03/04 '94 18:53 1:40738210 I THE COMPETITION TRIBUNAL
IN THE MATTER OF an Application by the Director of ln'festlgation and Research under section 79 of the Coml"ti.tion . lict, R.S.C. 198!, c.C-34, as am111ded; AND IN THE MATTER. OF certain pracUces by Companies of Canada Ltd. F I
L E OCT 26 1994 fa BETWEEN; 0 Applicant ·and· COMPeTITION TRIBUNAL NAL DE LA q fr j_URRENCE TRlBU _ THE D & B COMPANIES OF CANADA LTD. Fite No. •• er ~' *~' v~fj~'8~~ Respondent ex111blt No. •'A -51 lb,) :::: pl&~ ;;g /7 <ff 1l ~13- .. and· Dtpo•M .. ~ R. .i strar __,,.--- INFORMATION RESOURCES lNC. Grtffltr
Intervenor
AFFIDAV 1T OF DR. RALPH A. WINTER SWORN OCTOBER 4, 1994
I, DR. RALPH A. WINTER, of the City of Toronto, in lhe Municipality of Metropolit&n Toronto, MA.KE OATH AND SAY AS FOLLOWS:
STIKEMAN -ELLIOIT ...... SE TORONTO 1aJ 0021013 File No. CT-94/01
--.,.,_ __0.:1_104 .... ·u u:s3 't:t4073Ul0 STIXD..\."i ELL101T -• SE TORO~TO liit 00.3/013 ..
• :t • 1. I hold the positioii of Professor of Economics at the University of Toronio. I have twom. an Amdavit mt hese proceedings dalCd Scptcmbo. 20, 1PP4. At:t.aebad bereto as !xhib1t •A• ii a true copy c! my Report in response tO tJ:ae Affidavits of Professor Frank Matthewson alld Marp:at E. Gucrin-Calvm, med ou 'blhalf of the Respondent mt his maucr. SWORN BEFORE ME at Parla, Pra:a.co ) . .., ~ this .I.ft!. day of Ociobcr, 1994. ) ----~-----~---·-_· _ /...A " DR. RALPH A. WINTER ~n~l)~ A Commissioner, ete.
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OJ/O' '9' 18:SJ ~407J8210
IN TIIE COMPETITION TRIBUNAL File No. CT-94/0 l IN THE MAT I ER OF an Application by the Director of Investigation and Research under section 79 of'the Competition.Act. R..S.C. 1985, c.C-34, as amended;
AND IN THE MATTER OF certain practices by The D & B Companies or Canada Ltd. BETW'E.EN: THE DIRECTOR OF INVESTIGATION AND RESEARCH Applicant
- and -
THE D &: B COMPANIES OF CANADA LTD. Respondent ·and-
INFORMATION RESOURCES INC.
PROFESSOR WINTER'S RESPONSE TO THE BEPORTS OF NIELSEN'S EXPERTS
STI KEll.AN Ell.I on -.. SE TOROJ'l'TO ~0051013 Exhibit-"A "
Intervenor
_.._ •w••• STIJtDL.\.\' ELLion ...... SE TORO~'TO ~ 008/0lJ 1 RESPONSE TO PROFESSOR MATHEWSON'S REPORT 2 3 Professor Mathewson and I agree on a number ofi ssues in the Directol'1 applic;ation and disagree 4 on others. In ibis response to Profe.asor Mathewson's repon, I shall discuss his views on the six 5 main issues raised in the report: 6 • 1be definition oft he muket in ihe Application 7 • Competition between Nielsen ud IRI for the righu to ICIDDer data I • The bargaining power of grocery retailers. supplyiDa the acanner elm 9 • The bargaining power oft he buyers ofN"ielleA'a market tracking semca 10 • The evidence on price mowm=ts 11 • The explanation or cxdusivity in Nicbcn's ccmtrlCtl 12 ... 13 1. Market Def111ltlon 14 Nielsen has. through its two =Pert witnesses, abandoned the argument advanced in its response 15 that the relevant market in ibis applicadon must include products beyond market trackina 16 services. Professor Mathewson stans his lnllysis by aaminins the Canadian market for tracking 17 services and bis section 2.3 is •ne Nature of the Product Market: Market Trac:kihs Sc:vicca". 18
19 This narrows the product market definition issue to a sinal• question~ Have scumer-based 20 trackina services good substitutes bucd on other data sources? The market definition iD the Appli"tion can be critic:izcd auc:ceuNlly only with an a8irmative amwer to ibis questioa.. ..J. 23 Professor Mathewson does DDt address the question directly. He notesi bat there are alternative 24 data IOW'CCS for tracking market variablu, but doea not arsue tbal the alternative data aources are 25 dose substitutes f'or scanner-based servicea. 