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RBB Economics 16 November 2007 MERGERS IN TWO SIDED MARKETS: A CASE STUDY ADRIAN MAJUMDAR Adrian. [email protected] com
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics 16 NOVEMBER 2007 2 OVERVIEW • Background • Two-sided features of GDS platforms • Harm to the “upstream side”? • Airline counter-strategies ADRIAN MAJUMDAR • Too much two-sidedness?
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics Travelport proposed acquisition of Worldspan • At European level, 4 to 3 merger: • Amadeus (50 -60%) • Sabre (10 -20%) • W/G (20 -30%) • But W/G has high post merger shares in some countries Merger was cleared in August 2007 ADRIAN MAJUMDAR 16 NOVEMBER 2007 Merger of Global Distribution Service (GDS) platforms • Worldspan GDS • Galileo GDS (Travelport) • 3 •
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics ADRIAN MAJUMDAR 16 NOVEMBER 2007 4 GDS platform TSPs (e. g. airlines, car rental co, hotels) CONTENT ACCESS TO TAs (i. e. availability, prices) GDS CUSTOMER BASE BOOKING FACILITIES, PRICE & CONTENT COMPARISONS Travel Agents (TAs)
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics ADRIAN MAJUMDAR 16 NOVEMBER 2007 5 GDS: two-sided market features • Two separate sides: • “upstream side”, TSPs (e. g. airlines), European wide pricing • “downstream side”, TAs (TAs typically only national coverage) • Platform acts as “intermediary” • TAs find it easier to compare prices on the platform than contact airlines individually (“one-stop shop”) • Airlines obtain “block” access to TAs • CROSS GROUP EXTERNALITIES (indirect network effects): • One group’s valuation of the platform depends on the size of the group on the other side • The more TAs on the platform, the greater the value for airlines of joining • The more airlines on the platform, the greater the value to TAs for joining
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics Single and Multi Homing • Airlines join all platforms to maximise coverage (full multi homing) • Given that airlines join all platforms, TAs need join only one (single homing) Airline 1 Airline 2 GDS 1 GDS 2 TA 1 TA 2 ADRIAN MAJUMDAR 16 NOVEMBER 2007 6 • From TA point of view, platforms become more similar (increases competition on TA side) so that… • TAs are net receivers – platforms incentivise TAs to join… because a larger downstream base increases GDS’ ability to charge airlines more • Airlines pay for access to TAs • Network has price structure reflecting contribution to the network (cf need to get each side on board)
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics Theories of harm • The Commission analysed the possible effects of the merger with respect to non-coordinated and coordinated effects ADRIAN MAJUMDAR 16 NOVEMBER 2007 7 • Non-coordinated effects – “Vertical cross-market effects” – Elimination of a pricing maverick – Possible market power problems in EEA countries with high post merger market shares • Coordinated effects • No harm found – main focus on cross-group effect
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics Harm to the airline side? • Sufficient post merger competition on TA side • Merger increases Worldspan/Galileo customer base and so may give GDS greater bargaining power over airlines? ADRIAN MAJUMDAR 16 NOVEMBER 2007 8 • But airlines can adopt the following strategic responses: • Refuse to supply info on internet fares – Recent growth of internet fares (“supplier. coms”) – Examples of airlines securing discounts from GDS for supplying full content (“full content agreements”) • Surcharging…
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics Possible surcharging strategies • Airline can impose charges on TAs depending on their choice of platform and content • OPT IN: • If enough TAs “opt-in” to take full-content, GDS pays airline an “opt -in” discount • Airline encourages TAs to opt-in by surcharging them if they do not (e. g. BA)* • “Steering” • Steer to direct sales: surcharge TAs for purchasing internet fares through GDS (e. g. Brussels Airlines) • Steer to rival GDS: surcharge TAs according to their choice of platform (examples from US) * TAs prefer to pay to the GDS an opt-in fee instead of the airline surcharge. The GDS opt-in fee then funds the airline discount. ADRIAN MAJUMDAR 16 NOVEMBER 2007 9
BIICL 6 TH ANNUAL MERGER CONTROL CONFERENCE RBB Economics Too much two-sidedness? • Platforms and cross group externalities are not uncommon • In principle, a supermarket can be thought of as a platform where suppliers meet consumers: • Consumers single home (at their local store) • Suppliers multi home (to obtain full coverage) • But, if we care about harm to the “supplier side”, we might block a merger that generated beneficial reductions in marginal cost that would be passed on to consumers • Questions: • When is harm to one side more important than harm to the other? ADRIAN MAJUMDAR 16 NOVEMBER 2007 10 • When does two-sidedness add a fundamental new concern? E. g. compare a merger of night clubs with a merger in a “tippy” market? Will merger affect single / multi homing? Other areas? • Two-sided theories offer valuable insights but don’t forget about the standard merger analysis that has served us well to date!