1. Economics RBB 24 th November 2006Adrian Majumdar Are there direct tests of how a merger will impact on non-price features? Some answers from Waterstone’s / Ottakar’s.

2. Adrian Majumdar Economics RBB 2 24 th November 2006 The merging firms – specialist book retailers Waterstone’s 190 stores in the UK Ottakar’s 141 stores in the UK 33 overlap areas (stores within the same shopping location), mainly outside London Waterstone’s / Ottakar’s

3. Adrian Majumdar Economics RBB 3 24 th November 2006 National shares for book retailers (2005) % Waterstone’s17 Ottakar’s7 Total24 Other specialist bookshops15 Other stores (inc. WHS)19 Supermarkets8 Internet8 Book clubs and other distance seller15 Other10 Total100 Source: Table 1, National book market shares, 2005, Final CC report

4. Adrian Majumdar Economics RBB 4 24 th November 2006 Product market retailing of new books to consumers (CC) Both CC and OFT recognised potential differentiation by: sales channel: e.g. bricks and mortar vs internet vs book clubs store: “Large range” vs. “Small range” retailers (e.g. stock 10,000 titles or fewer vs the rest) book category: “Deep range” vs. Best seller titles, i.e. top 5,000 vs the rest

5. Adrian Majumdar Economics RBB 5 24 th November 2006 Geographic Market (1) National features of competition homogenous pricing throughout UK for most booksellers most “deep range” titles sold at RRP set by publishers Diversion ratio analysis indicated that national market shares reasonable indicators of competitive pressure – no reduction in national rivalry in price

6. Adrian Majumdar Economics RBB 6 24 th November 2006 Geographic Market (2) Potentially local features of competition which could be harmed: Range of titles stocked Quality of service offered

7. Adrian Majumdar Economics RBB 7 24 th November 2006 A direct test of harm on range Does O’s presence have an impact on W’s range after controlling for other factors that may have an effect (and vice versa), e.g. W’s range = function of: local population, store size, presence of O’s No finding of a robust statistically significant uplift in range when the other party is present W’s provided evidence that the merger could lead to an increase in range through synergies

8. Adrian Majumdar Economics RBB 8 24 th November 2006 A direct test of harm on service quality Does O’s presence have an impact on W’s service quality after controlling for other factors that may have an effect (and vice versa) Measures of service considered: staff levels staff experience opening hours refurbishments book signings No finding of a robust statistically significant uplift in service indicators when the other party is present for any measure… other than perhaps book signings

9. Adrian Majumdar Economics RBB 9 24 th November 2006 Book signings – a good measure? Service quality measure should be: important in determining consumers’ choice of store; and representative of other important aspects of service quality determined by the merging parties Book signings fails on both counts: rank v low on scale of attributes valued by consumers not always a retailer decision

10. Adrian Majumdar Economics RBB 10 24 th November 2006 The forgotten dimension? Competition in non-price factors should not be viewed in isolation from price competition pincer movement… growth of supermarkets and internet would force W’s and O’s to differentiate themselves by good range and service