26 27 Professor Mathewson, in f&ct, recognizes dm the data IOW1* vuy in their attributes and 28 fimctiom served: 29 •ne point is ·that data sources ad needs are diverse. This permiU business 30 opponunities at various levels (popaphically or trade level speciS.c) m this 31 industry both to collect data ad to povicle the decision mppon ICrvices that arc 32 demmdcd appropriate to tbe data at bud.• (2.1.4) 33 I aaree ihat the ~ous data 10WCC1 are divenc. ralhcr tblZl c:lo• IUbsdtmes for each other. 34 Ellcwbere in bil report, u I disc:uu below, Profusor Mathewson usumes that the fimctiom or 35 scazm.cr elm cannot be dectively duplicated by other data sources. Jn &hon, while he does not directly addrcu the validi!y oft he Director's market dc6nhion, Profcuor Mathewson's analysis ~1 supporu its validi!y. 38 39 Both o!Nielsen's expena 1gree that C-ned1 is the re1eYam pograpbical market (2.1.1). 40 ·:
Ol/O' 'I' 18:5' 1:'407l8210 STIXEKA..~ ELLIO'IT ••• SE TORO~TO llJ0011013 1 2. Competitive Bidding for the riebts to Scanner Data 2 Professor Mathewson argues that since 1986. any potential competitor such u IR.I could have bid 3 on contracts with major grocery c.bains for scanner data (l.3 and Section 2.4). He does not 4 attempt to connect the possibility of competitive bidding !or contracts, however, to the issue of 5 whether Nielsen's OJtclusivity rcsuictions violate Section 79 of the Competition Ad.. 6 7 This is approprillte, in my judgement. There is no connection. Bidding for the rights to the I essential iaput, or competition •ror the market", hu not led to competition within the market. As 9 I argue in my report, there is no reason to expect it to. More fundamentally, whether other firms 10 could or cowd Dot have entered exclusive contracts with suppliers. they did not. Once the 11 cxclusjvity contracts are struck and adhered. to, Nielsen ii protected against competition in the 12 market for sc.anner-based trackmg because no other mm hu ace.as to the essential input. 13 14 3. 1be Bari:ainin& Power of Grocery Retailers 15 Professor Mathewson argues (at 1.2) that major groce:y rcuilers, who supply the essential input 16 of scanner data, are larae and capable of negotialiDg favourable terms in their contt&QS with 17 Nielsen. 18 19 I agree:. lletailers ~ paid in some cases over for data that are vinually costless 20 to provide. They do not have to be coerced into acccptins these contracts. Because Nielsen and 21 nu have competed for the right to be a monopolist, a subsiamial share of the profits &om 22 monopoly flow upstream in the form of payments to retailer&. The redistn"buiion of rems from the 23 prevention of competition, however, has no relevance f'or the application of Sections 78 and 79. 24 25 Nor is then any suggestion in the Director's Application that either Nielsen's control of the 26 market for seamier-based tracking services or its anticompctive pra.ctica ha.I be= manifest in the 27 coersion of retailers in the upstream market for sc:.anner datL This is not the market of focus. 28 29 4. The Baraaining Power orBuyen 30 Professor Mathewson also arsues that the buyen in the relevant market, m1m1facturers, are large 31 and capable of negotiating favourable terms in theil' contracts with Nielsc::n. In support of this 32 argument, he ofi'ers (at 2.2.4) 33 34 35 A counte:rvailing-power defense of the prevemicm of competition among sellers may have some 36 economic basis in a market with a single buyer. In a mubt with wen two or three buycs, it has 37 none. F~ iD Numsweet. the Tn'bunal explicitly rejected the counterVailing power 38 defense in a market with two very large buyers. The buyers' side of'the relevant market in the . 39 Qlrrcnt c.ase i1 fir lesa concentrated than iD Nut!pWfft, u Professor Malbew1m1 1 1 own evidence 40 shows, and the countervailing power clefcme bas no basis. 41 42 The sources of manufacturers' bargaining power ofi'ered by Profasor Mathewson include the fact .U that •m~cn could cut ba.ck OD their demand for Nielsen's aemces• (2.2.6). I agree that 2
