Relaxing whilst doing Competition Law is not an Oxymoron

Ruminations on Market Definition in Merger Cases

with 5 comments

A thought to share:

In going through the RyanAir/AerLingus and Iberia/Vueling/Clickair cases – and following a discussion with David Hull yesterday –  I have increased difficulties with the idea  that low cost companies and flag carriers operate on the same relevant market.

Intuitively, I am prone to think that the demand served by low costs companies and flag carriers comprises several groups of customers, with different elasticities. In particular,  low costs carriers likely face a bunch of captive customers, which would never switch to a flag carrier. In the same vein, flag carriers probably face a share of captive demand, which would never switch to a low cost carrier.  I may be wrong out of sufficient technical knowledge, but it seems possible to argue that we have two distinct product markets (which, as the case may be, possibly exercise a competitive constraint on each other). My intuition is further confirmed by the fact that the features of low cost and flag carrier services are very different.

If I find time I’ll try to go through the decisions again, which might conceal the answer to this.

Written by Nicolas Petit

30 November 2010 at 7:33 pm

Posted in Uncategorized

5 Responses

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  1. Nicolas, happy to hear that you always keep your brain on the go. The first time I heard this argument (existence of distinctive low-cost airline market) was in Case C-344/04 IATA/ELFAA dealing with the the EU validity of the passengers’ rights regulation. In that case, ELFAA invoked inter alia a breach of the principle of proportionality with reference to the compensation duty and, in so doing, it made an attempt (dismissed by the ECJ) to prove the existence of such a (low cost) market…you may find the genesis of this idea there!
    I guess that I was one of the few impressed about this argument. As a result, I still use it – together with the coca-cola/pepsi example – as one of my best market definition teaser with my students!

    Alberto Alemanno

    30 November 2010 at 7:47 pm

  2. I see clients of low cost NOT switching to flag carriers but i may not see other way round. I would say “one way substitutability”, what do you think?


    30 November 2010 at 9:46 pm

  3. […] Following Alberto Alemano’s comment a few days ago, I’d like to ask our readers to share possible ” market definition teasers“. […]

  4. My intuition is that low cost carriers are sensitive to full cost carrier pricing. Although some customers may captive to flag carriers, there should exist a large group of customers willing to switch and the price difference must compensate for the (perceived) disadvantages of low-cost travel. In any event, route entry and exit is frequent these days – there must be plenty of economic evidence available on the flag carriers’ importance to low cost carriers’ prices…


    3 December 2010 at 2:23 pm

  5. You can argue that low cost carriers, on some routes at least, are not in a transport market at all but in the same market as other leisure activities.

    That is, in a traditional transport market, the customer thinks “I want to go to x” and then looks at options, possibly including some less attractive options like landing near but not at x.

    For some low-cost carrier customers at least, the question might be more “What shall we do this weekend to celebrate your birthday?” The answer “go to Budapest and drink a lot” could be assessed against lots of other activities, many of them not involving travel (but almost certainly won’t compete with a full service flight). Furthermore, those customers may be indifferent between going to Budapest, Dublin and Talinn for the piss-up.

    I occasionally use this to illustrate the point that the substitute products you might need to consider need not be physcially similar to the product under investigation. I don’t know whether this idea would pass a SSNIP test, but it seems plausible enough to illustrate the principle.


    7 December 2010 at 12:49 pm

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