Competition for the Field, Sirius/XM and Shelf Space

Josh Wright —  25 March 2008

Geoff and Paul like the result in XM/ Sirius but are puzzled by the DOJ press release, in particular as it pertains to analyzing ex ante competition, or “competition for the field,” in the form of payments to automobile manufacturers to adopt their services. Geoff thinks the DOJ’s press release contains some funny language appearing to suggest that the existence of exclusive contracts meant that there was not competition. I think the relevant language is in the second sentence of the press release:

The Division reached this conclusion because the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers for several reasons, including: a lack of competition between the parties in important segments even without the merger …

Geoff correctly notes that the press release clarifies the DOJ’s position on ex ante competition a bit. The DOJ appears to understand that competition for the field is important in this market, but concludes that margin of competition has been exhausted until 2012 when the relevant exclusives expire. Paul‘s critique of the DOJ press release is of a similar nature: why would the DOJ emphasize that there was a lack of competition between the parties on this margin? I agree with both of them that the press release is a bit odd — but for some reasons not discussed as of yet. I also want to take on Paul’s invitation to discuss the slotting allowance analogy to these payments and highlight some general issues about merger analysis and ex ante competition.

First, the press release. What strikes me as odd about the release is that you have to read pretty far into it to get to the discussion of market definition. And everybody knows the central issue in this case was whether this was a 2-1 merger or other terrestrial and other forms of radio were in. Why did the DOJ lead with the somewhat more fact intensive and complex point about competition for the field, noting the expiration dates of the contracts in 2012, and pointing out that the automobile distribution channel was an increasingly important part of the satellite radio market? A few guesses:

  • The DOJ leads with the most fact intensive part of its analysis to demonstrate that it really did its homework here, understands the satellite radio market, how it has changed over time, and the role that these sole source arrangements play in the competition between XM and Sirius.
  • Market definition is the more natural lead for obvious reasons. But there just isn’t enough variation in the price data and consumer switching (at least with non-confidential data) to show off the DOJ’s attention to analytical detail with the market definition point. Though note that if one concludes the market definition includes terrestrial radio, the competitive analysis is basically done.
  • Another reason one might lead with the competition for the field point is that suggesting that the presence of exclusives means that firms are not competing avoids the critique that the DOJ is reflexively non-interventionist — it is certainly not the standard “Chicago” position on competition for the field

Again, these are all just idle observations. But it does strike me as a conscious choice to design the press release this way instead of leading with the obvious market definition point.

Second, the role of timing. The DOJ goes to great lengths to point out a few timing issues that play a central role in its competitive analysis. For instance, that the exclusive contracts would not expire until 2012 and therefore ex ante competition was exhausted until then. As Paul notes, the inference from the expiration dates on the contracts to the notion that competition was non-existent (or perhaps not significant) on that margin is wrong. It is certainly not the standard approach to competition with exclusives in the single firm context where the duration of the exclusives is a factor in the rule of reason analysis but not even presumptively illegal much less conclusive that competition is absent. As a matter of economics, Paul is absolutely right that this ex ante competition was not absent simply because expiration dates on the contracts were in the future. Firms can breach exclusive contracts. Firms can compete for future customers. Those customers contracts can come up for expiration at different times (were they all up in 2012?). And of course, they can also compete again in anticipation of expiration in 2012. I think the charitable and probably intended reading of the DOJ release is that competition in this margin was largely completed, while existent, but practically insignificant.

Timing comes up again in the context of technological change and entry:

The likely evolution of technology played an important role in the Division’s assessment of competitive effects in the longer term because, for example, consumers are likely to have access to new alternatives, including mobile broadband Internet devices, by the time the current long-term contracts between the parties and car manufacturers expire.

So, while there is no significant competition between XM and Sirius on this margin, it doesn’t really matter because the world is likely to change before 2012 anyway. Fine. But again, if market definition and entry and dispositive, why lead with the ex ante competition point? And as far as entry considerations go, the Merger Guidelines limit consideration of entry to that which is likely to occur within two years. I wonder if that means two years from the time of the closing of the investigation or from the time of the merger proposal in this context given the wait time for a decision?

Third, mergers and ex ante competition generally. There are some interesting issues here about ex ante competition and merger analysis more generally. For example, Paul asks why the DOJ would do so much to emphasize the negligible impact of the competition between XM and Sirius on consumer behavior in the car market and asks whether the agencies would say the same thing about slotting contracts in the grocery retail industry (a subject I’ve written about, e.g. here and here). I don’t think they would. One certainly wouldn’t argue that the fact that consumers don’t switch supermarkets based on what exact allocation of baby food, spices, or frozen foods they carry justifies the inference that there is no relevant ex ante competition between manufacturers in those industries. So I’m not quite sure why so much emphasis on this fact other than to demonstrate that the DOJ investigated this market in great detail.