03104 '84 18:55 '!:r4073Ul0 STIKEKAN ELLI01T ·- SE TORO~""l:O lal 001/0ll 1 this is an option. Exchange is voluntuy in a free market economy, even in markets that are 2 monopol.W:d. However, nothing in the economic principles underlyins competition law assumes 3 otherwise. 4 s A second option offered for manufacturers is to influence favourably the terms and conditions th&t 6 they receive in Canada through tcnm that they are accorded by Nielsen in other national markets 7 (2.2.1). This is an cc;onomie argument that a 1irm with a monopoly in one market may be fi.ally I disciplined in iu pricing, by competition in the provision or othw producu to the wne buyers. I 9 know of no economic basis for this proposition. As a fa.ctu.al matter. I understand that the 10 opposite effect bas occurred. IR.I has been ai a ~mpetitive disadvantap in the sales ofiu U.S. 11 data to large multinational buyers because it cannot offer 1cazmiq data !'om both Canada and the 12 U.S. Nielsen's µionopoly in Canada bu an anti-competitive impact beyond the relevant market in 13 this cue. 14 15 5. Tbe Evidence on Price Movements 16 Professor Mathewson offers as one of bis main conclusions the following: 17 "The evidc:nce is Uw during the period 1986 to the present the real price of the 11 Nielsen market tracking service wu constant or declined margimlly and the 19 quality of the product increased as. amons other things, the scanning based cWa 20 became more reliable and usable.• 21 22 No cc:onomic theory allows us to infer fi"om inflation mes in a market the extent of competition in 23 the market. Monopoly is associated with high price Inca. not high price t:hangu over time. On iu own, the evidence on inflation rates is irrelevant. 25 26 The evidence on price changes in the Canadian market for tracking servicu becomes meaningfW., 27 for inference about the competitiveness of the market, when it is combined with evidence on price 28 changes in the U.S. market. lbis is bec111se while the Canadian market hu remained 29 monopolized, the market structure mt he U.S. bas cbanged. IlU 1 s market 1bare in the U.S. has 30 grown to roughly one-ha!! Tbis natural eaq>eriment, with the U.S. market playing the role or a 31 "control group•. allows us to infer the impact of the prcvemion of compeiition iD Canada through 32 Niclscn's exclusivity restrictions. 33 34 Jn this rep.rd, the evidence in the report o!Professora Gould and lloaezdield and, I understand, 35 &om other witnesses, shows that prices for market trackiag lll\licu have dcc:reued substantially 36 in the U.S. where there is competition, u compared to Ce0 •d1 whse there is a monopoly. In 37 sho~ the relevant pricina data dooa not support &be hypothesis that Niel1en bas priced 3~ competitively. 40 Noie in.addition. ihat in attributing the improved p~ quality to the iDcreued reliability of 41 wu:ming data, Professor Mathewson assumes that scanning du& have no close substitutes among 42 other data sources. 0Jl this we agree. 43
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STill:liA.'i ELLIOTT -- SE TORON".T"Q ii 009101:1 ( 1 6. Professor Mathewson's E:1planation ofExcJusivlty in this Market: 2 3 An analysis concluding that the role of a contractual restraint is not anticompetitive must, to be 4 complete, include an explanation of why the restraint is used in the market and why this use is s within the law. 6 7 Professor Mathewson prese:cts his theory of why Nielsen used exclusivity restrictions at 2.4.2.: I •eomromed with the W:t that DU had initiated a bidding game bued on 9 exclusivil:y, it is reuonable to claim tha.t Nielsen had liule choice but to respond 10 with exclusive contract proposal[s] of its own.• 11 12 An anticompetitive practice cannot be def=ided legirim•tely on the grounds that it is the only 13 profitable response to the use of the same practice by a rival, or even that it is necessary to survive 14 in the market. Scc:tion 79 does not eumpt an anticompetitive practice on grounds that more than 15 one firm was usms it or attempting to use it. The 1ection offers 1lO scope for •self-defense• 16 arguments. 17
