What is a normal market share?

Antitrust Guidelines for Collaborative Efforts

In 2000, the FTC and DoJ jointly issued new guidelines intended to explain how the agencies analyze antitrust issues with respect to collaborative efforts. Collaborative effort is the term used by the regulatory agencies to describe a range of horizontal agreements among competitors, such as joint ventures, strategic alliances, and other competitor agreements. Note that competitors include both actual and potential ones.

Regulators evaluate the impact on market share and the potential increase in market power resulting from a proposed collaborative effort. The agencies may be willing to overlook any temporary increase in market power if the participants can demonstrate that future increases in efficiency and innovation will result in lower overall selling prices or increased product quality in the long term. In general, the agencies are less likely to find a collaborative effort to be anticompetitive if (1) the participants have continued to compete through separate, independent operations or through participation in other collaborative efforts; (2) the financial interest in the effort by each participant is relatively small; (3) each participant's ability to control the effort is limited; (4) effective safeguards prevent information sharing; and (5) the duration of the collaborative effort is short.

The regulatory agencies have established two “safety zones” that provide collaborating firms with a degree of certainty that the agencies will not challenge them. First, the market shares of the collaborative effort and the participants collectively account for no more than 20% of the served market. Second, for R&D activities, there must be at least three or more independently controlled research efforts in addition to those of the collaborative effort.

Market share considerations overwhelmed other factors when the Justice Department threatened to file suit if Google and Yahoo! proceeded to implement an advertising alliance in late 2008 (see Case Study 2.3).

Case Study 2.3

Google Thwarted in Proposed Advertising Deal with Chief Rival Yahoo!

A proposal that gave Yahoo! an alternative to selling itself to Microsoft was killed in the face of opposition by U.S. government antitrust regulators. The deal called for Google to place ads alongside some of Yahoo!'s search results. Google and Yahoo! would share in the revenues generated by this arrangement. The deal was supposed to bring Yahoo! $250 million to $450 million in incremental cash flow in the first full year of the agreement. The deal was especially important to Yahoo!, due to the continued erosion in the firm's profitability and share of the online search market.

The Justice Department argued that the alliance would have limited competition for online advertising, resulting in higher fees charged to online advertisers. The regulatory agency further alleged that the arrangement would make Yahoo! more reliant on Google's already superior search capability and reduce Yahoo!'s efforts to invest in its own online search business. The regulators feared this would limit innovation in the online search industry.

On November 6, 2008, Google and Yahoo! announced the cessation of efforts to implement an advertising alliance. Google expressed concern that continuing the effort would result in a protracted legal battle and risked damaging lucrative relationships with their advertising partners.

The Justice Department's threat to block the proposal is a sign that Google can expect increased scrutiny in the future. High-tech markets often lend themselves to becoming “natural monopolies” in markets in which special factors foster market dominance by a single firm. Examples include Intel's domination of the microchip business, as economies of scale create huge barriers to entry for new competitors; Microsoft's preeminent market share in PC operating systems and related application software, due to its large installed customer base; and Google's dominance of Internet search, resulting from its demonstrably superior online search capability.

Step 2. Potential Adverse Competitive Effects of Mergers

Market concentration and market share data are based on historical data. Consequently, changing market conditions may distort the significance of market share. Suppose a new technology that is important to the long-term competitive viability of the firms within a market has been licensed to other firms within the market but not to the firm with the largest market share. Regulators may conclude that market share information overstates the potential for an increase in the market power of the firm with the largest market share. Therefore, before deciding to challenge a proposed transaction, regulators will consider factors other than simply market share and concentration to determine if a proposed merger will have “adverse competitive effects.” These other factors include evidence of coordinated interaction, differentiated products, and similarity of substitute products.

Coordinated interaction. Regulators consider the extent to which a small group of firms may exercise market power collectively by cooperating in restricting output or setting prices. Collusion may take the form of firms agreeing to follow simple guidelines, such as maintaining common prices, fixed price differentials, stable market shares, or customer or territorial restrictions.

Differentiated products. In some markets, the products are differentiated in the eyes of the consumer. Consequently, products sold by different firms in the market are not good substitutes for one another. A merger between firms in a market for differentiated products may diminish competition by enabling the merged firms to profit by raising the price of one or both products above premerger levels.

