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Cruise Line Mergers (2002)
Małgorzata Bartkowska
Ewelina Dawidczyk
Bartłomiej Wiśnicki
Agenda
• Introduction
• Background information about the case
i.
Review Process and Competitive Issues
• Basic Developments- The Merger Guidelines
Framework
i.
ii.
iii.
iv.
v.
vi.
Product market definition
Geographic market definition
Competitive effects analysis
Coordinated effects- Pricing
Coordinated effects- Capacity
Entry and Expansion
• Outcome and Subsequent Developments
• Conclusion
Introduction
• Three companies were involved into the mergers:
Royal Caribbean Cruises, P&O Princess Cruises
and Carnival Corporation
• The transactions were under review at the same
time because of the hostile tender offer between
Carnival and Princess
• The transactions were reviewed by USA, UK and
EU
Introduction
• Why were the transactions of interest of the
antitrust agencies?
i.
complexity of the mergers and importance of the
specific industry,
ii. application of many aspects of the Merger
Guidelines,
iii. empirical analyses which involved assessments of
booking patterns and price dispersion analyses,
iv. the specifics of the review and the key elements of
decision making were detailed to an extent greater
than is typical for cases that were not subject to
challenge
Background information
• Factors which induced the investigation:
i. Competing bids for Princess in late 2001,
ii. Carnival made a hostile tender offer for the shares
of Princess,
iii. Dual- listing structure- two firms function as a
single operating business but they have separate
identities and stock exchange listings,
iv. These companies represented the three of the four
largest cruise lines in industry,
Review Process and Competitive Issues
• The U.S review focused mainly on the possible
competitive effects of the transaction in North
America and on North American customers,
• The EU review of the Carnival- Princess
transaction focused principally on the effects on
European- based customers for cruises within
Europe,
• The UK review of the RCC- Princess transaction
focused on the possible effects of the transaction
on UK customers
Review Process and Competitive Issues
• Issues that were central to final decisions:
i.
Whether cruises were a relevant market or this
market was much more broader and could
included land- based vacations,
ii. Whether the high concentration of the antitrust
market was determined as relevant was sufficient
to suppose a competitive problem,
iii. Whether the transactions will promote
coordination amid cruise lines or maybe allow for
unilateral control that might be anticompetitive
iv. Whether the merger will strengthen the ability of
cruise lines to price discriminate amid cruisers
Basic Developments- The Merger
Guidelines
• The Merger Guidelines was the first methodology
for analysis and exposition of the decision used by
the FTC (Federal Trade Commission),
• The Merger Guidelines comprises: product and
geographic market, coordinated effects, critical
loss, diversion analysis as well as entry and
expansion,
• The main first- stage question related to the
analytics:
i.
Were cruises a relevant market, or were they part
of a larger vacation market?
Product market definition
• Crucial question: to what extent are land-based
vacations substitutes for cruises?
• Method of analysis:
▫ Small but significant and non-transitory increase
in price test (SSNIP test)
▫ Price discrimination analysis: price increase
response
Features of the product
•
•
•
•
•
•
Frequency of cruising
Trends in the types of cruises
Types of customers
On board amenities/activities
Duration of the cruise
Purchase and reservation method
SSNIP method
• Customers reaction to 5-10% price increase of the
investigated company for at least one year
• Analysis of profit change of:
▫ The investigated company
▫ The hypothetical relevant market
• Relevant market is considered when the sum of
profits is larger after the increase
• Estimating the elasticity of demand or „critical
loss”
SSNIP method
• Issues with the methodology:
▫ Examining the merger of A and B, the results of
SSNIP test will differ among firms
▫ Reasons for decrease in demand may not be
connected to shifts to competition
▫ Mixing the idea of market power and relevant
market
▫ Only price based competition
SSNIP test results
• FTC and EU:
▫ Estimates of -2.0 price elasticity as a response to 5%
price increase of cruise industry
▫ Experiment of substantial capacity – no price decrease
▫ Marketing and yield management disturb the results
▫ Price discrimination analysis: variation explained by
yield management
▫ Significant notion: multi-continental routes –
geographical competition
▫ Relative market analysis: limited to cruises.
Market share and concentration
• FTC: Analysis of market share changes based on
HH index (only lower berth capacity)
• The mergers will result in change of HH index
from 2700 to
▫ In case of Royal Caribbean – Princess merger: 3700
▫ In case of Carnival – Princess merger: 3800
• Either merged entity would control nearly half of
North American market
• EU & UK: including „premium market”: no
significant concentration issues.