18 F"mally, note that the statement once again recognizes that scanner data have no cloae substitutes 19 in the production ofmarketins services. M Professor Mathewson states, "To produc.c national 20 data. Nielsen would have bad to replace the missins data with d&ta from other source.s. If this 21 were grossly inferior, Nielsen would have had to abandon its attempt to produce national 22 marketing traclcing data services." Professor Mathewson's analysis usumes that there are no 23 close substitutes for scanner data. :for if scanner data were but one of many dosely substitutable 1 data sources. then Nielsen could have continued to compete in the market for national tracking .s services without scanner da1' rllher than being left with "little choice but to nspond with 26 exclusive contra.ct proposals of its own•. 4
------ --•..,44 ...... :.&. l"ORONT" @Ol0101J 1 RESPONSE TO THE REPORT OF MARGARETE. GUERIN-c:ALV ERT 2 3 1. The Market Definition 4 Ms. Guerin·C~vcrt states the main conclusion of her report in paragraph S: 5 •1 conclude that Nielsen's contracting practices with retailers in Canada have not 6 foreclosed couy opponuaities imo competition for the Ale of market tncking 7 services to consumer packaged goods manuf.actu.rers in Canada; thus, they have 8 not tended to lessen competition substantially in the sale of such ..vices.• 9 In reaciling tlµs conclusion. M.s. Guerin-Calvert simply adopts her own market definition: the JO provision of marketing servicca in general. This broad market definition appears to follow from a 11 consideration of which product.I Nielsen offers. 12 13 I accept that there have been entry opportunirles in the prDl'ision ots ome scmccs outside of 14 those based on seamier data. ISL ii an example of a competitor in this broad business. 1be 15 competitiveness of these markets. however, ia irrelevant for this case. 16 17 Nor has the Director, in defining the market to be scanner-based products. chosen a small part of 18 the Nielsen's business. Table 1 ofm y RPQrt, reproduced below, 19 20 21 22
24 25 26 27 28 29 30 31 32 ) 34 • 35 The Application is about the prcvcmion or Ju'C"ing ofc ompetition in IC'""er-bucd tracking. 36 The thc:mc throughout Ms. Guerin-calven 1 1 repon, tbat N"aelsen afl'era a wide range of products 37 and faces competition in the markets for some oft hese producu. ii beside the point. 5
STix::ElL\N ELLIOIT ...... SE TORO~TO Ill"' l 'OlJ 1 To establish th&t the market definition in an application or Section 79 cannot be as narrow u 2 sc::.anner-based tracking. Ms. Guerin-Calve:-t would have to show thu scanner-based tracking has 3 close substitutes among servicc.s based on other sources. This would require a detailed 4 examination of the specific functions provided by the scumcr-based product. Like Professor s Mathewson, Ms. Guerin-Calven does not a.ddreas this iuuc. 6 ·. . 7 1. The Dynamics or the Relevant Market I Ms. Oucrin-Calvcn makes t.hc observation (at 13 and 27) that for most ottbe period discussed in 9 the DirectoJ'a Application. 1986-1994, Nielaeo did not prod~ the relevw produc:i u defined by 10 the Director. Nielsen's national market-ttacking scnicc, MarbtTrack, wu introduced oaly in 11 1992. 12 13 M a matter of economics, there is no reason to cxpec:t the ~mequeaces of anticompetitive ac:ts 14 to be contemporaneous with the acts thc:mselvea. In this mark&t, Nielsen had substantial usets 1S invested in tnditional (non-scanning) market tracking technoloey u or 1986, and was the 16 dominant supplier of market trackins services in C101da. In aeneral, new innovations are often 17 introduced not by a dominant firm in an industry, which bu entire capital invested in tradhional 18 technology, but by new entranis. 