1. Hayden Green Consultant, NERA Australia 18 November 2007 Market Definition in the C7 Case Business Law Workshop

2. 2 Market Definition in C7 1. The small but significant non-transitory increase/reduction in price (SSNIP / SSNRP) test 2. Functional market definition 3. The relevance of accounting profits

3. 3 Defining an Antitrust Market A necessary first step to assessing the impact on competition of any conduct or transaction At the heart of market definition is the concept of substitutability The market should comprehend the range of business activities and the geographic area within which, if given a sufficient economic incentive: – buyers can switch to a substantial extent from one source of supply to another; and – sellers can switch to a substantial extent from one production plan to another Translates into a price elevation test – if, following a SSNIP: – consumers would switch their demand to close substitutes; and/or – alternative suppliers switch production plans and serve large volumes of the monopolists sales; then – the SSNIP may not be profitable – expand definition

4. 4 The SSNIP Test Seller A Product A Product B Seller B SSNIP

5. 5 The SSNRP Test What if it is buyers whom are allegedly engaged in the anti-competitive conduct by driving prices down? Necessary to establish the range of products, geographic area and functional levels that a hypothetical monopsonist would need to control in order to impose a profitable SSNRP If following a SSNRP: – consumers purchasing the same or similar products from alternative sources of supply will switch to the cheaper product; and/or – the seller will use an alternative method of sale or sell the product somewhere else; – the SSNRP may not be profitable – expand definition The usual approach, but in reverse

6. 6 The SSNRP Test Buyer NSWQLD Buyer SSNRP

7. 7 Common Pitfalls The cellophane fallacy – the importance of a competitive price Care must be taken to ensure that the data is appropriate: – past data may not reflect current industry trends – data supplied by customers is often unreliable (revealed preferences are superior to stated preferences) The SSNIP/SSNRP test should not be applied mechanically and/or in isolation to other factors (Brambles v Commerce Commission) What if there is little or no data, like in the C7 case? Can a SSNIP/SSNRP analysis still be useful? – yes – it is still a useful framework for analysis – Sackville J: a qualitative thought experiment But it is important not to present assumptions as conclusions

8. 8 Application of SSNIP/SSNRP in C7 Case AFL Pay TV Rights Market NRL Pay TV Rights Market Wholesale Sports Channel Market Retail Pay TV Market

9. 9 Application of SSNIP/SSNRP in C7 1. AFL/NRL Pay TV Rights Markets Seven: Demand by FTA broadcasters for the FTA rights for the relevant code would not constrain a SSNRP by a hypothetical single purchaser of the pay TV rights to a competitive price Respondents: Correct test is whether a hypothetical single pay TV purchaser of broadcasting rights for the relevant code could profitably complete a SSNRP Key considerations: – anti-siphoning regime does not mean that pay TV receives a separately identifiable group of subsidiary games – FTA and pay TV rights are intertwined thus the NRL and AFL pay TV rights have no constant existence or scope – rights can be re-allocated among coalitions

10. 10 Wholesale Sports Channel Market 2. Wholesale Sports Channel Market A SSNIP imposed by an AFL sports channel provider would not be rendered unprofitable by an NRL sports channel provider – AFL & NRL are separate subscription drivers – both marquee sports but supported by different tribes Judge found there was no separate functional market in any event 3. Pay TV Retail Market Respondents: Pay TV and FTA in same retail market: – there are a sufficiently large number of marginal pay TV customers who would switch following a SSNIP as evidenced by high churn – churn not linked to price / quantity changes – potential cellophane fallacy X

11. 11 The Functional Dimension NRL/AFL Broadcasting Rights Markets Wholesale Sports Channel Market Retail Pay TV Market SSNRP SSNIP Forward integration Backward integration No separate functional wholesale sports channel market - any attempt to impose a SSNIP/SSNRP would be defeated by vertical integration Relevance of overwhelming synergies – sufficient or necessary condition for single functional market? Market definition (supply-side substitution) or market power (entry)?

12. 12 Relevance of Accounting Profits Respondents: poor historic profit performance suggests FTA & pay TV in same retail market – odd scenario – firms subject to antitrust proceedings are generally profitable – accounting profits economic profits – financial accounts often not in a useful format: fixed cost allocations transfer pricing – time-horizon important – potential for a future bubble of profits BUT Maybe useful in conjunction with other qualitative information in the absence of other data

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