Case Documents

IN THE MATTER OF an application by the Dire.:_ . ..,; COMPEllllON TRIBUN~l lnv11t1gat1on and Reaearch under aection 79 o th~· 3~m.u oE LA c1.'~~~·::l::'-i-W: p Competition Act. R.S.C. 1985, c. C·34; R f 0 1 - D AND IN THE MATTER OF certain practices t OCT 28 1994 ;1,,, 1 u A.C. Nlelaen Company of Canada Umlted o Rt~ ..... ,.. ,,..,,;,rRAIRE ~ ~ - OHAWA, o~;~li;ro(b) BETWEEN:

THE DIRECTOR OF INVESTIGATION ANO RESEARCH Applicant ·and·

Al'l'IDAVIT I, ANDREW M. ROSENFIELD, of the City of Lake Forest, llllnols, make oath and aay u follows:

1. I am an economist and, together with Dr. John P. Gould, I was retained by counsel for Information R11ourc11, Inc. c•1RI") to undertake an analyala of the economic and lnduatrlal organization upects of certain iuun raleed In the Appllcatlon filed by the Director of Investigation and Research In thla proceeding. A true copy of the report prepared tor counsel to IRI pursuant to 111 atoreeaid request wu attached u Exhibit "A" to my Affidavit awom

Reepondent Intervenor

• 2. September 20, 1994. 2. I nave been provided with a copy of the Affidavits of Profeaaor Frank Mathewson and of Margaret Guerin-Calvert, botn sworn September 20, 1994, • well as the reports attached to such Affidavits. I understand that these Affidavits and the reporta attached thereto were prapar8d at the request of the Reepondant In connection with this proceeding. f am advised by counael for IRI and verlly believe that. prior to providing me with a copy of the reports attached to such Affidavits, such coun111 hid removed therefrom any Information that had been identified by counsel for the Respondent u conftdantlal to the Respondent

3. Together with Dr. Ciould,. I w• uklc:I by counsel for IRr to prepare a reaponaa to such Affidavits. Attached u Exhibit •A" to my Affidavit II a true copy of the report prepared for counsel to IRI pursuant to the aforeeald request. .

SWORN before me at the City ) Of Chicago, In the State Of ) Hltnola this 4th day ) of October, 1994 ) "OFFICIAL SIAL" RUTH ANN JOHNSON Noury Public. State of lllinoll Mr Commlaion l!api111 Nav. 20.1114

EXHIBIT ''A" CT· 14101 IN THE MATTER OF an application by the Director of Investigation and Reeearch under section 79 of the Competition Act R.S.C. 1985, c. C-3': AND IN THE MATTER OF certain practices by A.C. Nlelun company of Canida Limited

BETWEEN: THE DIRECTOR OF INVESTIBATION AND RESEARCl-t Applicant ·and -THE D&B COMPANIES OF CANADA LTD. Respondent - and· INFORMATION RESOURCES, INC. Intervenor

RESPONSE AFFIDAVIT OF JOHN P. GOULD AND ANDREW M. ROSENfl!LD

1. We have been aaked by counsel for Information Resources, Inc. (·IRI") ta provide a written response to the repol'18 attached ta the Affldavhs of Profeaaor Frank Mathewson and Margaret Ou1rln-Calvert, both of which were awom September 20, 199' and prepared for the Raepondent. The D&B COmpaniea of Canada Ltd. ("Nlelsen"), In this proceeding.

• 2 -2. Our report and opinions are baaed on our protee1iona1 training and experience aa aconomleta and on Information provided to us by IRI regarding the market structure and marketing practices In the U.S. and Canadian marketl tor market tracking aervicea. We have also had acc888 to publlcly avalllble materials on Information services avalllble from IRI, Nlellen and others. We have dlsCU1S1d Industry practices In csetall with IRI and with certain executlv11 of consumer packaged goods companlu that carry on business In both Canada and tne United Statea that use scanner-based lndu1try r111arch. We aJso have had access to certain summaries of Interviews conducted by Profeuor Donald N. Thompson, a Canadian economl1t also retained by coun111 for IRI and we have had diacueaiona with Profeaaor Thompson ae well. Finally, we have reviewed other documen11 of a general nature pertaining to this mattar that were provided to us by coune11 for IFU.