1 It is clear that if an incumbent dominant firm can block the 19 introduction Of I DC:W, superior tKbnOlogy through exclusionary CODU'&Ctl, it has the incentive to 20 do so. It is equally clear that the mcumbem dominant firm will them delay the introduction of the 21 new innovation. The exclusiozwy ~ntracts during the period prior to the introduction of the 22 new product serve to protect the value of existina. traditional assets against the entrant's new 23 technology. This ii an example of a conuactual restriction that economists term •we4 "4 c::xclusion •. 2 _s 26 Naked exclusion is clearly anticompetitive, notwithstandina the fact (evm, because of the fact) 21 that the incumbent firm does not use the superior product or tedmology. The chronoloS)' of 28 events in Canadian scanner-based market iractma. in which Nielsen purdiesed the exclusive 29 rights to all supply of an essem:ial input in 1986 but did not produce the national scannin& product 30 until 1992, is consistent with the anticompemive eff'ec:ts of Diked exclusion. NiclseD documents 31 show that Nielsen did intend to off'cr a national market tracking lel'Vice earlier than 1992, but in 32 my judgement ~mpetition &om DU would have forced Nielsen to develop the service more 33 quickly than it did. 1 Tbc potmri•' pin IO ID amam fram Ill iano\rlliaa dw damin•'• rmnmt ta:lmolol)' is tbe entire mcmopoly prab; the pin tom incumbcm maaopolist is mly th= inc:rouo in maaopoJy pro5ts in moving frmn chc old ccdmology to tbs ACW lldmoloJY.
2 This is the term adopted by ~!man Thamu 0. Knttenm•br mS StcMD C. Salq>. in "JlaisiDg Rivali' Costs to.A.chicve PowerovcrPzk.e•, TM Toi• LtzwJOMmt1I K, No.2(I)xanbe:r1986).1Ddescribe lbc purd:we of C:;cCbWamry riabts by I dominmt mm whidl tbm docs D0t use tbe iapm. The piD tD the d o = aU naDt firm arises solely from the cxdusicm or rivals, rather than from Ill)' shmccd 111pply. bmc:c the "zllkod• acllllioa. 6
0~104 '84 18:57 1:S'407UZ10 STIXEll..\N ELLIOTT - SE TORor· - .... aio121ou 1 1f the Directors Application were based solely on a claim that Nielsen's contracts lessened 2 competition during the 1986-1991 period {for ex.ample, if1he application were being brought in 3 1991 ), then the application would have to rely on the dynamic economic theory of anticompetitive 4 exclusion that I outline above. In my judgement, this theory is realistic and such a hypothetical S application would have aome merit. 6 7 But the Director's applicatlon in fact does not IWld or fall on the substantial lewming of I competition ~wing the 1986-91 period. For Section 79 to apply, it is enough that a firm have 9 comrol of a current market and that it be engaging in acts that are CID'r•n~ anticompetitive. The JO Director's application states (at 1) th&t Nielsen bu substantial or complete comrol oft he supply or 11 ac.azmer-based tracking services in Canada, ad that Nielsen has enpaed in and continues to 12 mpge in a practice of anticompetitive acu. 13 14 In light or the actual wording of the Director's Applicaiion, tbe followin1 statement in Ms. 15 Guerin-caivert'a repon is seriously misleading: 16 •As of 1986, when the Director alleges that Nielsen's contracting practices had 17 tccdcd substantially to lessen competition in the provision of acanner-bued market 18 tracking services. Nielsen did not produce and sell a market traddng product based 19 OD scanner data to consumer packaged goods manufacmrvs• (paragraph 27) 20 The Director's Application contains no such alleption. Ms. Guerin-Calvert has in her report 21 rewrincn the Application before critic:img iu market definition. 22 23 \Vlu1e I believe the Applicalion could have beeai brought legitimately mm as rewrinen, this is .!4 beside the point. The Application as it stands does not require prooft hat Nielsen controlled a 2S market from 1986-1991. The &.ct that eight years ago Nielsen did not o&r a product in the 26 market defined in the application, is irrelevant. 27
