Industrial economics and antitrust Oxana Fornea Fabrice Van Ex

The Tetra Pak case

Introduction Situating the Tetra Pak Case Investigational Questions Economical Analysis Conclusions References

Introduction Tetra Pak – one of the world leaders in the field of cartons for liquid food and the technology for filling these cartons Tetra Pak company started in 1951 in Sweden with a single product, the tetrahedronshaped package known as « Tetra Pak Standard »

Introduction In 1969 – the introduction of Tetra brik aseptic packaging system which allowed liquids to be hermetically sealed in cartons (‘long-life products’) Tetra Pak’s largest market is Europe, with 54% of its total turnover in 1985 and XX in 2004 Tetra Pak controls about 90% of the aseptic sector in the European Community

Situating the Tetra Pak case Complaints of competitor ELOPAK: Tetra Pak sells cartons & machines at predatory prices Tetra Pak imposes unfair contractual conditions on the sale/lease of its machines in order to reduce Elopak’s competitiviness and drive it out the market

Situating the Tetra Pak case In 1991 the European Commission fines Tetra Pak for its anti-competitive behavior in the non-aseptic cartons market Tetra Pak has abused its dominant position in the aseptic sector, to establish an anti-competitive dominant position in the non-aseptic sector

Situating the Tetra Pak case The European Commission distinguished four distinct markets: 4 MARKETS: Aseptic Cartons (AsC) Non-aseptic Cartons Machines for AsC Machines for Non AsC

Commission’s view on the markets

Interpreting the figures The only competitor of Tetra Pak in the aseptic sector (cartons and machines) was PKL (with resp. 20% and 10% market share) The non-aseptic sector (cartons and machines) is less concentrated: 6 competitors instead of 2, Tetra Pak’s market shares, although still important, are much smaller than in aseptic sector

Conclusion of the Commission Tetra Pak’s has abused its market power in the aseptic sector to establish a dominant position in the non-aseptic sector The goal of Tetra Pak’s strategy was to eliminate actual or potential competitors and/or their technology in the Non-Aseptic market by using vertical and horizontal market power transfer from the aseptic business

Arguments of Tetra Paks There hasnot been any voluntary strategy for using Tetra Pak’s dominant position in the aseptic sector to establish a dominant position in the non-aseptic sector Moreover, Tetra Pak doesn’t have a dominant position in the non-aseptic market since the relevant market having a much larger scope than defined by the Commission: not only cartons but also other packaging materials (glass, plastics, etc.) The competitive pressure in the non-aseptic packaging market is thus quite high, due to important substitution possibilities to cartons and due to much more competitors

Tetra Pak’s view on the market

Investigational questions Did Tetra Pak deploy anti-competitive actions in the non-aseptic market (cartons & machines)? Was there an abusive use of TP’s dominant position in the aseptic market to strenghten its position in the the Non-Aseptic market?

Economical Analysis of the Case: Key issues Relevant Market Definition Problems Market Dominance Predatory Pricing Exclusive contracts and Tie-ins Conclusion

Relevant Market Definition Problems Difficult issue in industrial economics and hence also in Tetra Pak II case RECALL: Commission distincted 4 separate markets although considering As.market (cartons&packaging systems) as closely related to Non-As.market A distance metric = (average) price elasticity of substitution, but:  Value is difficult to measure and varies a lot;  Intuitive ε -> cfr. In-class test

An In-class intuitive test Is the carton package market closely related to other package markets? Carton, Bottle: Pc=Pb=1; Qc=?; Qb=? If Pc*=1.20 and Pb=1; Qc*=?; Qb*=? If Pc**= 1.50 and Pb=1; Qc**=?; Qb**=? Carton, Plastic: Pc=Pp=1; Qc=?; Qp=? If Pc*=1.20 and Pp=1; Qc*=?; Qp*=? If Pc**=1.50 and Pp=1; Qc**=?; Qp**=?

