Individual Exemptions Individual Exemptions and the and the - PowerPoint PPT Presentation

Individual Exemptions Individual Exemptions and the and the Strategic Threat Of Exit: Strategic Threat Of Exit: The Case of The Case of Airline Joint Service Agreements Airline Joint Service Agreements C. Duncan MacRae & C. Duncan MacRae & Elizabeth Chase MacRae Elizabeth Chase MacRae Singapore Management University Singapore Management University

Agenda Agenda � Background -- Australia, Singapore, � Background -- Australia, Singapore, and the Qantas- British Airways (Q- BA) and the Qantas- British Airways (Q- BA) Joint Services Agreement (JSA) Joint Services Agreement (JSA) � Bargaining theory approach to � Bargaining theory approach to analysis of interaction between analysis of interaction between competition authority and firms competition authority and firms � Australia and the JSA � Australia and the JSA � Singapore and the JSA � Singapore and the JSA � Conclusions � Conclusions 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 2

Qantas-British Airways JSA: Qantas-British Airways JSA: Overview Overview � Dating from 1995 (with restatements) � Dating from 1995 (with restatements) � Coordination of airline services on the � Coordination of airline services on the Kangaroo Route between Australia and Kangaroo Route between Australia and Europe, through Singapore and Bangkok Europe, through Singapore and Bangkok � Scheduling � Scheduling � Marketing � Marketing � Sales � Sales � Prices � Prices � Customer Service � Customer Service � Generally viewed as a “hard core” restriction � Generally viewed as a “hard core” restriction � But also viewed as yielding economic � But also viewed as yielding economic efficiencies efficiencies 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 3

Australia (AU) and JSA: Australia (AU) and JSA: Overview Overview � 1974 Australian Trade Practices Act (TPA) � 1974 Australian Trade Practices Act (TPA) � Original bargain � Original bargain � Prior to 1995 Qantas and BA applied to Australian � Prior to 1995 Qantas and BA applied to Australian Competition and Consumer Commission (ACCC) for JSA Competition and Consumer Commission (ACCC) for JSA authorization under TPA authorization under TPA � 1995 JSA authorization by ACCC for 5 years � 1995 JSA authorization by ACCC for 5 years � Renewal bargain I � Renewal bargain I � 1999 Q-BA authorization request for Restated JSA � 1999 Q-BA authorization request for Restated JSA � 2000 Restated JSA authorization by ACCC for 3 years � 2000 Restated JSA authorization by ACCC for 3 years Plus further interim authorization Plus further interim authorization � Renewal bargain II � Renewal bargain II � 2003 Q-BA reauthorization request for Restated JSA � 2003 Q-BA reauthorization request for Restated JSA � 2005 Restated JSA authorization by ACCC for 5 years � 2005 Restated JSA authorization by ACCC for 5 years 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 4

Singapore (SG) and JSA: Singapore (SG) and JSA: Overview Overview � 2004 Singapore Competition Act (CA) � 2004 Singapore Competition Act (CA) � Bargain � Bargain � 2006 Qantas and BA applied to Competition � 2006 Qantas and BA applied to Competition Commission of Singapore (CSS) for decision Commission of Singapore (CSS) for decision exempting Restated JSA from prohibition under exempting Restated JSA from prohibition under CA CA � 2007 CCS approved Restated JSA -- indefinitely � 2007 CCS approved Restated JSA -- indefinitely exempted from CA prohibition exempted from CA prohibition Subject to conditions Subject to conditions 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 5

Bargaining Theory Approach: Bargaining Theory Approach: Rationale Rationale � Variety of contexts in law & economics � Variety of contexts in law & economics analyses for bargaining models analyses for bargaining models � Bargaining between firms � Bargaining between firms � Bargaining between nations, governmental entities � Bargaining between nations, governmental entities � This paper looks at the strategic interaction � This paper looks at the strategic interaction between competition authorities and firms between competition authorities and firms � Bargaining theory approach is reasonable � Bargaining theory approach is reasonable because … because … � there may be an opportunity to divide benefits of � there may be an opportunity to divide benefits of greater economic efficiencies between firms and greater economic efficiencies between firms and consumers or national as a whole consumers or national as a whole � government does not always “win” � government does not always “win” � firms can threaten to exit the market or jurisdiction � firms can threaten to exit the market or jurisdiction of the competition authority of the competition authority 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 6

Bargaining Model Assumptions (1) Bargaining Model Assumptions (1) � Two parties: Competition Authority and � Two parties: Competition Authority and coalition of firms coalition of firms � Coalition of firms with a potentially anticompetitive � Coalition of firms with a potentially anticompetitive agreement is seeking exemption by Competition agreement is seeking exemption by Competition Authority Authority � Competition Authority wants to maximize total � Competition Authority wants to maximize total welfare for its jurisdiction welfare for its jurisdiction � Model can be readily extended to include consumer � Model can be readily extended to include consumer surplus maximization by competition authority surplus maximization by competition authority � Coalition of firms want to maximize producer � Coalition of firms want to maximize producer surplus for firms surplus for firms � Coalition activities may provide economic benefits � Coalition activities may provide economic benefits through gains in efficiency through gains in efficiency � Coalition activities may reduce or transfer economic � Coalition activities may reduce or transfer economic benefits through anti-competitive behavior benefits through anti-competitive behavior 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 7

Bargaining Model Assumptions (2) Bargaining Model Assumptions (2) � There is a range of possible conditions on the � There is a range of possible conditions on the agreements, not just “yes/ no” approval from agreements, not just “yes/ no” approval from Authority Authority � Restrictions on joint activities � Restrictions on joint activities � Remedies � Remedies � Time limits for duration of agreement � Time limits for duration of agreement � Range of possible conditions yields Pareto- � Range of possible conditions yields Pareto- optimal tradeoff between objectives of two optimal tradeoff between objectives of two parties parties � There is time “impatience” pressure for both � There is time “impatience” pressure for both parties to reach a bargain parties to reach a bargain � Both wish to enjoy the possible economic benefits � Both wish to enjoy the possible economic benefits from the agreement from the agreement 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 8

Bargaining Model Assumptions (3) Bargaining Model Assumptions (3) � But there may be “inside options” � But there may be “inside options” � Both parties may enjoy, perhaps � Both parties may enjoy, perhaps diminished, benefits during the bargaining diminished, benefits during the bargaining process process � And there may be “ outside options” � And there may be “ outside options” � Firms may choose to exit the market to � Firms may choose to exit the market to gain producer surplus gain producer surplus � Firms may even choose to exit the � Firms may even choose to exit the jurisdiction jurisdiction � Competition authorities may choose � Competition authorities may choose alternative arrangements, perhaps different alternative arrangements, perhaps different firms, to provide welfare to their jurisdiction firms, to provide welfare to their jurisdiction 16 March 2007 16 March 2007 Airlline Joint Service Agreements Airlline Joint Service Agreements 9