After repeated letters to the Competition Commission, including letters sent to the Commission e-mail address on the 3rd and the 10th September this year, in which I sought a response to a number of questions around their findings, the Commission have finally responded to me via the deputy chairman and the head of this particular panel, Alisdair Smith. I am grateful that the Commission have finally engaged in dialogue, around two weeks after their decision has become legally binding.
They have given me a response to my initial queries plus a subsequent post on the condition that I reproduce it in its entirety, without edits, and I do so below. I will be writing my own response to their response tomorrow, but until then feel free to make your own mind up.
AN OPEN LETTER FROM THE COMPETITION COMMISSION TO MARK LIVERSIDGE
In your Movie Evangelist blogs, you have made several reasoned criticisms of the Competition Commission (CC) decision on Cineworld’s acquisition of Picturehouse. Several of your points have been picked up by other commentators or members of the public who have written to the CC.
As you know, the period after the publication of the CC’s provisional findings report in August was when interested parties could influence our thinking. The legal framework within which we operate does not allow us to re-open an inquiry after the publication of the final report.
Nonetheless, we think it is in the interest of public understanding to address the points you have raised. That’s why I am writing this open letter to you. It serves only to state our position on certain issues. It is not being sent to initiate a further debate. And we must stress that the comments that follow are not formal positions; our Final Report, published on 8 October, is the definitive legal statement of our findings.
Letters from the general public
It has been suggested that we have taken no notice of the many comments from the general public we received on our provisional findings of 20 August 2013. That is not the case. We gave these comments careful consideration and indeed sought to address points made in those letters where we felt that our provisional findings had not sufficiently explained our thinking.
In particular, we explained at paragraph 6.5 of the final report how we had taken into account the differentiation between Cineworld and Picturehouse in our analysis of the impact of the merger. Similarly, we responded to your specific and interesting point on the effect of Cineworld’s Unlimited Scheme directly in the final report at paragraph 6.55.
In your blog dated October 8, you make several points and ask a number of questions. I respond below to some of the numbered questions – although this does not mean that we agree with the other points you have advanced but on which I have not commented.
1. Was there no requirement to set a suitable threshold of competition in a particular area?
The task of the CC in a merger inquiry is to decide whether there is a substantial lessening of competition in a particular case referred to it by the Office of Fair Trading (OFT), given a particular set of circumstances. Our task was not to consider the whole landscape of competition in cinema exhibition in the UK.
The CC is required by law to identify the market that is relevant to the merger in question. The market for cinema exhibition is largely a local market, so the question becomes whether there is a substantial lessening of competition in particular localities. Indeed, cinema exhibitors told us the specific local conditions of areas were key drivers of their product offering. The report summarises the evidence we received on this matter in paragraphs 6.6 to 6.20. There is no simple rule which determines how many competing cinemas could successfully operate in a given area.
There may well therefore be communities comparable to Bury St Edmunds which are served by a single cinema operator, but that has no bearing on whether this merger results in a substantial lessening of competition in Bury St Edmunds.
2. The OFT’s initial report indicated that Cineworld and Picturehouse operate in different markets
This is not the case: paragraph 110 of the OFT’s report of June 5 referring the merger to the CC states: “The OFT has analysed the transaction against a market for film exhibition services in this case. It has considered whether it is appropriate to segment this wider market by art-house and multiplex cinema. The parties failed to provide sufficient evidence in support of their arguments that the product market should be further segmented, Further, a number of pieces of evidence including: survey evidence, entry analysis, price concentration analysis and film overlap analysis indicates that there is competition between art-house and multiplex cinemas and it would not be appropriate to segment the market in this case.”
3. Why is it believed that introducing another party to these areas will have the effect of reducing prices?
The evidence discussed in paragraphs 6.14 – 6.20 and the econometric analysis of the relationship between prices and local concentration in Appendix C suggest that the extent of local competition affects prices.
4. Why were membership schemes excluded from the CC’s analysis?
Membership schemes were not excluded from the CC’s analysis. In our survey, as described in 4(b) of Appendix D on consumer surveys, separate questions were asked about membership schemes. We agree that the Cineworld membership scheme effectively sets a national price for membership. However, the results of our analysis gave us more concern about future Picturehouse prices than Cineworld prices in Aberdeen, Bury St Edmunds and Cambridge. The Picturehouse membership scheme is different the Cineworld scheme and does not insulate members from local price increases. The different cinema membership schemes are described at paragraph 6.22 of the Final Report and the specific point made by you about Cineworld’s Unlimited Scheme is considered at paragraph 6.55.
5. Is there any evidence of any other part of the country where competition alone is successful in influencing prices? On inspection, the prices seem to be set at a level more related to the general cost of living than the factors used in the correlation in the report, and comparisons with local areas with both more competition and no competition do not suggest any evidence of a strong effect of competition on prices in this sector. The subsequent fear is that any competitor purchasing either of the cinemas will not be able to be restricted from raising prices from current levels, and I would be keen to understand the Commission’s powers to influence in this regard.
As explained in the CC’s merger assessment guidelines, competition between firms is generally expected to create incentives for firms to cut price, increase output, improve quality, enhance efficiency, or introduce new and better products.
In relation to cinemas specifically, our econometric analysis found local competition effects after allowing for local cost effects. It is the strength of local competition which will restrict a purchaser of the cinemas to be divested from raising prices.
6. What controls will the CC put in place to prevent price increases as a result of a change in ownership?
The CC is not proposing price controls and we see no reason why a change in ownership should result in a price increase.
You entitled a blog of October 13 “A request for the Competition Commission to explain basic economics to me”, and particularly asked about “GUPPI”.
GUPPI calculations, described and used in Appendix F to the Final Report, on Pricing incentive analysis, are a standard tool for considering the effects of reduced competition following a merger in markets, like cinema exhibition, where sellers offer products which are differentiated from the products of their competitors. It is perhaps worth adding that the GUPPI calculations were only one element which went into the judgements about whether there would be a substantial lessening of competition.
Primacy of the Final Report
We hope this open letter goes some way to help you and other critics of the CC come to a better understanding of our findings on Cineworld’s acquisition of Picturehouse. We must stress again in conclusion that these one-off comments are intended solely to help you and the wider public understand our reasoning; and the CC’s final report remains the definitive legal statement of our reasoning.
Inquiry group chair on behalf of the inquiry group and staff
 http://www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/rules_and_guide/pdf/11_03_25_a_quick_guide_to_uk_merger_assessmentpdf.pdf explains the framework within which the CC operates and how it approaches merger inquiries.