GE and the Honeywell. Argument For And Against The Commission Decision - Essay Example

? ARGUMENT FOR AND AGAINST THE COMMISSION DECISION Task: Argument for and against the Commission decision Introduction The joining of the GE and the Honeywell corporate would affect the product markets that deal with aerospace and power system industries. One of the activities involved is bundling which according to the commission, can be advantageous to the merged business because of eliminating the competitors. As such, Pfanz (2001) posit that “The recent attempt by General Electric to acquire Honeywell, which ended in a prohibition by the European Commission, has been the highest-profile EU merger control case of recent years” (1). However, Nalebuff 2001 (p 3) highlights the negative effects through “to block a merger, the Merger Control Regulation requires the Commission to demonstrate that the proposed merger would lead to market dominance”. This means that the associaction is likely to culminate in market dominance. However, some people have argued against the Commission’s view saying that bundling would make the businesses to be concerned more about their competitors than the consumers’ welfare. Some have also argued that putting bundling into practice would be difficult because of the issues relating to price negotiation (Regualtion (EEC) 2001, 2). Argument for the EC decision on Bundling The Commission opined that the merging of the EG and Honeywell would enable the entity to partake in more coercive forms of bundling, which would effectively deprive the consumers of choice. According to Pfanz (2001), the categories of bundling might have included pure and mixed. Indeed, as the paper progresses it would be simpler to deduce the category. The Commission suggested that the bundling technique would have many pleasant effects on the merged GE and Honeywell’s competitors in the markets for aerospace equipment and jet engines. This is because the rivals’ market shares would be eroded by their incapability to compete with the joined entity package deals, which in turn would lower the profitability of their rivals leading to their exit (Schlossberg & American Bar Association. Section of Antitrust Law 2008, p. 17). The Commission thought that the ability of the company to employ bundling would enable the combined corporate to offer complimentary goods at a reduced price compared to when the products are sold separately. The Commission suggested that bundling would lower the revenues for the GE’s and Honey well’s Competitors in the market. The reduction of revenues would be advantageous to the companies since it would reduce their competitors’ ability to invest. Moreover, it would augment the companies’ capabilities of competing effectively. According to the Commission’s view, the prices could rise in future, and this would cause harm to their rivals and customers in the market. From the Commission’s presentation, bundling would have an ultimate effect of shutting out markets for the competitors who deals with single line of products. Such foreclose would help in the decrease of investments by other competitors or even eliminate them. The Commission predicted that the combined business would have incentives by bundling its companies’ products. This would make its competitors to be less competitive by depriving then revenues. This implies that the firms that have been deprived their revenues would not cover their fixed cost. He argued that this would be advantageous to the EG and Honeywell, since it would have unpleasant effects on their competitors spending and thus they would not compete effectively in future. In his argument, the Commission proved his points by providing proof that Honeywell uses bundling in strategic way called “multi-product” bids. Moreover, the Commission got evidence from the companies’ competitors proving that they faced Honeywell bundling, which made it difficult for them to compete. Therefore, the Commission said that if bundling were to continue, their rivals would withdraw particularly the Rockwell Collins Company (Grant & Neven 2005, p. 5). The Commission’s idea about bundling derives support from two arguments, which are theoretical and empirical. The theoretical shows the existence of economic models, which proves that a firm can use bundling to eliminate rivals. In his paper, the Commission showed that a firm could engage into a profitable bundling only after an exit of a firm. To avoid to prove the recoupment, the Commission used another model to show that bundling cannot hurt the merged entity, but it will only harm the rival by depriving them of their profit that is essential for sustaining their competitiveness. From the empirical perspective, it is reasonable that the corporate will partake in bundling since it is already observable in this industry (Motta 2007, p. 388). In the year 2001, the Air Force rejected the bundling appeal. According to them, bundling as proposed by the commission was a good idea since they thought it would protect small businesses. The Air Force thought that bundling would be helpful since it would make the company to save approximately 100 million dollars yearly (Vejanovski 2003, p. 180). Argument against the