28 3. R.etailen Bargaillin& Power 29 Ms. Guerin-Calvert's repon develops, even more than Professor Mathewson's report, the issue of 30 monopsonistic coersion in the market for rights to the data. Her report states: 31 •nc comra.cting omcome, however, was not an amicompetitive ac:t or result 32 Rather it is the re.suit of independan c:hoices made by retailers. NidscD does not 33 have market powa over the retailen IUCh that it could force IDCClusives on each of 34 them." (paragraph 19) 35 I accept that the retailers did not have to be coerced iDto accepting up to . for 36 the exclusive rights to data that cost them virtually nothina to produce . The high payments 37 offered for the exclusive rightl to data, however, are DOt evidaa of pro-competitive effects of ~8 the exclusivity restrictions. To the comraiy. the paymema are cvidmce of substantial rems being _,9 earned from the prevem:ion of competition. The paymems repracm a abift ofthae rems to the 40 cnwen of the essemri•> inputs:= .1 41 42 ..·
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1::'407.)1%10 STiltDl.A.N EllIOTT ...... SE TORON'T'"' fil Ol:l/Ol:l 1 '- The PosslbWty or "Niche" Entry ' 2 Both ofNielsen's expert wimcsses argue that a firm could have entered into competition for some 3 ofNialscn's 1camu:r-based products without purchasing riJhta to data from the entire aet of 4 grocery distributors. Nielsen offers, for example, key account rcpons which individually depend S oDI)' cm the data ft-om a sinsJe chain; and regional reports which depend upon the da1a from a 6 region. A firm such &s DU could have enten:d as a competitor, the witnesses argue, by purcbuing 1 cough da.t& to offer one of these products. I g I have three responses to the argument that this •mcbe enuy" was possible. P'°U'lt. there would be 10 little manufacturer demand for the key 8"0Unt of a ainglc retailer alone. A NielscD witness, Mr. 11 Cburc:.bill, said in disQovay that be WU una~ ofa ny ZIWDJfacturer that purcbued only a key 12 accoWJ1. ManufamJnn need substantially all maJor data IOW'Gel Cor two reasons: 1) n gives 13 them as complete a set of key accounts as possible. for decision·makina and negotiating with 14 individual retailers; and, 2} because or dlireren.ces among grocmy distributors in ales and lS distn'bution methods, missing even one large retailer would bias utimatcs o!nation&l and regional 16 agrepte variables. Therefore if'a supplier ofm arket tracking urvicca entered locally, 17 manufacturers would need to purchase from both supplic:ra. This would involve the c:osu of 18 integrating both sets or data and possibly software systm.s {in a market where the current vend is 19 towards user-fiicndly systems that require very little expertise or computing input by the user). ls 20 a configuration in which an entrant such u nu bids successfully for the rishta to one or nvo large 21 chains, sustainable? No. The entrant will be outbid by Nielsen because oft he gains to 22. c:ompatibility a.s well as the profit gains 5-om any elimination of competition. 23 Not only these theoretical factors but the historical facts sussest that a single firm will win the 25 bidding rights for all data sources when exclusivity is pc:rmined. Whatever the technical fusibility 26 of producins a marketing ICl'Vice bued on a small tet of data, a monopoly over scanner data 27 tracking is the market outcome. 28 29 Second, as I show in my report, cvc:n if this is wrong. the market outcome involving cxclUliviiy 30 ruuictions on the pan oft wo &ms still lessens competition compared to the market with no 31 exclusivity. 32 33 Third. wbalever the potc:Dtial for such enuy, it did not oceur. Nielsen's exclusive contracts, once 34 emered and adhered to, prevented the entry of any competitors • cvc:n local competitors • by tying 35 up an essential input. The logic of the argument by Nielsen's witnesses is that if'the exclusive 36 comn.cu had not been struck. then the contracts would not have been anticompetitive. This is 37 uue but irrelevant to an assessment of the Director's application. I