3. Nielsen's economlata UH various th1oret1cal argumenta that purport to show that Nlalaan does not have market power In canacta, thus suggesting that Nlel1en'1 practices In Canada cannot f\arm competition ot conaumara. In thla reaponea, we explain wny eacn of their arguments ls Incorrect. Moreover, we believe that what 18 Jm1 in the Nlallen economist..' affldavlta ia especially telling: Flrat, they make no attempt to provide m procompetltlve Justification or explanation tor Nle181n'1 1xclu11v1 contracta with retallera; Second, they make no attempt to explaln why the marklt traeklng aervice Nielaen currently offere In Canada la more expensive and of Inferior quality than what IAI and Nlellln offer In the United Stat11. Put 1lmply, th••• affidavits attempt to uae (In our vtew, erroneously) vartoua theoretical ar;umenta about market deftnttlon and market power to deflect the basic fact that Nlelaen'a practices have In fact prevented entry and Injured consumers. In short. they provide no Juatlficatlon for the exelu11v1 arrangements between. Nielsen and the large grocery retall chains.

. 3. 4. We begin by noting that we have In this case a kind of a controlled experiment of the . type that la rather rare in economic analyals. This controlled comparison arises because we can compare the U.S. market for acanner-bued market tracking 1ervice1, where axcluslves are lblent and both IRI and Nlel1en compete, with the market In Canada where exclu11ve contracts are In force making Nielsen the only auppller of any scanner-based service. Aa we have explained In greater detail In our 1ar111r affidavit, there la an enormous difference In the quality and quantity of the 1canner-b11ed market tracking Information avallable to cuatomera In the United States u compared to C&nada. Moat, If not all. of the major u11ra of scanner tracking Information In the United Statea alao 1arl their products in Canada 10 thll rar;e difference in the quality and quantity of the data ia not due to a difference In the 1ophlstlcation or needs of the client firms that are users of the service. Moreover, we understand from dtacus1ion1 and meetings with technical personnel at IRI that it would be possible to provide acanner·based market tracking Information In Canada that II similar In quality and quantity to that provided In the United States If IRI had acceu to the Canadian acanner data that Nielsen control& tnrougn lt8 1xciu11ve contracts. Neither of the affidavits of the Nieleln economists addr111e1 or even aclcnowledgea this dramatic difference In the quality and quantity of acanner·baaed market tracking Information between the United State• and Canada. We believe thia empirically observable difference shows that the argument that the exclualve contracts In Canada do not have anticompetitive effecte Is unsupported by actual experience and economic facts. We now tum to an analysis of and response to the theoretical arguments found In the affidavits of the Nillaen economlatl.

5. The Nlela1n economlatl present essentially three ar;umentl why Nlelsen doea not have market power: (1) they argue that the relevant product market in this case Is broader than 1cann1r-ba1ed market tracking servlc11 and that Nlelaen therefore doea not have slgnlfl·

. 4. \. cant market power because It Is only one competitor among others and that flrma Including perhaps IRI could enter by ualn; panel, store-audit. or warehouse·wlthdrawal·baled data sources: (2) they argue that major purchuers of market tracking aervlcee are large consumer good8 tirma and, therefore, have euffleient power In their own rtght to prevent the exercise of market power: and (3) they argue that IRI hid the opportunity to 1r;n exclualve contracts with retailers in 1886 and attempted to do 10.

8. With regard to market definition, we believe that Nielaen'a economists have not ade· quately taken Into account an Important consideration In the economics of market definition •• namely, the ao.catled "cellophane fallacy." Thia problem Is 10 named because it aroae In 1he Supreme Court's opinion In United State• v. E.!. dupont de Nemours & Co. 351 U.S. 377 (1956) ("the Cellophane Cue•), and th• economic mistake made there 18 now part of the hlatorlography of law and economica. In the Cellophane cue, the defendant, _DuPont, wu accused of monopollzlng the cellophane market. DuPont defended In part by arguing that the market wu much broader than cellophane. In particular, It argued that all products to which consumera were turning u 1ubatltut11 for cellophane (all "flexible packaging materlala") should be lnctudad within the market. Using the language of economics, DuPont argued that all products that ware •cro11-11uttc" with cellophane at Its current aelllng price should be lncluc:tecl Within the market. The Supreme Court wu confused on this point and, at a time when the economics of antltrult wu 1tlll In Its Infancy, expanded the market to Include some of the other products to which consumers were turning u 1ubltitutee tor cellophane.

