Demand Estimation in OFT s Investigations

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Marcia Stephens
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1 Demand Estimation in OFT s Investigations Enrico Pesaresi Head of Econometrics, OFT ACE Conference Paris, 26 October 2012 The views expressed are those of the author and cannot be regarded as stating an official position of the Office of Fair Trading 1

views expressed are those of the author and cannot be regarded

2 OFT s mission: making markets work well for consumers The Office of Fair Trading has a wide range of responsibilities - Antitrust Enforcement (Competition Act 1998) - Market Studies and Calls for Information (Enterprise Act 2002) - Phase I Merger Control Assessment of consumers behaviour is important in each of those - Market definition (and establishment of dominance) in CA98 - Assessment of closeness of substitution between available alternatives in Market Studies - Assessment of closeness of substitution between available alternatives/ likely concentrations effects in (horizontal) mergers scrutiny 2

important in each of those - Market definition (and establishment of dominance) in CA98 - Assessment of closeness of substitution between available

3 Demand Estimation Demand estimation would give information on - How would consumers react if faced with 5-10% price increase/quality decrease in their product of choice (And if coupled with merger simulation) What would be the effect of a given concentration on prices/quality observed in a market Demand estimation relies on revealed preference (rather than stated ones) - In principle, demand estimation more reliable in identifying consumers behaviour (than consumers surveys) It also addresses the SSNIP question directly 3

concentration on prices/quality observed in a market Demand estimation relies on revealed preference (rather than stated ones) - In

4 Though in practice Pattern of substitution identified depends upon the model used Need to impose a certain structure on consumer behaviour Choice of model important (AIDS vs discrete choice) Reasonable (?!) assumptions vs computational complexity Sensitivity analysis important It is a time consuming exercise! Large amount of data involved Even more time consuming if data have to be collected and homogenized by the authority Non-negligible risk of having inconclusive results To be assessed ex-ante before sunk investment of data management incurred 4

!) assumptions vs computational complexity Sensitivity analysis important It is a time consuming exercise!

5 OFT and demand estimation: evidence so far The OFT have carried out/reviewed demand estimation as part of the evidence in series of merger investigations - Recent examples: Long Clawson/Millway, Inbev/Anheuser- Busch (2008), Lactalis/Lubborn (2009), Prince s/premier (2011) (diary, breweries, consumer goods) - Demand estimation less often included as evidence in CA98 and market studies 5

Inbev/Anheuser- Busch (2008), Lactalis/Lubborn (2009), Prince s/premier (2011) (diary, breweries,

6 Mergers Most of the OFT s experience on demand estimation is in mergers where - standard of proof is lower realistic prospect of SLC compared to more likely than not for phase II investigations - Deadlines are tighter: 40 days+ pre-notification - OFT has no formal power to request data! In practice, demand estimation carried out where market data are readily available in a consistent format - Scanner data and alike available - 6 Less burdensome for the authority and the Parties

pre-notification - OFT has no formal power to request data!

7 Mergers II In recent years, the OFT has relied on indicators (GUPPI,IPR) - Easier to compute Margins (from Parties accounting data) Diversion ratios (from consumer surveys) Pass-through (from industry and Parties information) Assumptions (symmetric/asymmetric merging Parties, extent of feedback effect) - shape of demand curve is considered taking two extremes (linear and iso-elastic) Choice on the basis of industry characteristics and info from the Parties Sufficient for identifying phase I concerns (provided that assumptions are met) 7

Parties, extent of feedback effect) - shape of demand curve is considered taking two extremes (linear and iso-elastic) Choice on the

8 What about antitrust and market studies? Difficult to reconcile own and cross-price elasticities with notion of dominance for CA98 - How low should they be? Likely to be industry specific - And what if they are high? - A lot of weight on market definition Demand estimation to be considered in the wider set of information gathered in the course of the investigation - What weight to give to results conflicting with the rest of the evidence? Need to safeguard Parties right of defence - Data room required when confidential data involved Data (again!) - The OFT has no power to request data for market studies More suitable for market inquiries/competition Commission? 8

- A lot of weight on market definition Demand estimation to be considered in the wider set of information gathered in the course of the investigation - What weight to

9 Way Forward Demand estimation could be used in a wider set of circumstances, even in phase I investigations - Discussion about need for demand estimation as early as possible - need for established procedures for performing/assessing econometric evidence - Agreement with parties on methodology early in the process To facilitate review of econometric evidence Preserving right of defence as for other types of evidence - Econometrics Team (established in 2010) to help on 9 this!

performing/assessing econometric evidence - Agreement with parties on methodology early in the process To facilitate

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