Tetra Pak: “long term elasticity of substitution in Non-As.market = high” “Glass bottles, plastic bottles, metal contents, new technology, etc. -> provide high degree of interchangeability with (our) cartons” “Competitive pressure will be important enough to assure competitive pricing” Relevant Market Definition Problems

Relevant Market Definition EC recognized potential interchangeability between different types of packaging modi, but only in long run In short and medium term analysis, relevant market was market of non-aseptic cartons -> price elasticity of substitution close to 0 ! Commission & ECJ: relevant market = Non-aseptic Cartons (resp. filling machines)

Market Dominance RECALL: Market dominance in As. Market is clear (90-95% market share, strong vertical integration, technical know-how) but less clear in Non-As. Market Commission didn’t explicitely consider Tetra Pak (45% market share) having market dominance in Non-As. Market Commission considered TP’s market (super) dominance in As-Market as basis for abusive actions in Non-As.Market

Some factors: Market Share Number of competitors Relative firm size Degree of vertical integration Control of distribution process Technical know-how Market Dominance

RECALL of allegations towards Tetra Pak 1.Use of Predatory prices when selling cartons and filling machines 2.Applying unfair contractual conditions when supplying machines GOALS: - To Kick out/buy out competitors - To Erect barriers for potential new entrants

1. Predatory Pricing 1 element of TP’s abusive behaviour following EC and ECJ ECJ: “where prices are below the average variable cost, predation must always be presumed” [cfr. Vickers (1999) on cit.] ECJ didn’t explicitely consider TP’s recoupment possibilities of short-term losses (= quite rare) ECJ: event pricing above variable cost but less than total cost is abusive if “part of plan for eliminating competitor” [cfr. Vickers (1999) on cit.] (= also quite rare) ECJ not considering TP explicitely as being dominant firm in Non-As. Market when deciding of predatory pricing (= very rare)

2. Exclusive contracts and Tie-ins Tetra Pak used exclusive contracts when supplying machines, including:  Exclusive rights to maintain & repair machines;  Exclusive right to supply spare parts.  Priority right of machine repurchase by TP at prearranged price Tetra Pak included Contract penalties when switching supplier Tetra Pak applied Tie-ins: i.e. tied sale/use of TP’s cartons together with TP’s machines

2. Exclusive contracts and Tie-ins Erects entry barriers for new entrants since they would have to compensate (e.g. in their output prices) penalty costs of customers switching from Tetra Pak to them. Designed to prevent entry and capture entrant’s rents (via penalty clauses) and cheap buyouts Tetra Pak: “exclusive contracts are due to complexity of sector and products and are not deliberated predative strategy” [Nalebuff and Majerus (2003) on cit.]

Conclusions Tetra Pak case is considered as very interesting in the industrial organisational literature since it led to an investigation/condamnation of several distinct anti-competitive actions in a same case. Using a dominant position in a distinct (although closely related?) market to decide about abusive use of it in another market was/is quite uncommon. Opinions in industrial organisation literature about anti-competitive character of Tetra Pak’s behaviour and strategy, are quite divided, as well as conclusions.

References GARCIA-GALLEGO A. and GEORGANTZIS N. (1999), Dominance in the Tetra Pak Case: An Empirical Approach, European Journal of Law and Economics, 7, HABORD D. and HOEHN T. (1994), Barriers to Entry and Exit in European Competition, International Review of Law and Economics, 14, LOWE Ph. (2003), EU Competition Practice on Predatory Pricing, Introductionary Adress to the Seminar “Pro and Cons of Low Prices, Stockholm.

References NALEBUFF B. and MAJERUS D. (2003), Bundling, Tying and Portfolio Effects, DTI Economics Paper n°1 SCHERER F.M. (1980), Industrial Market Structure and Economic Performance, Chicago Press TIROLE J. (2004), The Analysis of Tying Cases: A Primer, Working Paper, 1-21 VICKERS J. (2005), Abuse of Market Power, The Economic Journal, 115,