7. Economist& were quick to point out the obvious error. A monopouat of a product always raises the price of that prOduct until aubatltutlon to other products occurs. Thus, at the monopoly price, aom1 other products (however remote they may 111m from the monopolized

. 5. product) must be aubatltut11. H the monopolist fallad to raJae price to a level at which 1ome other products are aubltltutea, It obviously could make more money almply by raising price further becau1e It then would reeeive greater revenue and would have to forego very few Hl11 since, by definition, consumers have no 1uba11tute1. For thll reuon, an elementary proposition In antltru1t economics la that a monopollat l8tl price In the elastic region of the demand curve where conaumera at the margtn have gOOd 1ubltltute1 and where tome have awltchld to other productl - only by doing so can a monopollat earn the full monopoly return. At thia price, we expect to see other products that are croA-elutlc with the monopolized product, but that doll not contradict the fact that these productl would JlS21 ba substitutes at the competitive prtce.

8. That Is why economists (and other commentatora) lnlllt that In a monopOly cue the relevant marklt muat be defined at the competitive price and not at the monopoly price. For example, Richard Poaner and Frank Eaatarbrook (both of whom now are judges on the United Slates coun of Appeals tor the seventh Clrcun) explain the cellophane fallacy In this way In their casebook: DuPont wu the sole supplier of cellophane and the qulltlon wu whether cellophane 1hould be deemed the relevant product market or whether the market ahould be expanded to Include producta (other ftexlble packaging rnatarlals) that exhibited a high croaa-elaaticlty of demand with cellophane at the 1xlatlng price of cellophane. But to include products that were good subltltutal tor cellophane at tb• prtce at wbieh cellophane was being sold by tbls sole Producer begged the question whether the producer had • monopoly •. If he had a monopoly and was charging thl monopoly price, that would make attractive subs11tutes which at the competitive price would be considered grossly Inferior.

Posner and Easterbrook. Antitrust 2d (,981) at 311·2 (emphuls In orlglnal).

9. Put almply, the qu1at1on 'What 18 the relevant market In thll case?• muat be anawerect by Imagining that the market for scanner-baaed market tracking service were behaving

. 6. competltlvely (which It II not In Canada). We muat examine what would happen If customers In Canada were being ottered acanner-bued market tracking services of the same quallty and price u those available In the United States. Then the queatlon la: Would a email but algnlfl· cant and non-tranaltory price lncreue (aay, five percent) cause 10 much substitution away from 1canner-bued market tracking services to other products 1uch u panel, 1tora-audlt, or warahouae-withdrawaJ-bued 11rvlcta that an lncreue In prlC8 would Itself be uneconomical? If so. the market Is Indeed broader than scanner-based market tracking eervlca. If not, scanner-baaed services are a market. Or. to uk the queatlon allghtly dltferently: what other services would buyers of scanner·bued market traeking service l'IQard as aubstttutaa with auch aervtcea If ita price were to rile only a little bit above the competitive level?

1o . The fact that some producera of conaumer goods today may substitute to panel, store-audit, or warehouse-withdrawal-baaed market tracking aervlcea In canada has nothing to do with the correct definition of the relevant market. Byt tor Nielsen's practices, there would be (at leaat) two firms ottering acanner-bued market tracking 11rvtc11 In Canada, and the Canadian market would perform mucn like the market tn the United States. We already have noted that In the United States the quality and quantity of 1canner·bued market tracking aervica Is substantially better than In Canada and, more directly to the point, this aervlce has all but driven out market tracking services baaed on other data sources. Thia fact prpvg that Nielsen's economists are wrong In concluding that Nielsen's practices have not affected competition and that Nielsen lacks power. Nl1la1n's position In the Canadian market and tta axclualve acce11 to retaller scanner data have worked directly to Injure conaumera.

11 • Once the correct question II ukld. the answer II obvious. If Canadian consumer packaged goods producers were offered acanner-bued market tracking service llke those

