1. Economics RBB TOULOUSE, NOVEMBER 2007ANDREA LOFARO Svitzer/Adsteam: Assessing unilateral effects when monopolists merge Association of Competition Economics (ACE) Conference

2. ACE Conference Economics RBB 2 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 Overview 1.Potential competition concern 2.Analysis of potential entry 3.What’s the relevant price benchmark?

3. ACE Conference Economics RBB 3 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 1.Potential competition concern Harbour towage companies operating at different ports do not constrain each other – Apart from Liverpool, merger did not involve any structural change – Concern was whether Svitzer represented the most likely potential entrant into Adsteam ports (and vice versa) Profitability of parties’ ports was generally either low or negative – Threat of entry represented an effective competitive constraint

4. ACE Conference Economics RBB 4 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 2.1Analysis of Potential Entry High fixed costs imply that any entry strategy can only be viable if a sufficient number of customers can be secured This could be achieved – by displacing the incumbent entirely; or – by cherry-picking certain customers We analysed the costs of the incumbent and (low-cost) potential entrants for each port

5. ACE Conference Economics RBB 5 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 2 tugs3 tugs4 tugs5 tugs6 tugs Tug Jobs per Year Average costs, Average price (GBP) 0 500 1,000 1,500 2,000 2,500 2505007501,000 low cost ACSvitzer ACcurrent operationaverage price 2.2Average Cost Curves at Different Levels of Operation

6. ACE Conference Economics RBB 6 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 2.3 Entry by displacing strategy Non-unionised entrant would face significantly lower costs than Svitzer (Adsteam) Cost structure of Svitzer (Adsteam) can be used as a proxy for likely costs that Adsteam would face if it decided to enter (and vice-versa) Operators without current UK operations are at least as likely (if not more likely) entrants into each Svitzer (Adsteam) port than Adsteam (Svitzer)

7. ACE Conference Economics RBB 7 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 2.4 Entry by “cherry-picking” strategy Strategy might be less costly than previous one as it would require an investment in a smaller number of tugs – E.g. an investment in only 3 tugs could be viable if enough customers do not require more than 3 tugs for each job Analysis shows that minimum number of tugs (and tug jobs) a (low-cost) entrant would require to break even was generally below the size of the parties’ operations Cherry-picking strategy would be viable for a non-unionised entrant but not for a unionised company, such as Svitzer or Adsteam

8. ACE Conference Economics RBB 8 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 Tug Jobs per Year Average price (GBP) 0 500 1,000 1,500 2,000 2,500 2505007501,000 business requiring more than 3 tugsbusiness up to 3 tugsLarge customers 1234 2.5Cherry Picking – Customers ranked by Revenue

9. ACE Conference Economics RBB 9 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 Tug Jobs per Year 0 Average costs, Average price (GBP) 500 1,000 1,500 2,000 2,500 2505007501,000 1234 business requiring more than 3 tugsbusiness up to 3 tugsLarge customers low cost AC 2.6Cherry Picking – Break-Even for Low-Cost Entrant average price

10. ACE Conference Economics RBB 10 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 Tug Jobs per Year Average costs, Average price (GBP) 0 500 1,000 1,500 2,000 2,500 2505007501,000 cherry picking effect Svitzer AC with 5 tugsSvitzer AC with fewer tugs Incumbent’s post-entry operationIncumbent’s pre-entry operation Price 2.7Cherry Picking – Effect on Incumbent’s Profits

11. ACE Conference Economics RBB 11 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 2.8Analysis of Potential Entry – Conclusions Neither Svitzer nor Adsteam enjoy a unique cost advantage over other potential entrants – Merger would not reduce the constraint to which each UK “monopoly” port was subject Should entry occur in those ports for which a cherry picking strategy is viable, Svitzer’s AUC would increase significantly – Threat of losing even a small portion of business likely to provide an effective constraint on incumbents’ behaviour – Consistent with evidence on low profitability of harbour towage services in UK ports due to threat of entry

12. ACE Conference Economics RBB 12 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 3.1What’s the relevant price benchmark? Some disagreement with CC over the price benchmark that was relevant for assessing viability of entry CC considered that after entry, increased competition would drive prices to 10% below their current levels CC concluded that an operator considering entry would be unlikely to enter UNLESS it could profitably do so at prices 10% below their current levels

13. ACE Conference Economics RBB 13 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 3.2What’s the relevant price benchmark? In general, a firm deciding whether to enter will be influenced by post-entry prices (not by current prices) In some cases, current price provides good proxy for likely post- entry price In other cases, post-entry price may be substantially below the prevailing price (e.g. textbook case of Bertrand competition) – Incumbent may continue to set high prices without attracting entry – Threat of entry cannot be considered to constrain pre-entry prices

14. ACE Conference Economics RBB 14 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 3.3What’s the relevant price benchmark? However CC identified potential entry as THE factor that constrained current prices – consistent with evidence on low profitability For the new entity to remain constrained it is required that: – customers would be able to sponsor entry (CC’s questionnaire confirmed this) by guaranteeing their business at current prices – rival operators would be able to profitably supply at current prices Unreasonable to expect parties to demonstrate that entry would have been attractive at prices 10% lower than current levels

15. ACE Conference Economics RBB 15 ANDREA LOFARO TOULOUSE, NOVEMBER 2007 3.4What’s the relevant price benchmark? For example, any attempt by Svitzer to raise prices from €100 to €110 would be unprofitable provided that – some customers could respond by guaranteeing their business at a price of 100 to a rival – Rival would be able profitably to supply those customers at 100 Entrant would not need to offer a significant discount over pre- merger prices Entrant would not need to be concerned about the effects of a possible post-entry price war CC’s requirement to assess whether entry would be attractive at a price of €90 was inappropriate