Competitive effects analysis
• The analysis the theory of
▫ Unilateral effects: decrease in competition
allows the merged entity to exercise the market
power
▫ Coordinated effects: ability to coordinate the
behavior of the whole industry, including not
merged companies
Unilateral effects
• Homogeneous market: important role of market
shares and capacity
• In differentiated markets the problem arises when
goods are close substitutes
• No need for large market shares in differentiated
market
• FTC: analysis of profitability of shifting capacity
from North America
• Results: no sufficient predictability about the
amount needed in order to make the shift profitable
Coordinated effects – pricing
• No anti-competetive results in across-the-board case –
moving to selective coordination analysis
• Essential factors:
▫ transparency of prices
▫ complexity of price mechanism
• The FTC analysis was conducted in regard to following
matters:
▫
▫
▫
▫
Complexity of prices
Complexity of price discrimination
Connection between variation of prices and time-schedule of cruises
Variation of prices due to booking system
Coordinated effects – pricing
• The FTC analysis revealed that:
▫ The ability of differentiating the cheating scheme from
competitive response is extremely low
▫ There is no common yield management practice
▫ Due to price complexity of price mechanisms it is
nearly impossible to coordinate in prices
• Conclusion: The probability of price
coordination is very low
Coordinated Effects - Capacity
• FTC examined likelihood that
it would be profitable to reduce
capacity sufficiently so as to
increase prices for cruises
capacity
prices
• Empirical analysis:
- diversion of sufficient ships to other regions
- effects on overall margins from the shift
• Conclusion: capacity reductions would have to be
sufficiently large that it would not be profitable
Coordinated Effects - Capacity
• Different opinions about treatment of the capacity
allocation and diversion theory in FTC
Dissenting commisioners
Companies monitored each other’s procisng and behavior
Postmerger concetration would be at a sufficient high levell to create the incentive to coordinate on pricing
Capacity additions could be delayed or reduced and it would cause greater opportunity foe coordinationn and some
reductions in capacity
• EU and UK conclusion: it would be prohibitively
costly for all the ships on order to be cancelled due
to possible penalties
Entry and Expansion/Repositioning
• Focus on the number of new ships for which there
were firm commitments with shipyards that could
not be delayed without penalties
• Ability of the companies do divert or shift cruise
ships
• The FTW concluded that there were substantial
penalties associated with canceling contracts and
it would take big capacity reduction in order to
increase prices
Outcome and subsequent developments
• Common conclusion:
approval of the cruise line mergers under
their jurisdiction and review
• EU and UK – focus on customer switching and
customer choice of cruises as competitive
constrains
• FTC – focus on empirical analyses
Outcome and subsequent developments
• Planned additions of capacity would provide a
constraint on the merging parties
• Capacity and pricing trends followed the
expectations set out in the decision
• CLIA’s (Cruise Line International Association)
overview shows continuation of expansion after
merger in terms of number of passengers served
(presented on the next page)
• It is difficult to say whether the expansion would
have been larger in the absence of the merger
Outcome and subsequent developments
Worldwide geographical Destinations for Cruises since 1987 (Source: 2006 CLIA Overview)
Outcome and subsequent developments
Growth in Number of Barths/Total Capacity: Operating Statistics of the North American
Cruise Industry (Source: the Cruise Industry 2005 Economic Summary, CLIA)
2005
2004
2003
2005
2004
2003
Number of ships
192
192
184
0.0%
4.3%
4.5%
Lower Berths
245,755
240,401
215,405
2.2%
11.6%
9.5%
Global Passengers
11.5
10.85
9.83
6.0%
10.3%
6.6%
Passengers Residing in
United States
9.06
8.31
7.48
9.0%
11.1%
7.0%
U.S. Embarkations
8.61
8.10
7.11
6.3%
13.9%
9.5%
Capacity
Carryings (millions)
• The growth in passengers on cruises is reflected in
growth in capacity (presented above)
Outcome and subsequent developments
• Increase in price after 2003 caused by overall
increases in costs associated with fuel
• In this case there is no anticompetitive changes
in prices
Fuel prices increase
Overall costs
increase
Prices for
cruises increase
Conclusion
• Sharp focus on several elements of merger review like
importance of market definition for initial competitive
analyses of the merger:
had the market been deemed to broader?
• Overriding importance of industry facts to assessment:
nascent stage of the industry
new ships were to be added
costly reduction of capacity
inability to articulate price discrimination markets
extreme variability of prices
Conclusion:
customers would not be harmed by the transaction
Conclusion
• Review conducted in various jurisdictions is
valuable because it highlights some similarities in
merger review guidelines but differences in
approach.
Different perspectives on:
the scope of geographical markets
the importance of brand and smaller markets
based on quality of product
market definition
competitive effects
Question 1
The SSNIP test:
a) measures competition based on prices
b) helps in defining the relevant market
c) can be applied by estimating the critical elasticity of
demand
d) all of above
Question 2
Which of these sentences is false?
a) Unilateral effects arise where as a result of a merger, due
to decrease in competition, the merged entity can
profitably excerise the market power
b) The likelihood of coordination behavior in the whole
market is connected with coordination effects
c) In differentiated markets, the ability to increase
the price due to unilateral effects depends only
on market share of the merged entity
d) All of above.
Question 3
What is the definition of the dual- listed company?
a) Two companies function as a single operating business
through a legal equalization agreement, but retain
separate legal identities and stock exchange listings
b)
A firm lists its equity shares on one or more foreign stock exchange
in addition to its domestic exchange
c)
Strategic management, corporate finance and management dealing
with the buying, selling, dividing and combining of different
companies and similar entities
d)
A business agreement in which the parties agree to develop, for a
finite time, a new entity and new assets by contributing equity
Question 4
What does the Merger Guidelines comprise?
a)
b)
c)
d)
e)
Product and geographic market
Entry and expansion
Coordinated effects
Critical loss and diversion analysis
All above
Question 5
Is a review of the analyses conducted in various jurisdictions of
value to antitrust practitioners?
a) no, because of differences in review guidelines
b) no, because of differences in perspectives on scope of
geographic markets
c) Yes, because they agree on importance of brand and smaller
markets based on quality product
d) Yes, because it highlights some similarities in
merger review guidelines and some differences in
approach