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GREETINGS TO PARTICIPANTS AT THE NATIONAL TRAINING WORKSHOP ON COMPETITION POLICY AND LAW ADDIS ABABA 12-16 MAY 2008 1 RELEVANT MARKET Dr. S. CHAKRAVARTHY (Profession : Civil Servant) Formerly, Member, Monopolies and Restrictive Trade Practices Commission, Member, High Level Committee on Competition Policy and Law And Member of Committee for Drafting the Law. Presently, Adviser/Consultant Competition Policy and Law HYDERABAD, INDIA Copyright - Dr. S. Chakravarthy 2 RELEVANT MARKET – A DEFINITION ‘RELEVANT MARKET’ REFERS TO THE LINE OF COMMERCE IN WHICH COMPETITION HAS BEEN RESTRAINED AND TO THE GEOGRAPHIC AREA INVOLVED, DEFINED TO INCLUDE ALL REASONABLY SUBSTITUTABLE PRODUCTS OR SERVICES, AND ALL NEARBY COMPETITORS, TO WHICH CONSUMERS COULD TURN IN THE NEAR TERM IF THE RESTRAINT OR ABUSE RAISED PRICES BY A NOT INSIGNIFICANT AMOUNT. Copyright - Dr. S. Chakravarthy 3 IN SIMPLE TERMS RELEVANT MARKET IDENTIFIES 1. THE PARTICULAR PRODUCT/SERVICE OR CLASS OF PRODUCTS PRODUCED OR SERVICES RENDERED BY ENTERPRISES. 2. THE GEOGRAPHIC AREA. 3. ENTERPRISES THAT COMPETE TO SUPPLY THOSE PRODUCTS OR SERVICES. Copyright - Dr. S. Chakravarthy 4 RM = RPM + RGM RELEVANT MARKET (RM) HAS TWO DIMENSIONS, NAMELY, * RELEVANT PRODUCT MARKET(RPM) * RELEVANT GEOGRAPHIC MARKET(RGM) Copyright - Dr. S. Chakravarthy 5 PRODUCT MARKET INTERCHANGEABILITY OR SUBSTITUTABILITY OF GOODS/SERVICES BY CONSUMERS/PURCHASERS 1. DEMAND SUBSTITUTABILITY – SUBSTITUTES CONSUMER WOULD SWITCH TO IF PRICE OF PRODUCT INCREASES 2. SUPPLY SUBSTITUTABILITY – SUBSTITUTES PRODUCERS WOULD SWITCH TO PRODUCE EXISTING FACILITIES IF CONSUMERS WANT Copyright - Dr. S. Chakravarthy WITH 6 3 ELEMENTS PIN PRODUCT MARKET 1. PRICE INCREASE 2. REACTION OF PURCHASERS 3. SMALLEST SIZE REQUIREMENT Copyright - Dr. S. Chakravarthy 7 PRICE INCREASE • PURCHASERS SHIFT FOR SUBSTITUTES WHEN THE PRICE INCREASES • PRICE INCREASE MUST BE 1. NON – TRANSITORY 2. SMALL BUT SIGNIFICANT CAKE BAKERS – BUTTER VS. MARGARINE Copyright - Dr. S. Chakravarthy 8 REACTION OF PURCHASERS • PURCHASERS GENERALLY REACT TO PRICE INCREASES RATIONALLY IF PRICE OF BUTTER INCREASES OVER A REASONABLE LENGTH OF TIME, CAKE BAKERS WILL SWITCH TO MARGARINE (IN THE EVENT, B & M ARE RELEVANT PRODUCTS) IF PRICE INCREASE IS TRANSITORY, CAKE BAKERS WILL CONTINUE WITH BUTTER (IN THE EVENT, B & M ARE NOT RELEVANT PRODUCTS) Copyright - Dr. S. Chakravarthy 9 SMALLEST SIZE REQUIREMENT • MARKET TO BE THE SMALLEST COLLECTION OF GOODS/SERVICES FOR WHICH THE PURCHASER REACTION HOLDS • PRODUCTS SHOULD NOT BE CONSIDERED AS SUBSTITUTES MERELY BECAUSE OF PRICE INCREASE • SUBSTITUTABILITY SHOULD HAVE DIRECT NEXUS WITH PRICE INCREASE Copyright - Dr. S. Chakravarthy 10 FACTORS GERMANE TO RELEVANT PRODUCT MARKET • PHYSICAL CHARACTERISTICS OR END-USE OF GOODS; • PRICE OF GOODS OR SERVICE; • CONSUMER PREFERENCES; • EXCLUSION OF IN-HOUSE PRODUCTION; • EXISTENCE OF SPECIALISED PRODUCERS; • CLASSIFICATION OF INDUSTRIAL PRODUCTS Copyright - Dr. S. Chakravarthy 11 DEMAND ELASTICITY • DEMAND ELASTICITY = PERCENTAGE CHANGE IN QUANTITY DEMANDED BY PERCENTAGE CHANGE IN THE PRICE OF THE PRODUCT CROSS ELASTICITY OF DEMAND OF A PRODUCT IN RELATION TO PRICES OF OTHER PRODUCTS Copyright - Dr. S. Chakravarthy 12 ECONOMIC AGENTS TO CONTACT • • • • • • • • PURCHASERS OF THE PRODUCT PURCHASERS OF SIMILAR PRODUCTS SELLERS OF THE PRODUCT SELLERS OF THE SAME PRODUCT IN ANOTHER REGION SELLERS OF SIMILAR PRODUCTS ASSOCIATION OF PURCHASERS OR SELLERS OF THE PRODUCT WHOLESALERS/RETAILERS OF THE PRODUCT AND SIMILAR PRODUCTS STATISTICAL BUREAUS FOR THE PRODUCT Copyright - Dr. S. Chakravarthy 13 SOME USEFUL QUESTIONS TO PURCHASERS 1. WHO ARE YOUR CURRENT SUPPLIERS? 