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Competition Policy, Coordinated effect-Holiday
Introduction
Since the traveling industry took shape, the fierce competition have never come to a stop. Market shares, customer ownership, all the factors affect the status of a company are snatched around. Then, merger became a new way to eliminate one’s competitors.
By the merger of the companies, several firms come into one. It is called the merged entity. The merged entity may dominate the price level of the whole traveling market, manipulate the other disadvantaged competitors and finally disturb the market order. Under this circumstance, EC merger policy was established in 1989. There were 3 options to the competition http://www.ukassignment.org/lxszy/ authority firstly: allowing the merger, allowing the merger subject to remedies and prohibiting the merger. Till 2004, EC adopted a dominance test with two tools to intervene in horizontal mergers: collective dominance and unilateral effects. In 2004, the revision closed a gap that had previously existed in the EC Merger Regulation. The merger case of Airtours was a typical case in the EC merger regulation. This essay will firstly discuss the important features of the Airtours merger case. Following this, it will elaborate the relevant economic theory for analysing the case. Subsequently the arguments for and against the decision will be discussed and an overall conclusion on the decision will also be provided. Finally, it will look at what happened next in the market.
Important features of the Airtours merger case
Airtours proposed to merge with First Choice. They are supply of leisure travel services to customers in the United Kingdom and Ireland and supplying package tours and certain other holiday products, they are also both vertically integrated into upstream (airline operation) and downstream (travel agency) businesses. This kind of merger belongs to horizontal merger. The intervention of this event means oligopolistic dominance conductive to the creation of a collective dominant position.
For the market definition, there are two kinds of it. The first one is short-haul package holidays. It refers to the accomodation and possibly other services in a given (ususally foreign) desitination with return travel (usually by air) to and from it. The second is the independent holiday. By it customers are more familiar with the tour and the transparency of the information increase.
The market structure comprises four large tour operators. Each vertically integrated both upstream into charter airline operation and downstream into travel agency and together accounting for the large majority of sales. According to Airtours, there are two ways of doing business in this industry. Either stay small and buy inputs or produce large volumes and integreate vertically. In the United Kingdom tour market, there are four leading companies. Of all the four companies, Thomson took the market share of 30.7%, Thomas Cook took the market share of 20.4%, Airtours took the market share of 19.4% and First Choice took the market share of 15%. They controlled over 80% of the tour market. The four large firms are operated in vertical integration from their airlines to local distribution channel. In the upstream channel, it includes charter airlines, seat broking and car rental broking. And First Choice has one of the largest charter airlines. In the downsteam distribution channel, a chain of distribution channel, it includes tour operating and travel agencies.
The market has several characteristics. Oligopolistic dominance is conducive to creation of a collective dominant position. There are only the four main integrated players and capacity expansions are highly risky. The reasons are as follows. First, the products are homogeneous. The fundamentals are similar, all involve packaging of travel and accommodation and depend on bulk buying. Second, the demand growth of the market is low. There are not essential items for consumer spending, because the market growth are moderate and the economic situation in UK is low. Third, the overall package price increase does not affect the initiative of the customer and limit the output is available. Fourth, economies of scale is set at a max by around 15-20 aircrafts. The four major firms have a larger number of aircrafts than the limit and they have similar marketing and distribution channel. http://www.ukassignment.org/lxszy/ Airtours has suggested that entry barriers into tour operation, charter airline operation and travel agency are all insignificant. The absence of regulatory constraints, the occurrence of entry and exit in tour operation and airline operation, the low financial outlay required and so on. The primary barriers to entry and expansion are airline seats and the distribution through travel agencies. For the small tour companies, they usually pay a commisson to the four large operators for capacity. In terms of transpareny, there are mutual dependency between the operators in the market. Merger increases the link of transparency thus increases mutual dependency and the number of bilateral links and makes it incentive to restrict capacity. Speaking about the buyer power, individual consumers have no buyer power and most holidays are sold by travel agencies. Moreover, other market imperfections, such as inadequate information to consumers on the links between agencies, operators and airlines, the difficulty of comparing competing products from the limited information available in tour operators brochures, and the nature of holiday purchases, these are all the factors affect the buyer power. Tour operators need to operate at high levels of capacity utilisation (95% or more).
In 1999 April 29th, The Commission received a notification of a proposed concentration pursuant to Article 4 of Regulation (EEC): Airtours plc. acquires the whole of First Choice plc. In 1999 June 3rd, The Commission decided to initiate proceedings in application of Article 6(1)(c) of the Merger Regulation. The Commission therefore blocked the merger between Airtours and First Choice Holidays plc in September, 1999. Because it will cause collective dominant for short-haul foreign package holidays in UK, where such positive didn’t exist before. In 2002 June, Court of First Instant (CFI) annulled the commission decision.
Relevant economic theories for analysing the case
There are two types of possible effects of a merger. They are coordinated effects and unilateral effects. The former arise if the merger results in an likelihood of tacit collusion and the latter arise from an individual incentive for the merged entity to raise prices post merger.
Coordinated effect, which has the same meaning with tacit collusion. There are two main reasons why a merger might favour the creation of collusive outcomes. First, a merger reduces the number of firms; second, a merger might give rise to a more symmetric distribution of assets. Coordinated effects arise if a merger results in an increase in prices due to tacit collusion.