-7-available In the United States at a price cloae to the price of auch aervtce in the United States, they would buy scanner-baled market tracldn; service and would not regard panel, atore-audlt, or warehouae-wlthdrawal-baaed services as a aubatituta for market tracking aervlcee that are baaed on acannlng data. Such producers might still use some non ..c anner-based services u a complement to scanner-based market tracking aervlce (u sometimes happens in the United States), but they would not r1gard non-1canner-bued aervlcea u a aubltitute tor acanner-bued market tracking aervice. We know this becauae we can oblerve In the United States a competitive scanner-baaed market tracking lnduatry and we do not believe anyone would contend that non-scanner-baaed market tracking 1ervlc88 provide a constraint on the prices charged by Nletaen and IRI in the United State• for scanner-baled market tracking services. Indeed, that II why the U.S. Federal Trade commlulon prohibited a marger between Nlelaen and IRI In the late 1980'•· If panel, store-audit. or warehou••· withdrawal-baaed servlcu were competitive with scannar-bued eatvicea or entry Into the scanner-based market tracking Industry were euy, a combination of the two flrma providing 1canner-b111d marklt traclelng 11rvlce would ,,ot have raied competitive concerns. Thus, the obeervatlon that some packaged goods producers In Canada made an effort to avoid Nlelaen and instead uae non-scanner·bued 11rvicea because they face a tow quality, monopollatically priced market tracking service Is both Irrelevant and an example of the cluslc cellophane fallacy.

12. The affidavits of th• Nielsen economlata suggest. moreover, that competition In the proviaion of 1cann1r·bued market tracking service can be achieved almply by acquiring data In a secondary fashion, for example from the end uaer. Aa Professor Mathaweon states: "Nothing prevents any end uaer from purchulng the data from one source and then using another consultant u a marketing advisor to the firm.• The problem with such an argument Is -

. 8. that If the exclusive contracts permit Nielsen to prtce the data monopollstlcally. then nothing about competition In the market to analyze tne data will be able to counteract that monop· ollstlc power. The key anticompetitive Issue then has to do with the acqulsltJon of the actual ecanner data not the subsequent analyeie of these data. M we noted In our earlier affidavit, these raw scanner data coming from the retaJI stores are an 1111ntlal faclllty and monopollstlc control of those data la all that la needed to eetabliah noncompetitive pricea throughout the martcet.

13. To aee the flaw In Professor Mathewson's argument. conalder a simple example. Suppose that the market for personal computer operatJn; eyatems were monopollzed and that the market for personal computer word processing software were Intensively competitive. It would be absurd to argue that compatltJon In the marklt for word processors (which are used together with an operating system) would counteract monopoly power In the market for operating systems because word proceulng software 18 not a substitute for an operating system.

i 4. Tne Nle1aen economilta allo 1eem to suggest that competition on a regional basis might be poaaible If one or two retallara·could bl persuaded not to uee an exclusive contract. While It Is poaalble tnat regional Information Is of uaa to aome end uaars (aay manufacturers and producers cf locally or regionally distributed products}, such limited data does not allow IAI or any other firm to be competitive In the broader market for national data. Thus, even entry on a regional basla (If fea1lbl1) would not be an effective economic re1pon11 to the anticompetitive altuatlon In the national market. It ia important for potential competitors In the 1canner-ba11d market tracking buelnesa to have acceas to all the data for their 11rvlce1 to be truly comparable and effectively competitive because major conaumer goodl companiea want

. 9. national coverage. For example, we understand that all 2S of IRI'• largest customers In the United States purchae IFU'a nation~ market tracking •rvlce u well 18 more dlaa;gregata Information such u •key account" service.

1$ . Professor Mathewson suggests that IRI could enter C8nada by ullng a ioehold-entry strategy of bulldlng from a reglonal or key account to 1 natlonal aervlce. • We do not believe that thll strategy would be very effective In view of Niell8n'e complete control of the market because Nlel11n can use this dominance to block or hinder auch efforts. However, even 11 IAI (or any other firm) could uae such a strategy to somehow Inch tta way to the point where It could offer a national service ev1nsv111v. whlel't ii doubtful, Nlellen would contJnue to be a monopolist for the entire transition period. At belt. ttiil path to competition In the •canner· based market tracking aervlcel martcet would be long, coetly, tedloua, and uncertain; however, the same goal can bl more eally and dlrectly raaJized ltmply by prohibiting Nl118en'a •xcluslve contracts. At we have pointed out. Ni1ta1n'1 economlltl have offered no procompetltlve Juatlflcation for Nlel81n'a exctuatve contracts with ratallera. Thus. the contracta are excluslonary and. consequently, anticompetitive.