2. WHO HAVE BEEN YOUR SUPPLIERS IN THE PAST? 3. WHY DID YOU SWITCH SUPPLIERS? (IF ANSWERS TO ITEMS 1 AND 2 TWO ARE DIFFERENT) 4. WHO ELSE HAVE YOU CONSIDERED AS SUPPLIERS? 5. WHY HAVE YOU NOT BOUGHT FROM THEM? 6. WHAT IS IMPORTANT WHEN YOU DECIDE FROM WHICH SUPPLIER TO BUY? WHY? 7. IS THERE A SUBSTITUTE FOR THE PRODUCT THAT YOU ARE USING? 8. WHAT IS NECESSARY TO SUBSTITUTE THE PRODUCT YOU ARE PRESENTLY USING? Copyright - Dr. S. Chakravarthy 14 SOME USEFUL QUESTIONS TO SELLERS 1. WHO ARE YOUR COMPETITORS? 2. WHAT NEEDS TO BE DONE BY YOU TO CONVINCE PURCHASERS TO BUY FROM YOU? (TIMELY DELIVERY, ADVERTISE, SUPERIOR TECHNICAL SERVICE). 3. WHAT NEEDS TO BE DONE BY YOU TO CONVINCE PURCHASERS TO SWITCH FROM BUYING FROM ONE OF YOUR COMPETITORS TO BUYING FROM YOU (DISCOUNT IN PRICE) 4. IS THERE ANY TYPE OF PURCHASERS WHO TEND TO BUY FROM YOU RATHER THAN FROM YOUR COMPETITOR? 5. IF SO WHY DO THEY PREFER YOU? Copyright - Dr. S. Chakravarthy 15 RELEVANT GEOGRAPHIC MARKET (RGM) • GEOGRAPHICAL DIMENSION INVOLVES IDENTIFICATION OF GEOGRAPHICAL AREA WITHIN WHICH COMPETITION TAKES PLACE • RGM MAY BE INTERNATIONAL LOCAL, NATIONAL OR • GEOGRAPHICAL DIMENSION INCLUDES – – – – CONSUMPTION AND SHIPMENT PATTERNS TRANSPORTATION COST PERISHABILITY OF GOODS BARRIERS BETWEEN ADJOINING GEOGRAPHIC AREAS Copyright - Dr. S. Chakravarthy 16 FACTORS GERMANE TO RELEVANT GEOGRAPHIC MARKET – – – – – – – – REGULATORY TRADE BARRIERS; LOCAL SPECIFICATION REQUIREMENTS; NATIONAL PROCUREMENT POLICIES; ADEQUATE DISTRIBUTION FACILITIES; TRANSPORT COSTS; LANGUAGE; CONSUMER PREFERENCES; NEED FOR SECURE OR REGULAR SUPPLIES OR RAPID AFTER-SALES SERVICES. Copyright - Dr. S. Chakravarthy 17 BARRIERS TO MARKET ENTRY 1. 2. 3. 4. 5. 6. ADMINISTRATIVE DECISION BY STATE AGENCIES LEGAL PROVISIONS RELATING TO MANUFACTURING AND DELIVERY LEGAL PROFESSIONAL STANDARDS TRADE POLICY (TARIFFS, QUOTAS, ANTI-DUMPING MEASURES ETC) FINANCIAL BARRIERS BARRIERS RELATING TO IPRs, TECHNOLOGY ETC Copyright - Dr. S. Chakravarthy 18 TWO MODELS MODEL 1 DEMAND SIDE SUBSTITUTION MARKET DEFINITION MODEL 2 DEMAND SIDE SUBSTITUTION AND SUPPLY SIDE SUBSTITUTION SUPPLY SIDE SUBSTITUTION AND ENTRY BARRIERS MARKET DEFINITION ASSESSMENT OF COMPETITION ENTRY BARRIERS ASSESSMENT OF COMPETITION MODEL 2 IS ADVISED Copyright - Dr. S. Chakravarthy 19 BOEING-McDONNELL DOUGLAS MERGER CASE • BOTH BOEING AND McDONNELL DOUGLAS ARE COMPANIES IN US • BOTH MANUFACTURE JET AIR CRAFTS • BOEING ACQUIRED McDONNELL DOUGLAS • EUROPEAN UNION PROTESTED THE MERGER THOUGH IT WAS NOT IN ITS SOIL • AIRBUS INDUSTRIE, AN EUROPEAN CONSORTIUM IS THE ONLY OTHER MANUFACTURER • CONCEPT OF RELEVANT MARKET WAS INVOKED Copyright - Dr. S. Chakravarthy 20 FINALE • COMPETITION AUTHORITY NEEDS TO DETERMINE RELEVANT MARKET • IT SHOULD HAVE REGARD TO RPM AND RGM • INVESTIGATION IS CRITICAL TO THE DETERMINATION • GOOD INVESTIGATION INVOLVES IDENTIFICATION OF IMPORTANT ECONOMIC AGENTS AND POSING APPROPRIATE QUESTIONS Copyright - Dr. S. Chakravarthy 21 THANK YOU FOR YOUR KIND ATTENTION Copyright - Dr. S. Chakravarthy 22