Industrial economics and antitrust

Oxana Fornea Fabrice Van Ex

The Tetra Pak case

The Tetra Pak case

Introduction

Situating the Tetra Pak Case

Investigational Questions

Economical Analysis

Conclusions

References

Introduction

Tetra Pak – one of the world leaders in the field of cartons for liquid food and the technology for filling these cartons

Tetra Pak company started in 1951 in Sweden with a single product, the tetrahedronshaped package known as « Tetra Pak Standard »

Introduction

In 1969 – the introduction of Tetra brik aseptic packaging system which allowed liquids to be hermetically sealed in cartons (‘long-life products’)

Tetra Pak’s largest market is Europe, with 54% of its total turnover in 1985 and XX in 2004

Tetra Pak controls about 90% of the aseptic sector in the European Community

Situating the Tetra Pak case

Complaints of competitor ELOPAK:

Tetra Pak sells cartons & machines at predatory prices

Tetra Pak imposes unfair contractual conditions on the sale/lease of its machines in order to reduce Elopak’s competitiviness and drive it out the market

Situating the Tetra Pak case

In 1991 the European Commission fines Tetra Pak for its anti-competitive behavior in the non-aseptic cartons market

Tetra Pak has abused its dominant position in the aseptic sector, to establish an anti-competitive dominant position in the non-aseptic sector

Situating the Tetra Pak case

The European Commission distinguished four distinct markets:

4 MARKETS:

Aseptic Cartons (AsC) Non-aseptic Cartons

Machines for AsC Machines for Non AsC

Commission’s view on the markets

01020

3040506070

8090

100

As Cartons Machines Nas Cartons Machines

TetraPakPKLOthers (4)

Interpreting the figures

The only competitor of Tetra Pak in the aseptic sector (cartons and machines) was PKL (with resp. 20% and 10% market share)

The non-aseptic sector (cartons and machines) is less concentrated: 6 competitors instead of 2, Tetra Pak’s market shares, although still important, are much smaller than in aseptic sector

Conclusion of the Commission

Tetra Pak’s has abused its market power in the aseptic sector to establish a dominant position in the non-aseptic sector

The goal of Tetra Pak’s strategy was to eliminate actual or potential competitors and/or their technology in the Non-Aseptic market by using vertical and horizontal market power transfer from the aseptic business

Arguments of Tetra Paks There hasnot been any voluntary strategy for using Tetra

Pak’s dominant position in the aseptic sector to establish a dominant position in the non-aseptic sector

Moreover, Tetra Pak doesn’t have a dominant position in the non-aseptic market since the relevant market having a much larger scope than defined by the Commission: not only cartons but also other packaging materials (glass, plastics, etc.)

The competitive pressure in the non-aseptic packaging market is thus quite high, due to important substitution possibilities to cartons and due to much more competitors

Tetra Pak’s view on the market

0

10

20

30

40

50

60

70

80

90

As Cartons Nas Packs

TetraPakOthers

Investigational questions

Did Tetra Pak deploy anti-competitive actions in the non-aseptic market (cartons & machines)?

Was there an abusive use of TP’s dominant position in the aseptic market to strenghten its position in the the Non-Aseptic market?

Economical Analysis of the Case: Key issues

Relevant Market Definition Problems

Market Dominance

Predatory Pricing

Exclusive contracts and Tie-ins

Conclusion

Relevant Market Definition Problems

Difficult issue in industrial economics and hence also in Tetra Pak II case

RECALL: Commission distincted 4 separate markets although considering As.market (cartons&packaging systems) as closely related to Non-As.market

A distance metric = (average) price elasticity of substitution, but: Value is difficult to measure and varies a lot; Intuitive ε -> cfr. In-class test

An In-class intuitive testIs the carton package market closely related to other

package markets?

Carton, Bottle: Pc=Pb=1; Qc=?; Qb=?

If Pc*=1.20 and Pb=1; Qc*=?; Qb*=?

If Pc**= 1.50 and Pb=1; Qc**=?; Qb**=?

Carton, Plastic: Pc=Pp=1; Qc=?; Qp=?

If Pc*=1.20 and Pp=1; Qc*=?; Qp*=?