Similarity of substitutes. Market concentration may be increased if two firms whose products are viewed by customers as equally desirable merge. In this instance, market share may understate the anticompetitive impact of the merger if the products of the merging firms are more similar in their various attributes to one another than to other products in the relevant market. In contrast, market share may overstate the perceived undesirable competitive effects when the relevant products are less similar in their attributes to one another than to other products in the relevant market.

21.1.1 Australian Regulation

The Australian share market is regarded as being typical of that of an advanced country. It has a reasonable degree of informational efficiency and is quite well regulated. For example, Section 205G of (Australian) Corporations Act (2001) requires every director of a listed company to notify the Australian Stock Exchange (ASX) about holdings and changes in relevant interests in securities in their own firms. The notification must be within 5 business days of the change in interest. In order to satisfy this requirement, directors are obliged to complete an appendix, which is then recorded by the ASX. This reveals the director who trades, the amount traded, the price at which they bought or sold, and whether or not it was an on or off market trade. This information is then disseminated to the general public on the day the director lodges the appendix. In an examination by the ASX, its 2008 report revealed that over 13% of directors did not conform to the reporting requirement.

In March 2008, the ASX issued a report to all companies reminding them of their obligations and stating that, from July 1, 2008, they will be heavily scrutinizing directors' interest notices that are lodged late or incomplete. Breaches of Section 205G may result in criminal prosecutions by the Australian Securities and Investment Commission (ASIC). When ASIC identifies a breach, the director is sent a letter asking for an explanation. This explanation may not necessarily avoid prosecution being taken. However, the explanation will be taken into account when the ASIC is deciding criminal prosecution.

In September 2008, the practice of short selling became the focus of the Australian regulatory authorities. Company directors selling stocks in a bear market were not regarded as the major problem. After all, they were only selling shares that they already owned. Nevertheless, the position put in this chapter is that their decision to sell stock in their own company may have become a signal for those market players who wished to profit from a fall in the share price. The moral justification of short selling was again brought into the spotlight. Can we legally sell something that we do not own? Did selling directors contribute either innocently or deliberately to others short selling profits being generated on the basis of bad news? Did short selling exacerbate a fall in the Australian stock market? The regulatory authorities felt the latter activity did, and bans on uncovered and covered short selling were introduced on September 21, 2008. The ban on covered short selling was lifted on May 25, 2009, primarily on the basis of a partial recovery in the Australian stock market, but reporting requirements remained.

LIFFE: Using Technology to Make a Comeback

After losing significant market share to Eurex, LIFFE found its footing by putting itself on the fast track toward electronic trading. It ordered a complete shutdown of its floor within one year. It was a bold move that risked losing traders and liquidity, the lifeblood of an exchange. For LIFFE, the risk paid off. After closing its floor in 2000, the exchange has seen steady growth. With its merger with Euronext, the exchange became a conglomerate covering markets in several European countries. It also took advantage of the modular exchange model to provide its electronic trading platform to other exchanges. The CBOT, until its recent merger with CME, used the LIFFE Connect platform for its trading platform. TFX in Japan still uses LIFFE Connect for its trading needs. Finally, with its recent merger with NYSE, LIFFE has established itself as part of a major transatlantic exchange conglomerate. Through mergers, acquisitions, and partnerships and its migration toward electronic trading, it now boasts a product suite across asset classes and a presence in the United States, Europe, and Asia. Similarly, exchanges around the world jumped on the bandwagon of partnerships, mergers, and acquisitions to gain market share. Whether it's the pioneers solidifying their positions in the electronic trading world or the followers playing catch-up, technology provided exchanges and financial markets the flexibility to expand and capture market share around the world.

6.2.1 Market concentration

Statistics showed that market share of both top 100 and top 10 real estate companies from 2009 to 2013 increased year by year, and the concentration of Chinese real estate industry improved steadily. As of 2013, market share of top 10 real estate companies reached 12%, accounting for 39.1% of total sales of the top 100 enterprises. On the one hand, only the annual sales of China Vanke Co. Ltd. were above 100 billion Chinese Renminbi before 2012, but seven real estate companies reached that mark in 2013, and the trend that following companies approached the top rank continues. On the other hand, the real estate industry has been also involved in a wave of merger and acquisition, and nearly 200 A-share listed companies (companies in Mainland China listed in the Shanghai or Shenzhen Stock Market) were involved in merger cases of real estate projects in 2013, such as Vanfund Real Estate Co., Beijing Capital Group Co., COFCO Property Co., etc. Moreover, real estate companies focus on a certain regions; it is more common that several enterprises occupy a large share of a city’s development market. For example, Country Garden Co., Poly Real Estate Co., Agile Co., China Vanke Co., and R&F Properties Co. together had 25% of the market share in Guangzhou in 2011, and 12 listed real estate companies had two-thirds of the residential land market in Beijing in 2012, including China Vanke Co., Beijing Capital Development Co., Overseas Chinese Town Co., Poly Real Estate Co., China Merchants Co., etc. Resources will be further concentrated in large enterprises with the real estate industry becoming more mature and standardized; meanwhile, small real estate developers will gradually be squeezed out of the market.