There is a possibility of coordination between competing firms. It happenes when one firm compete in the same markets again and again. This kind of dynamic activities always lead to joint exercise of collective market power. It will result in higher price levels than the uncoordinated effects before.(Marc et al 2003)Tacit collusion occurs when two or more firms agree to play a certain strategy without explicitly saying so. They may then be able to maintain higher prices by tacitly agreeing that any deviation from the collusive path would trigger some retaliation. Take the Airtours, First Choice and Thoms Cook after the merger for example. According to Airtours it would, because the nature of the product makes it impossible to tacitly coordinate on price and there would in any case be numerous possibilities to cheat on the tacitly agreed prices.
Unilateral effect happens within some industry as one kind of competition.Fro example, there are four companies: A, B, C and D, in the market producing differntianted products. If A increases its price it will lose some sales to its rivals B, C & D. After the merger between A & B, A increases its price. The merger entity captures some of the lost sales with firm B. The phenomenon is called internalising the externality. So the post-merger A & B have an incentive to increase prices. The price increase is larger if A & B are very close substitutes. The outsiders, C & D, may also have an incentive to increase prices. It is called free-ride on the merger. Overall, prices increase and consumer welfare falls. Unilateral effect decides whether the merger will eliminate important competitive constraints on one or more firms, which would enjoy increased market power. This effect may arise in a number of ways: A merger may create or strengthen a dominant position, thus enabling the firm to raise price unilaterally; unilateral effects problems may arise even though the merged entity may not satisfy the traditional requirements to be found dominant. Applying to the case, Airtours increases prices and First Choice will also increase prices due to they are close substitutes. So Thomson and Thomas Cook are able to free ride on merger to raise prices. Finally, the consumer surplus will be reduced.
Collective dominance refers to a few firms own a high market shares in an obligopolistic market but can not individually dominant. After a merger, the firms avoid a strong competition in the market. A merger can alter the market structure in order to help the undertakings create a dominant position in an oligopolistic market. It has diverse forms of the collective dominance. For exmaple, corresponding the price, limiting the production, dividing the market and so on. Evaluate the risks of Collective dominance. It can be seen that one of the fundamental economic principle of the collective dominance is tacit collusion.#p#分页标题#e#
Arguments against the decision made
Arguments against the ECC’s decision believe that there are no economic case for single firm dominance after the merge. The case for tacit collusion to be present after the merge is weak. First, a checklist of certain criteria that will facilitate tacit collusion, such as product homogeneity, stable and symetric market share, stable demand, high barriers to entry and so on. Second, effective punishment must be in place to sustain tacit collusion. UK’s FPH has no credible punishment because the capacity is fixed and rivals can not serve additional customers. What is more, there has no compensation for lower price
On the 6 June 2002, CFI annulled the EC commission decision of prohibiting the merger of Airtours and First Choice. The commission wrongly concluded that the characteristics of the package travel industry were conducive to firms reaching a tacit agreement. The retaliatory measures identified by the Commission could not be implemented quickly and effectively enough for them to act as adequate deterrents. The Commission underestimated the importance of factors external to the obligopoly group as a counterbalance capable of destabilizing collusion. The proposed merger may have resulted in higher prices and lower welfare for the customers. However, due to complex market characteristics, the lack of evidence to prove dominant power and the weakness of the case for tacit collusion, the merger should of stood with great possibility
Conclusion
In conclusion, the regulation policy of merger has an inevitable road to walk as to show economics knowledge in the revolution. The merger policy must depend on the basis of the development of economic theories. It must regulate itself as the economic theory develop. Once the policy comes into being, it also needs economic analysis and explanation. It can be said that the rationality and the legitimacy are all based on the consistency of merger regulation policy and economic theories. The merger policy stresses that merger regulation policy and all the competition policy must establish the improvement of consumer welfare level as the only policy target. The policy also stresses the change of efficiency and gains brought to the consumer. In the method of analysis, effect determination is more important than form determination. That is to say, it is the actual effects of the commercial activities that affect the judgement, not the manifestations of them. In this way, commercial activity that looks like having affected normal competitions would not be investigated wrongly.
The economic theories showed in the case are no way the only principles in the merger. As a real event in practise, theories would never judge the fact 100% correctly. There are many uncertain factors http://www.ukassignment.org/lxszy/ in the case. The competition situation, the efficiency of the merged entity, the area distribution of employees and industry, the international competition situation of the United Kingdom firms, the country’s strategic interests, the survival ability of the merged entity, the change of the target company and so on. It is clearly showed that theory is only an auxiliary method in the regulation of merger policy. Many uncertainties mean the theories are only references.
Airtours is a surviver in the Airtours may not get so much immediate benefit from the victory in the appeal. But the result may have much more significance beyond the case itself. The ECC has clarified the test for collective dominance to some extent to avoid future fault. Cases alike in the future will be more predictable. The commission itself will get a more clear view of judgement on the merger cases. The case of airtours steadyed the need for the introduction of more transparent and accountable decisions made by the ECC. The commission itself would get much experience in the case to utilize in the future revolution.
References
Marc, I. et al., 2003. The Economics of Unilateral Effects. Ch. 1 esp. pp. 17-20
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