16. Having aasened in one part of hil affidavit that there are many waya to compete In providing market tracking aervlcea ln Clnada and that the "toehold" strategy would bt viable for IRI, we find it curtous that in Hctlon 2.4.2 of hll affidavit Professor Mathewson argu11 Just the oppoaite point. 2.4.2 Confronted with the fact tnat IRI had tnmattd a bidding game bued on exctusM· ty, It 11 reuonlble to CllJm that Nlellan had rlttl• choice but to reepond with [ale} exclusive contract proposal of Its own. If Nletaen hid responded with non-excrueive contractual bk:t1. then one outcome unfavourable to Nlellen would be for IAI to have secured some exelualve retell cuatomera and for Ntellln to have secured aome customers on a non-exclusive blsla. Thaae retlll cuatomars then would have been In a poaltton to alao sell their data to IAt giving IRI the opportunity to secure a national

• 10. sample, eufflclantty reliable to market a national acannlng-bued market tracking service. Under thil outcome, Nl1lsen could have secured aome retail cu1tomer1 but found ltaelf unrepreaented in certain regions of the country. Furthermore, Nielsen would be In a weak position to strike a deal to aecura lf~l'a exclusive data. To produce national data, Nielsen would have had to replace the mfallng data wtth data from other 1ourct1. If thla were groealy Inferior, Nielaen would have had to abandon lte attempt to produce national marketing tracking data aervtcaa. Of course, Nielsen could have developed a regional marklt tracking service.

In this statement. Profesaor Mathewson effectively acknowledges that the options left to a market tracking flrm (either Nielsen or IRI) when It does not have access to a national sample of scanner data are not very good substitutes for auch a sample (otherwise Nletaen would not care If IRI had 1xctualv1 contracts). Moreover, In thia nctton of hie affidavit, he himself shows why tha •toehold" strategy he advocates elsewhere would not be effective against the exclueive contracts.

17. Tuming next to the Ntelaen economists' argument that consumara of market tracking services have sufficient bargaining power to prevent monopoly conduct by Nielsen, It it euy to 111 that thia argument 18 incorrect u well. Nielaen'e eervlct la of lower quality and higher co1t In Canada than It ia In the United State•. proving that Procter & Ciamble, Campbelf'a, and others cannot create competition When competition has been prevented by Nlelaen'a exclusive licensing practices. Moreover, we understand that consumer packaged goods producers would welcome IRl'a entry into Canada and are not aatllfled with the statue quo.

18. Finally, the Nielsen economists aJso appear to. justify Nlelaen '1 excluaionary staggered exclualve contracts by referencing the tad that In 1886 IAI aought to launch a scanner-based market tracking service ualng exclualve contracts. We believe thta fact too hu no relevance to the present lesue. At that time, no one anywhere had launched a scanner-based market tracking service ·- the first euccesaful such service was ottered In the United Stataa beginning

• 11 • In 1987. Second, scanners were not ubiquitous In grocery stores In Canada u they are now. Third, IRI faced a dominant Mtabfiahld rtval that was taking th• poaftlon that acanner-baaed market tracking service wu not rellable and Inferior to audit-baaed •rvlce. Fourth, IRI was a small firm with meager raaource1 and needed to uaur1 ttaelf that It would have aome time pertod during which It could attempt to dlattngulsh Itself from Nlellen. In our view. these factora dlltinguiah IRl's efforts In the middle 1980'1 from Nl11Hn'1 practfcea today. More Importantly, however, If today IAI were the firm with staggered exclu1lv1 contracta giving It unique accea1 to 1canner·bued data and It were IRI that dominated the Canadian 1canner· based market tracking Industry, It would then be our view that JB1 Injured competition by using exclualve contracts with grocery ratallera to foreclose entry by rtvaJa. Put 1Jmpty, It II the con­trol of 1xclu1lve acceae to the neceseary ecanner data which, In tum. IUUlta In dominance that createa the competitive problem here, not tha Identity of the firm that uaea sucti practlcaa. In our earlier affidavit, we deacrlbed Nielsen'• hlatorlcal position only to explain why It uaed Its then ulstlng dominant poaltion to prevent entry: but the 1111nce of Its abuse of dominant poaltlon raaldl8 In ltl cyrrent practice of u1lng exctualve contracts to prevent entry by competition.

19. The Nielsen economlltl suggest that the exclusive contracts emerge not solely because of Nlelaen'a actions and pollclta ln the Canadian market but partially because of the concentrated structure of the retail grocery Industry In Canida. even If true, we believe that this factor hu no relevance to the economic 1uu. . railed In thll proceeding. The real economic concem here ia the Mil of the exclulfve contract that precludaa IRI or otner firms from entering compettttvely. The Incremental (or marginal) coat of having the retall 1cann1r data made available to more than one market anaJyall firm (such as Nielstn or lRI) la zero or very low. Thus, prohibiting retallara and market analyals tlrms trom having exclustve contracts