Commentary

 Comment

Rethinking competition

Stephen Bartholomeusz

Published 12:12 PM, 29 May 2009


The US Federal Trade Commission’s decision to challenge CSL’s proposed $3.5 billion acquisition of Talecris Biotherapeutics is based on an unusual premise that will attract the attention of the Australian Competition and Consumer Commission. The reduction in the number of competitors, it argues, would cause anti-competitive harm by making "co-ordinated interaction" even more likely.

Co-ordinated interaction doesn’t appear to involve actual illegal collusion – cartel-like behaviour – but rather an informal, uncoordinated understanding by competitors that it is in everyone’s interests not to compete too hard.

The ACCC will be particularly interested in that element of the FTC’s arguments because of the number of very concentrated sectors that have emerged in the Australian economy.

The consolidation of the banking sector is a particularly topical issue, given that the global financial crisis has decimated the non-bank sector, forced St George and BankWest into the arms of big bank acquirers and weakened the remaining regionals as a competitive force.

Petrol marketing and refining, alcoholic beverages, soft drinks, retailing, building materials, aviation, dairy and media are among a string of highly-concentrated sectors with only a handful of big players, some of whom are experiencing varying degrees of stress.

The FTC’s opposition to the CSL deal is based on a view that further consolidation of the market for plasma-derivative protein therapies would increase the likelihood of collusion. CSL and Talecris are, it says, the world’s second and third-largest suppliers of those therapies respectively.

A merger would reduce the number of competitors in the US markets for immune globulin and albumin from five to four and leave CSL and Baxter with more than 80 per cent of the market – and continue the reduction in competition that had occurred over the past 19 years. In 1990 there were 13 competitors. The FTC says that firms in the industry have used this consolidation as a tool to limit supply and drive higher prices.

In a sense, CSL’s Brian McNamee has brought the FTC’s wrath down upon his own head. Back in 2004 the US market for plasma products was under stress, which was a major issue for CSL, given that it had entered the US market in 2000 with the transforming $1 billion acquisition of Switzerland’s ZLB.

Mitsubishi had put its Alpha Therapeutics business on the market against a backdrop of over-capacity and slowing demand. Alpha, denied funding from its parent, started dumping inventory to generate cash and to force a competitor to take it out and stabilise the sector. Prices fell 40 per cent or more. In the end it was carved up by Baxter and Spain’s Grifols group.

CSL’s contribution to stabilising the sector was to acquire Aventis Behring through another $1 billion dollar deal and preside over a managed rundown of its massive excess inventories. Not surprisingly, prices firmed.

From a commercial perspective, ending irrational behaviour and bringing supply more closely into line is a sensible strategy that leads to rational competition and facilitates both returns and investment.

For regulators, excess capacity and sub-economic pricing driven by fierce competition for the available demand generates consumer benefit and rational competition breeds suspicion of collusion or at least an implicit understanding of how to maximise the profitability of an oligopoly.

As the chief executive of a rather well-known company once said of a competitor’s chief executive who had initiated a price war: "Doesn’t the #$%@! idiot understand how to operate in a duopoly?" The offending executive was subsequently replaced by someone who had a better understanding of "rational" competition.

There is only a subtle difference between an industry where participants engage in optimal levels of competition and one where they understand that being too competitive damages all the participants’ interests in maximising returns, including their own. They don’t have to actively to collude to reach that conclusion or achieve the outcomes.

The ACCC could confront exactly that issue in banking and in petrol retailing, where Caltex’s proposed acquisition of Mobil’s service stations has created a live case for the ACCC to consider.

When does consolidation create an industry structure that encourages competitors to engage in constrained competition without ever doing anything, or having to do anything, that could trigger anti-cartel actions by the regulator?

Is it a proper regulatory objective to pursue or preserve market structures that promote irrational competition for near term consumer benefit but at a potential cost to longer term investment and innovation?

The FTC action, which CSL proposes to fight, might provide some insights.




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