1. Economics RBB 16 November 2007 MERGERS IN TWO SIDED MARKETS: A CASE STUDY ADRIAN MAJUMDAR Adrian.Majumdar@rbbecon.com

2. ADRIAN MAJUMDAR Economics RBB 2 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 OVERVIEW Background Two-sided features of GDS platforms Harm to the “upstream side”? Airline counter-strategies Too much two-sidedness?

3. ADRIAN MAJUMDAR Economics RBB 3 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 Merger of Global Distribution Service (GDS) platforms Worldspan GDS Galileo GDS (Travelport) At European level, 4 to 3 merger: Amadeus (50-60%) Sabre (10-20%) W/G (20-30%) But W/G has high post merger shares in some countries Merger was cleared in August 2007 Travelport proposed acquisition of Worldspan

4. ADRIAN MAJUMDAR Economics RBB 4 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 GDS platform GDS TSPs (e.g. airlines, car rental co, hotels) Travel Agents (TAs) CONTENT (i.e. availability, prices) ACCESS TO TAs BOOKING FACILITIES, PRICE & CONTENT COMPARISONS CUSTOMER BASE

5. ADRIAN MAJUMDAR Economics RBB 5 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 GDS: two-sided market features Two separate sides: “upstream side”, TSPs (e.g. airlines), European wide pricing “downstream side”, TAs (TAs typically only national coverage) Platform acts as “intermediary” TAs find it easier to compare prices on the platform than contact airlines individually (“one-stop shop”) Airlines obtain “block” access to TAs CROSS GROUP EXTERNALITIES (indirect network effects): One group’s valuation of the platform depends on the size of the group on the other side The more TAs on the platform, the greater the value for airlines of joining The more airlines on the platform, the greater the value to TAs for joining

6. ADRIAN MAJUMDAR Economics RBB 6 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 Single and Multi Homing GDS 2 TA 2 GDS 1 TA 1 Airline 2 Airline 1 Airlines join all platforms to maximise coverage (full multi homing) Given that airlines join all platforms, TAs need join only one (single homing) From TA point of view, platforms become more similar (increases competition on TA side) so that… TAs are net receivers – platforms incentivise TAs to join… because a larger downstream base increases GDS’ ability to charge airlines more Airlines pay for access to TAs Network has price structure reflecting contribution to the network (cf need to get each side on board)

7. ADRIAN MAJUMDAR Economics RBB 7 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 Theories of harm The Commission analysed the possible effects of the merger with respect to non-coordinated and coordinated effects Non-coordinated effects – “Vertical cross-market effects” – Elimination of a pricing maverick – Possible market power problems in EEA countries with high post merger market shares Coordinated effects No harm found – main focus on cross-group effect

8. ADRIAN MAJUMDAR Economics RBB 8 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 Harm to the airline side? Sufficient post merger competition on TA side Merger increases Worldspan/Galileo customer base and so may give GDS greater bargaining power over airlines? But airlines can adopt the following strategic responses: Refuse to supply info on internet fares – Recent growth of internet fares (“supplier.coms”) – Examples of airlines securing discounts from GDS for supplying full content (“full content agreements”) Surcharging…

9. ADRIAN MAJUMDAR Economics RBB 9 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 Possible surcharging strategies Airline can impose charges on TAs depending on their choice of platform and content OPT IN: If enough TAs “opt-in” to take full-content, GDS pays airline an “opt-in” discount Airline encourages TAs to opt-in by surcharging them if they do not (e.g. BA)* “Steering” Steer to direct sales: surcharge TAs for purchasing internet fares through GDS (e.g.Brussels Airlines) Steer to rival GDS: surcharge TAs according to their choice of platform (examples from US) * TAs prefer to pay to the GDS an opt-in fee instead of the airline surcharge. The GDS opt-in fee then funds the airline discount.

10. ADRIAN MAJUMDAR Economics RBB 10 BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE 16 NOVEMBER 2007 Too much two-sidedness? Platforms and cross group externalities are not uncommon In principle, a supermarket can be thought of as a platform where suppliers meet consumers: Consumers single home (at their local store) Suppliers multi home (to obtain full coverage) But, if we care about harm to the “supplier side”, we might block a merger that generated beneficial reductions in marginal cost that would be passed on to consumers Questions: When is harm to one side more important than harm to the other? When does two-sidedness add a fundamental new concern? E.g. compare a merger of night clubs with a merger in a “tippy” market? Will merger affect single / multi homing? Other areas? Two-sided theories offer valuable insights but don’t forget about the standard merger analysis that has served us well to date!