1. The Impala case at the CFI Association of Competition Economists Conference 2007 Simon Pilsbury, Managing Consultant November 30th 2007

2. 2 Overview -institutional structure and its effects on the merger process -Commission’s approach to the initial filing -method of consideration of joint dominance

3. November 30th 20073 Institutional structure (I) -both initial procedure and re-filing carried out under the 1989 merger regulation -test for whether a merger should be blocked was as follows -‘creates or strengthens a dominant position as a result of which effective competition would be significantly impeded’ -2004 merger regulation changes the emphasis -‘concentration which would significantly impede effective competition … in particular as a result of the creation or strengthening of a dominant position’ -dominant position no longer necessary after 2004

4. November 30th 20074 Institutional structure (II) -may have impacted the way in which the Commission examined the merger -needed to find unilateral or joint dominance in the market -not sufficient to find ‘pockets’ of market power within a wider economic market -places great emphasis on market definition

5. November 30th 20075 Commission’s approach to the initial filing (I) -no precise product market definition from the Commission in its decision -stated that it did not make a difference to the outcome -some discussion of whether genres might be individual product markets -precedent suggesting that this might be the case -however, market shares only presented on a ‘whole market’ basis -detailed data by genre not set out

6. November 30th 20076 Commission’s approach to the initial filing (II) -focus very clearly on market shares -other aspects of potential unilateral dominance left almost untouched -Italy: combined market shares were 30–35% -really no possible market where they approach 40%? -difficult to determine unilateral dominance on the basis of market shares when you haven’t defined a market! -joint dominance considered in much more detail

7. November 30th 20077 Consideration of joint dominance (I) -as before, markets not clearly defined -makes it more difficult to determine whether there is joint dominance -basic approach in line with the Airtours criteria -transparency -ability to deter -tight oligopoly -looked for evidence of past price coordination -useful for strengthening a dominant position, but creating one? -spent considerable time analysing price trends in each Member State

8. November 30th 20078 Consideration of joint dominance (II) -content of albums heterogeneous -stated as reducing ability to collude -many features favouring transparency found -retail monitoring -low number of majors -publication of weekly hit charts -but discounts found to be sufficient to undermine transparency -retaliation could be via exclusion from joint ventures -compilation albums important -but no evidence that it had occurred in the past

9. November 30th 20079 CFI’s comments on joint dominance -CFI found that the market was sufficiently transparent for monitoring to take place -low discounts, which showed little variation -also stated that transparency could be directly inferred from pricing -if prices were closely aligned and above competitive levels -and if no other reasonable explanation -stable pricing despite a fall in demand at a price level seen as high might be evidence of tacit coordination -but wouldn't prices be stable after a demand shock in a competitive market? -lack of punishment episodes not crucial -‘the most effective deterrent is that which has not been used’

10. November 30th 200710 Final thoughts -features of the market consistent with a reasonably competitive market pre-merger -differentiated products (albums) each have some small amount of market power -no ability to precisely replicate albums -substitutability largely within genres -costs of production are similar across all majors -demand shocks strongly correlated -no tacit collusion -some albums ‘flop’ and do not cover their costs of production -would expect to see similar pricing across albums -demand shocks would not cause large price cuts -price levels likely to be seen as high to cover costs of flops

11. www.oxera.com Contact: Simon Pilsbury +32 (0) 2 535 7890 simon.pilsbury@oxera.com