STAFF DISCUSSION DRAFT:
FOR PURPOSES OF DEBATE AND DISCUSSION ONLY
THE ROLE AND ASSESSMENT OF CLASSICAL MARKET POWER
IN JOINT VENTURE ANALYSIS
Michael S. McFalls
Policy Planning
Federal Trade Commission
October, 1997
Executive Summary
Market power is an important factor in many antitrust cases involving joint ventures, which this paper defines to include all collaborations, short of a merger, between or among entities that would have been actual or likely potential competitors in a relevant market absent that collaboration. This paper focuses on how the analysis of "classical" market power figures in assessing anticompetitive effects that may result from a joint venture. The "classical" market power inquiry typically asks about the ability and incentive of a firm or group of firms to raise prices profitably by reducing their own output.(1)
The paper first briefly reviews the conceptual underpinnings of market power analysis using market shares and the Herfindahl-Hirschman Index as proxies to evaluate whether market power exists. Although many other factors, such as conditions relevant to the likelihood of coordinated interaction or unilateral effects, entry, and other issues identified in Sections 2-5 of the 1992 Horizontal Merger Guidelines (as revised), also may affect the presence and degree of market power, this paper does not attempt to encompass all of those factors in its analysis.
Rather, this paper applies an analytical framework of "outsider" and "insider" competition(2) to identify issues peculiar to the assessment of classical market power where, unlike in mergers, firms do not combine all of their productive capacities in a relevant market to operate permanently as a single firm. In these competitor collaborations that are short of merger, an evaluation of classical market power may require examining not only whether competition from "outsiders" -- i.e., those who are not members of the collaboration -- may negate the existence of market power, but also whether one or more forms of ongoing, post-joint-venture competition from "insiders" -- i.e., those who are members of the collaboration -- may affect the likelihood that a joint venture may exercise market power. Among other things, the paper discusses when it may be appropriate to use a "single-share analysis" in which the market shares of the joint venture members are aggregated into a single market share and when it may be appropriate to incorporate other factors relevant to "insider" competition. The paper also discusses how various courts have analyzed non-exclusive joint ventures to identify factors relevant to "insider competition." Finally, the paper addresses the pros and cons of market-share based safe harbors for joint ventures.
The list of questions attached to this executive summary is intended as an aid to focusing the debate and discussion that this paper is intended to prompt.
QUESTIONS CONCERNING THE ROLE AND ASSESSMENT OF
CLASSICAL MARKET POWER IN JOINT VENTURE ANALYSIS
Mergers Compared with Joint Ventures
To what extent is merger analysis useful in assessing the competitive effects associated with joint ventures?
What competitive concerns might be raised by a joint venture among competitors that merger analysis alone would not address?
"Outsider" and "Insider" Competition
The attached paper develops issues relating to competition from those "outside" a joint venture and competition from those "inside" a joint venture. Those issues raise at least the following questions:
What factors affect the ability and incentive of joint venturers to compete outside or within a joint venture? How might these factors be evaluated?
Under what circumstances could "insider" competition significantly lessen competitive concerns where "outsider" competition may not be sufficient to constrain an exercise of market power?
As a practical matter, how might factors relevant to "insider" competition most usefully be incorporated into the antitrust analysis of joint ventures?
Safe Harbors
Is there a role for one or more market-share-based safe harbors for joint ventures?
If so, should the safe harbors vary depending on the type of collaboration (e.g., R&D joint venture versus marketing joint venture)?
Should certain types of practices be excluded from coverage by market-share safe harbors?
Endnotes:
1. By contrast, an "exclusionary" market power inquiry asks about the ability and incentive of a firm or group of firms to exclude competition by raising the costs of or reducing the output of their competitors. Topics relating to exclusionary market power will be addressed in a separate paper.
2. Steven Salop has used these terms in discussing when and how it is proper for competitors to collaborate and has identified three types of "insider competition" that may be maintained after a joint venture is formed. See Section V infra for an extensive discussion of these concepts.