IV.C.3 Information Systems Contribution to Market Share Growth

IS impacts on market share growth can be measured in terms of market share gains, sales growth, and revenue growth. A new IS may help increase product awareness, support the sales force, improve product availability, and facilitate payment. IS that establish and use marketing databases can promote product awareness by exploiting “addressability”—the ability to direct specific messages to specific individuals or groups. By providing information such as purchase patterns, affiliations, and age, these databases make it possible to focus marketing resources on the individuals with a higher probability of making a purchase.

IS can support various steps in the sales process, including designing the sales program, identifying prospects, negotiating prices, order taking, and follow-up contacts to maintain the relationship. IS such as inventory systems also provide an effective way for businesses to maximize merchandise availability without excessive inventory levels by tracking the quantity on hand of every item and allowing quick replenishment. Facilitating payment is another way to increase sales volume by helping customers purchase products. IS that allow credit card, debit card, and smart card transactions all facilitate payment for consumers by making cash or checks unnecessary, thereby increasing convenience and sales volume.

Empirical Sharpe Ratios as Performance Measures

The analysis of asymptotic market shares becomes more involved when the performance of mediators is judged by comparing historical Sharpe ratios. In this case the choice function (6.42) is no longer invertible, because the performance measure as defined in Example 6.2 is based on a four-dimensional vector zt ∈ ℝ4. As a consequence, the evolution of the system is described by a four-dimensional ODE. The set of asymptotic market shares as given in Corollary 6.4 allows the representation

(6.83)ɛ={η∈[η_,η¯]:φ−1(η,β)=ΛΠ∘ζ(η)}

where φ−1(., β) is the inverse of the logit function (Eq. 6.41) and π(2) − π(1) = ΔΠ o ζ(η) describes the stationary difference in Sharpe ratios of the two mediators. Although φ−1(., β) is analytically available, the map ΔΠ o ζ on the right side must be obtained by simulating the benchmark models (Eq. 6.79).

The hump-shaped curve in Figure 6.6a represents a numerical approximation of Δ o ζ. Figure 6.6b indicates that the two functions in Eq. 6.83 have three intersection points, provided that the intensity of choice β is sufficiently large. The leftmost intersection point (β = 2) is hardly visible but exists because φ−1(,2) has two vertical asymptotes at η and,

Simulations of the nonlinear model Eq. 6.81 reveal again that the asymptotic behavior of market shares is random. The long-run market share depends strongly on the intensity of choice and is sensitive to initial conditions. For β = 1, Figure 6.8 depicts the empirical densities after T = 10,000 periods, which correspond to an initial market share of ηo = 6.5% in panel (a) and for ηo = 35.5% in panel (b), respectively.

Similar observations are made for β = 2. In this case, however, the distribution of market shares may be bimodal. Figure 6.8 shows the empirical distribution for ηo = 6-5% in panel (c) and for ηo = 35.5% in panel (d). If ηo = 6.5%, the chartist almost “dies out” in the sense that her long-run market share is pushed to the leftmost fixed point. For ηo = 35.5% the empirical distribution of asymptotic market shares is bimodal, with two peaks that are approximately located at the outer intersection points of the respective functions depicted in Figure 6.6b. If the chartist's initial market share is sufficiently high, she will “survive” with positive probability. The bimodality demonstrates that the long-run market shares depend also on the specific history generated by the noise-trader transactions.

These two examples show that the long-run market shares of two financial mediators may strongly depend on the random environment of the market that is created by the choice behavior of consumers. As a consequence, asset prices may become nonergodic as the price process converges in distribution, with the limiting distribution being path dependent. Economically, this result implies that social interaction among consumers may endogenously create a risk that leads to inefficient portfolio holdings.

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