EC decision on Bundling The GE and the Honeywell deal was criticized by the DOJ in many speeches. For instance, in a speech to the OECD, the Assistant Attorney General for Antitrust said that there should be a different approach in merging the entities other than bundling (Cseres 2005, p.281). The most controversial part of the Commission’s study was the bundling issue. The Commission thought that the bundles of aircraft engines and system would lead to the shutting out of rivals and the elimination of helpful competition in the jet engine market. There were many issues, which made the Commission’s argument regarding bundling be doubtful (Cseres 2005, p.281). It is not very clear whether the bundling issue is under the European Merger Regulation or Article 82. Bundling is a behavioral problem concerning the ways a firm uses its powers. The focus of the European merger control is on the position of the parties and at the time of merger and not the probable future conduct. Some studies prove that that Article 81 and 82 are applicable to this conduct. However, some have argued that the issue is not very important. Concerning the bundling issue, the CFI thought that, even though the law disallows merger creation of a main position, which has considerable anti-competitive effects, the conditions do not necessarily imply that the fused entity will because of the merger, practice unauthorized conduct (Cseres 2005, p.281). Additionally, it was arguable that the bundle theory did not have a strong basis financially. The decision was not very particular in dealing with the financial evaluation of bundling. The commission mainly focused on a model, which contradicted with the aerospace industry according to its creator. According to the Commission perception, the consumers who all pay the same price, would select a product that is bundled and discounted over the product that is more expensive. This situation can only be applicable in Microsoft since one cannot compare the computer industry with the aerospace firm. This is because, in the aerospace business, the prices of all the single products are separately negotiable due to their considerable costs. Hence, discounts cannot be negotiable for the bundle of products but can be negotiable for individual products (Cseres 2005, p.282). The bundle method is not applicable in the aerospace industry since it can only work effectively in mass consumer goods markets of operating systems and browsers. The aerospace market system consists of very few but sophisticated purchasers who might decide to purchase products from different suppliers. It is doubtful that the bundle of products would have the positive effects on competition as predicted by the Commission (Cseres 2005, p. 281). According to the US antitrust authorities, the Commission’s financial view regarding the GE’s alleged foreclosure was imperfect. According to the Commission, the idea of what makes up foreclosure in GE’s case, which entail the ability to join its economic strengths, ability to buy aircrafts in large quantities, ability to enjoy the benefits of harmony, and to offer reasonable solutions to airlines, have made the GE be capable of foreclosing competition. This view contradicts the meaning of foreclosure in economics. According to economics, foreclosure is the way a corporate uses monopoly to prevent other firms that deal with the same product from competing with it in the market. This makes one competitor to be very superior compared to other competitors and this can cause harm to the market. Moreover, it cannot justify liability for an anti-competitive act. The Commissioner Monti indicated that he wanted to augment the role economic evaluation in the Commission’s work in the course modernization of European competition law. However, many people did not approve the use of economic theories (Cseres 2005, p. 281). According to the US, the Commission’s test regarding bundling is very unclear. Both the EU and US antitrust laws wanted to prevent the implementation of the action claiming that it would hinder healthy competition. They further claim that bundling would encourage monopoly, which will prevent a healthy competition. According to the US antitrust laws, competition enables many companies to achieve their goals of being efficient and considering the consumer welfare. The antitrust law focuses on how bundling would affect the consumer, while the Commission focuses on how the action would affects the competitors of the General Electric and Honeywell (Smitherman 2007, p.88). Additionally the US antitrust law is against the Commission proposal regarding bundling since according to them; the action lacks practical rigidity and financial input. This is proved by the fact the Commission does not have clear proof. According to the CFI judgment in Air tours, the commission ignored the evidence, which the parties presented and failed to examine the rest properly (Kokkoris & Olivares-Caminal 2010, p. 33). The Genera Electric and Honeywell filed separate appeals at the European CFI against the Commission’s decision to stop the merger, each requesting to terminate the Commission’s theory of bundling, which created the base of the decision to stop the agreement (Cseres 2005, p.281). The Commission presented the proof regarding the Honeywell engagement in bundling. However, the Commission’s case team discovered that bundling was not extensive in the markets. They discovered that bundling was not a very effective strategy because of the nature of industries the Honeywell and GE are. The reason they gave for their opinion was that, there lacks list of prices for the entity products and the transactions are subject to solitary negotiation singly. The purchasers select the products that they find best according to them based on technical specifications. Additionally the team found out that the procurement process involved in the process is unpleasantly long. They also discovered that the application of bundling would be difficult because the prospective purchasers have the ability to play sellers off against each other. Furthermore, suppliers alter the prices of their entire products after two months (Grant & Neven 2005, p. 16). According to the Commission, Honeywell had practiced bidding of multi-products, which was also another name for bundling. Nevertheless, the discounts on the bundles were very small, and the consumers could split the packages choosing the best, and could maintain the bundle discount. Hence, if bundling was evident as the Commission claimed, it was not very clear if the method was effective in taking all the purchasers from the rivals (Grant & Neven 2005, p. 16). The Commission also gave a confidential report of the Honeywell to prove that, even in the presence of impediments, bundling can still give pleasant results. He also gave some examples where there was offering of warranties to those purchasers that bought two products at the same time. He gave a US airline by AlliedSignal as an example. However, the commission failed to mention products that AlliedSignal’s competitors offered and if the bid was successful. For this reason, it is intricate to devise a conclusion from the presentation. He presented one example where more products were offered in a bundle but what was unclear, was the amount of discounts and bundles that were bought (Zimmer & Schwalbe 2009, p. 393). The Commission gave more examples regarding bundling in the aerospace business. In one of them, the airframer asked to be given bundles for non-avionic components after selecting Honeywell as the products’ supplier. However, the facts were not enough to make a conclusion from that since he never mentioned the results. From the outcome of the researchers’ studies, that the commission had mentioned that a manufacturer requested for a bundle for the non-avionics systems but the firm was not successful since it never sold the whole bundle. Additionally, there were complaints from the two rivals claiming that bundling never took place. The Commission did not mention in his presentation that there were evidence from some airlines, which showed bundling did not occur (Smith 2002, p.53). The commission ignored the evidence and continued to assume that the merger would allow GE to practice bundling (Smith 2002, p.53). However, where GE is the only engine supplier like the Boeing 737, the buyers negotiate the buying of the plane with Boeing, giving GE no room to attempt to bundle other components. Additionally, on the multi-source basis, the consumers chose the engines a significant time before choosing the avionics and non-avionics components. Therefore, this makes it more complicated for bundling to be effective. The GE offered discounts on the avionics. These results into more difficulties since the pricing of the products are never fixed, but it is usually negotiable (Snelders & Subiotto 2002, p. 21). Practically, the Commission never applies the HMT, which is a way of market definition on a regular basis. The EC market definition does not fully employ the HTM. A report showed that market definition is not subject to thorough analysis. Moreover, it is fails to constitute the focus whether an undertaking can gainfully augment price above the competitive level. Rather, at the market definition level, the informal assessment of exchangeability in use and the absolute prices are the center. The commission did not see the significance of applying the HMT, and this was confirmed when the European Court discarded the complainant’s claim on this issue. The Commission’s decisions regarding the market definition are the same in EC and US antitrust laws. There has been frequent criticism of the Commission’s action concerning the adoption of unduly narrow goods, and geographical market definitions in order to find a merger incompatible with Community law. However, it is inherent that a relevant product market consists of the most contracted goods grouping over which the supposed monopolist can gainfully escalate above the competitive price. Due to the prevalence of the merger decision, most of the explanations that the Commission gave regarding the market lacked derivation on the substantial market study. The tendency to sue the model by the Commission can result to difficulties (Financial Services Authority 2005, p. 15). Winning the market shares and hurting competitors should lead to the price reduction, which would benefit buyers. One would