Capital Tie-up /13
  11. 11. (2) Related Markets (i) Price Correlation analysis 11 Mirin-like seasonings Seishu (for cooking) Sake compound (for cooking) Mirin Pre Pre Pre Post Pre Post Pre Post Trend Removal (Pre) Mirin-type fermented seasonings 0.62 0.73 0.42 0.59 0.01 0.39 0.52 0.83 Sake (for cooking) 0.90 0.92 0.13 0.67 -0.13 0.38 0.55 0.87 Trend Removal (Post) Mirin-type fermented seasonings 0.40 -0.16 0.41 -0.02 0.06 0.16 0.28 0.18 Sake (for cooking) 0.79 0.51 0.18 0.09 -0.21 0.07 0.20 0.02 ・ Pre-merger: Correlation Coefficient ↑ ・ Post-merger Correlation Coefficient ↓ Field of Trade: (i) Mirintype femented seasonings (ii) Sake (for cooking) The related markets: (i) Mirin-like seasonings (ii) Seishu (for cooking) (iii) Sake compound (for cooking) (iv) Mirin Price correlation analysis 75 80 85 90 95 100 105 110 115 120 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Moving Average of the price (13period) みりんタイプ発酵調味料 (料理用)日本酒 みりん風調味料 (料理用)清酒 (料理用)合成清酒 みりん Merger Source: The Distribution Economics Institute of Japan, NPI Point of Sale Data (grocery store, etc) Mirin-like seasonings Sake (for cooking) Seishu (for cooking) Sake compound (for cooking) Mirin Mirin-type fermented seasonings (April, 2008 = 100) /13 Down Trend
  12. 12. 12 Pre-merger Post-merger Mirin-type fermented seasonings -1.827 -5.087 Sake (for cooking) 0.973 -1.393 Mirin-like seasonings 0.093 -2.962 Seishu (for cooking) -5.003 -12.573 Sake compound (for cooking) -3.294 -8.854 Mirin 1.496 -2.094 Antitrust Logit Model Pre estimation S.D. t-value significant Price -0.008 0.003 -2.727 ** (Epstein and Rubinfeld(2004)) IV (brewers alcohol,rice) β The absolute values of own price elasticity become larger (The prices are in a downtrend) Own price elasticity Post estimation S.D. t-value significant Price -0.024 0.004 -6.324 *** *** 0.1%, **, 1% ([Remark] Pre-merger : Mar. 2005 ~ Mar. 2008 Post-merger : Apr. 2008 ~ Sep. 2015) (2) Related Markets (ii) Antitrust Logit Model/Critical Loss Analyses Pre-merger Post-merger CL AL CL AL Mirin-type fermented seasonings 8.369 37.658 20.277 22.382 Sake (for cooking) -5.115 31.833 6.513 24.684 Mirin-like seasonings -0.472 - 12.901 - Seishu (for cooking) 20.010 18.032 38.599 14.189 Sake compound (for cooking) 14.142 47.663 30.686 88.886 Mirin -8.088 38.627 9.478 26.531 Critical Loss Analyses “-” not significant Critical Loss and Actual Loss (5% SSNIP) CL : the maximum loss in sales resulting from a price increase that would still make the price increase profitable. AL : the predicted loss from the demand curve that would result from a price increase. No incentive to price raise in each product (except Seishu (for cooking)) → competitive pressure from the related markets ? Logit parameter /13
  13. 13. 13 4. Conclusions/Suggestions for Japanese Business Combination Review Conclusions This joint research is consistent with JFTC’s review results generally, although there are some issues related to techniques and data. (We need to be careful about generalizing from these results and applying this cases to other cases.) The accumulation of ex-post evaluation of business combinations is worthwhile to refine ex-post evaluation techniques. Suggestions (1) Enhancement of data collection in the review process (Ex. adopt a system that would enable data to be gathered by a standardized procedure) (2) Securing of human resources and the way of information disclosure for the refinement of analysis techniques (Ex. train staffs with economic thinking through collaboration with economists) Dokkin (JFTC mascot character) Thank you very much !! Please visit our website at: JFTC:http://www.jftc.go.jp/en CPRC:http://www.jftc.go.jp/en/cprc/index.html /13

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