If Pc**=1.50 and Pp=1; Qc**=?; Qp**=?

Tetra Pak: “long term elasticity of substitution in Non-As.market = high”

“Glass bottles, plastic bottles, metal contents, new technology, etc. -> provide high degree of interchangeability with (our) cartons”

“Competitive pressure will be important enough to assure competitive pricing”

Relevant Market Definition Problems

Relevant Market Definition EC recognized potential interchangeability

between different types of packaging modi, but only in long run

In short and medium term analysis, relevant market was market of non-aseptic cartons -> price elasticity of substitution close to 0 !

Commission & ECJ: relevant market = Non-aseptic Cartons (resp. filling machines)

Market Dominance RECALL: Market dominance in As. Market is

clear (90-95% market share, strong vertical integration, technical know-how) but less clear in Non-As. Market

Commission didn’t explicitely consider Tetra Pak (45% market share) having market dominance in Non-As. Market

Commission considered TP’s market (super) dominance in As-Market as basis for abusive actions in Non-As.Market

Some factors:

Market Share

Number of competitors

Relative firm size

Degree of vertical integration

Control of distribution process

Technical know-how

Market Dominance

RECALL of allegations towards Tetra Pak

1. Use of Predatory prices when selling cartons and filling machines

2. Applying unfair contractual conditions when supplying machines

GOALS:

- To Kick out/buy out competitors- To Erect barriers for potential new entrants

1. Predatory Pricing 1 element of TP’s abusive behaviour following EC and ECJ

ECJ: “where prices are below the average variable cost, predation must always be presumed” [cfr. Vickers (1999) on cit.]

ECJ didn’t explicitely consider TP’s recoupment possibilities of short-term losses (= quite rare)

ECJ: event pricing above variable cost but less than total cost is abusive if “part of plan for eliminating competitor” [cfr. Vickers (1999) on cit.] (= also quite rare)

ECJ not considering TP explicitely as being dominant firm in Non-As. Market when deciding of predatory pricing (= very rare)

2. Exclusive contracts and Tie-ins

Tetra Pak used exclusive contracts when supplying machines, including: Exclusive rights to maintain & repair machines; Exclusive right to supply spare parts. Priority right of machine repurchase by TP at

prearranged price

Tetra Pak included Contract penalties when switching supplier

Tetra Pak applied Tie-ins: i.e. tied sale/use of TP’s cartons together with TP’s machines

2. Exclusive contracts and Tie-ins

Erects entry barriers for new entrants since they would have to compensate (e.g. in their output prices) penalty costs of customers switching from Tetra Pak to them.

Designed to prevent entry and capture entrant’s rents (via penalty clauses) and cheap buyouts

Tetra Pak: “exclusive contracts are due to complexity of sector and products and are not deliberated predative strategy” [Nalebuff and Majerus (2003) on cit.]

Conclusions Tetra Pak case is considered as very interesting in the

industrial organisational literature since it led to an investigation/condamnation of several distinct anti-competitive actions in a same case.

Using a dominant position in a distinct (although closely related?) market to decide about abusive use of it in another market was/is quite uncommon.

Opinions in industrial organisation literature about anti-competitive character of Tetra Pak’s behaviour and strategy, are quite divided, as well as conclusions.

References

GARCIA-GALLEGO A. and GEORGANTZIS N. (1999), Dominance in the Tetra Pak Case: An Empirical Approach, European Journal of Law and Economics, 7, 137-160

HABORD D. and HOEHN T. (1994), Barriers to Entry and Exit in European Competition, International Review of Law and Economics, 14, 411-435

LOWE Ph. (2003), EU Competition Practice on Predatory Pricing, Introductionary Adress to the Seminar “Pro and Cons of Low Prices, Stockholm.

References

NALEBUFF B. and MAJERUS D. (2003), Bundling, Tying and Portfolio Effects, DTI Economics Paper n°1

SCHERER F.M. (1980), Industrial Market Structure and Economic Performance, Chicago Press

TIROLE J. (2004), The Analysis of Tying Cases: A Primer, Working Paper, 1-21

VICKERS J. (2005), Abuse of Market Power, The Economic Journal, 115, 244-260