also expect the prices to go down since the GE and Honeywell deal with complimentary goods. A corporate that deals with complimentary products is mostly expected to lower the prices of its products. However, according to the Commission’s presentations, the bundling would lead to the price rise. In addition, it is not clear if the industries that are expected to exit will truly do that. For instance, it is very unlikely that some big firms like UTC, which has a strong presence in the market will exit. This is because they will not just wait for the bundling strategy to eliminate them. They will also find other ways for the sustenance of their existence in the market. For instance, they can do this by acquiring other corporate, or they can also form alliances to widen the range of products (Basedow & Wurmnest 2011, p.50). Even if, the rivals will exit, it will not be very soon. This is because; the operating life of an aeroplane is not short and since the revenues of most of the products do not come from the first sales but from the MRO services and spare parts, it is clear that it will take long for the rival to exit. Therefore, in enforcing the bundling plan there should be the consideration of some trade-off. If the phase with low prices are longer and the rivals are still operating, the resulting initial effect on the welfare that must be outweighed by the negative impacts on prices that will take place after the exit will be larger (Russo, Pieter & Gunster, 2006, p.348). There was a proposal that the Commission could have allowed the merger, but it should not have imposed the option of obliging the corporate to practice bundling. The proposal was improper and untenable since the EC never wanted to monitor the business regularly. The other possible option available was that the EC could allow the merger, but should set a system that would monitor the GE /Honeywell. The monitoring system would prevent the entities’ misuse of dominance and will help in knowing if the business practices monopolization. The EC did not find the option preferable since setting up the monitoring system would be difficult and costly (Motta 2007, p.389). EC Competition Commissioner Monti made an observation and revealed that protecting rivals can lead to the protection of competition. Causing harm to competitors is not a healthy competition as proposed by the Commission can cause harm to competitors. Harm to competition arises from monopoly, which is encouraged by the bundling action because it will cause the price escalation and reduction of outputs. Hence, the Commission’s idea is not effective. Secondly, it is true that the aim of competition policy is customer benefits. The US antitrust official seized this when there was controversy about the GE/Honeywell. The seizure was not noticeable in Europe, and they viewed it as a wrong law statement (Monti 2007). Conclusion Regardless of extensively practicing bundling in the future, the commission cannot influence the competitors’ decisions at the counter. For instance, even if some competitors refuse to offer bundles, because of the obstacles caused by negotiation, such as who will reduce their prices compared to others, there is a likelihood that the competitors will still be of significance to the market. It also vital to understand that, although rivals would not offer bundles, the extension of the product line over which bundling occurs, while increasing the attractiveness of bundling, would reduce the extend to which competitors would be affected. It is true that bundling can result to the augmentation of the products prices. The price escalation may not be very attractive to consumers, but that does not concern the Commission much. The supposition that competitors will be subject to elimination concerns the commission. This observation further reveals that the presumption such that competitors would be subject to marginalization, lacks robustness and presumption. List of references Basedow, J, & Wurmnest, W 2011, Structure and effects in EU competition law: Studies on exclusionary conduct and state aid, Kluwer Law International, Alphen aan den Rijn. Cseres, K 2005, Competition law and consumer protection, The Hague, Kluwer Law Internat. 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Nalebuff, B 2002, Bundling and the GE-Honeywell Merger, Yale University - Yale School of Management Viewed at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=327380 Pfanz, M 2001, The Economics of GE/Honeywell – Part 1: Mixed Bundling, CRA Competition Memo Regualtion (EEC) 2001, Declaring a concentration to be compatible with the common market and the EEA Agreement, Viewed at < http://www.academia-research.com/filecache/instr/m/a/668221_main_case_study.pdf> Russo, F, Pieter, M & Gunster, A, 2006, European Commission decisions on competition: Economic perspectives on landmark antitrust and merger cases, Cambridge University Press, Cambridge. Smith, E, 2002, Perspectives on international trade, Nova Science, New York. Smitherman, C, 2007, Transatlantic merger cases: United States--European Community merger review cooperation, Cameron May, London. Schlossberg, S, & American Bar Association. 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