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MERGERS IN TWO SIDED MARKETS: A CASE STUDY

MERGERS IN TWO SIDED MARKETS: A CASE STUDY. ADRIAN MAJUMDAR Adrian.Majumdar@rbbecon.com. OVERVIEW. Background Two-sided features of GDS platforms Harm to the “upstream side”? Airline counter-strategies Too much two-sidedness?. Travelport proposed acquisition of Worldspan.

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MERGERS IN TWO SIDED MARKETS: A CASE STUDY

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  1. MERGERS IN TWO SIDED MARKETS: A CASE STUDY ADRIAN MAJUMDAR Adrian.Majumdar@rbbecon.com

  2. OVERVIEW BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • Background • Two-sided features of GDS platforms • Harm to the “upstream side”? • Airline counter-strategies • Too much two-sidedness?

  3. Travelport proposed acquisition of Worldspan BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • Merger of Global Distribution Service (GDS) platforms • Worldspan GDS • Galileo GDS (Travelport) • 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

  4. GDS platform BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE TSPs (e.g. airlines, car rental co, hotels) CONTENT (i.e. availability, prices) ACCESS TO TAs GDS BOOKING FACILITIES, PRICE & CONTENT COMPARISONS CUSTOMER BASE Travel Agents (TAs)

  5. GDS: two-sided market features BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • 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

  6. Airlines join all platforms to maximise coverage (full multi homing) Given that airlines join all platforms, TAs need join only one (single homing) 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) Single and Multi Homing BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE Airline 1 Airline 2 GDS 1 GDS 2 TA 1 TA 2

  7. Theories of harm BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • The Commission analysed the possible effects of the merger with respect to non-coordinated and coordinated effects • 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

  8. Harm to the airline side? BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • Sufficient post merger competition on TA side • Merger increases Worldspan/Galileo customer base and so may give GDS greater bargaining power over airlines? • 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…

  9. Possible surcharging strategies BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • 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.

  10. Too much two-sidedness? BIICL 6TH ANNUAL MERGER CONTROL CONFERENCE • 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? • 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!

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