Cruise Mergers in the U.S. and Europe: How are They Different?
FTC:WATCH No. 593
July 22, 2002
The aai Column
by Diana L. Moss
Currently under antitrust review in the U.S. and European Union are the proposed competing efforts of Royal Caribbean Cruises and Carnival Cruise Lines to acquire P&O Princess. Carnival is the largest cruise line, Royal Caribbean the second largest, and Princess the third largest. Where the FTC and the European Competition Commission come out on these deals will be a bellwether for transnational merger enforcement. Ideally, the Commissions' decisions will also highlight the crucial fact that a merger may have a fundamentally different effect on competition and consumer welfare in the U.S. than in European markets. Despite the pressures of thinking in terms of "economic globalization," antitrust review is still focused on the central question of potential competitive harm in a well-defined market.
While the FTC has not yet finished its investigation, the Commission has been encouraged to block both mergers. For example, in a June 26 letter to Chairman Muris, the American Antitrust Institute (AAI) concludes that ". . .both a Royal Caribbean/Princess combination and a Carnival/Princess combination raise significant competitive issues in the North American premium cruise market" and ". . .would bring about a significant increase in concentration in highly concentrated downstream cruise and upstream cruise ship markets."
In Europe, the story might be somewhat different. For example, the U.K. Competition Commission recently found that the Royal Caribbean/Princess combination was not likely to have a significant effect on competition. This determination was based on their assessment of merger-related effects on competition within a regional U.K. cruise market. Although they did not explicitly define a product market, the U.K. Commission found that ". . .the existence of a wider holiday market, and the availability of cruises of types other than those operated by POPC and RCCL, both constrained these companies' actions and limited commercial freedom. . ." Indeed, the U.K. Commission states that, even if cruises were a separate market, the merger would increase concentration in a relatively unconcentrated market only by a small amount (292 to 1,490--as measured by the HHI statistic). Central to the U.K. Commission's reasoning was that demand for cruising is growing, there is variety in cruise offerings, and there is entry - particularly in the economy segment of the industry.
By contrast, if a North American cruise market exists, concentration increases by 1,848 to 4,474 HHI due to the Carnival/Princess combination and by 792 to 3,418 HHI due to the Royal Caribbean/Princess combination -- raising market concentration well into the danger zone. It is easy to see that whether the proposed cruise mergers raise competitive concerns clearly hinges on the crucial and controversial issue of market definition. The AAI notes in its letter to the FTC that in its discussions with the cruise lines, Carnival asserts that the relevant market is the "worldwide market for leisure travel." Indeed, if cruises compete with land-based vacations so significantly that they should be considered in the same market for antitrust purposes, then it takes little effort to conclude that the mergers would have no anticompetitive effect in that cruises represent something like five percent of the overall vacation market. But, is this really the case?
The crux of the market definition problem is asking what would happen if the merged firm were to raise prices by a "small but significant and nontransitory" amount. Take the effect of the mergers in the U.S. Would enough U.S. cruise buyers shift to other vacation products or to cruise lines that market to consumers, say, in Europe, to defeat a price increase? Would existing or new cruise lines enter the North American market where they did not previously operate?
The answer to these questions is probably "no" -- substantial demand-side and supply-side substitution isn't likely. The AAI letter to the FTC points to analysis that indicates that, among other factors, most cruisers pay more for cruises than for most other vacation packages, go to special vendors to purchase cruises, do not usually consider other vacations in choosing a cruise, and would generally be unwilling to switch to cruises marketed outside the U.S. Suppliers may not be able to move ships fast enough to respond to changes in regional prices and developing infrastructure to serve new markets is costly. Moreover, entry by new firms requires the construction of new ships, establishing infrastructure and brand name recognition -- all time-consuming and costly tasks.
What this all means for these mergers in the U.S. is that the relevant market is likely a cruise-only market, limited to the geographic region of North America. By default, the market includes only premium cruises, since economy cruises are a very small proportion of cruise products in North America. Either merger significantly exacerbates concentration in this already highly concentrated market. This is very different, as noted above, from the situation in the U.K.
It is currently being reported that the European Competition Commission will likely allow the Carnival/Princess deal to go through without divestitures -- an apparent reversal of its negative position on the deal a short time ago. Whether this reversal signals a change in stance on market definition and/or a response to political factors (e.g., the recent devastating Airtours decision) or deference to a member country's analysis (e.g., the U.K. Commission's decision not to challenge the Royal Caribbean/Princess deal) won't be clear until it issues its report. What remains, however, are a significantly different set of circumstances in the U.S. and Europe which directly affect market definition and, therefore, the competitive effects of the proposed cruise mergers.
This is not another General Electric/Honeywell or Boeing/McDonnell Douglas situation with concerns about conflicting national policies or interests. Nor are there issues of protecting or favoring domestic companies. Rather, it is a classic illustration of the fundamental that markets must be defined correctly for antitrust purposes and can be defined differently based on the country-specific or regional characteristics.
In the July 22 article "Cruise Mergers in the U.S. and Europe: How are They Different?" there were several typos involving HHI figures. The correct figures are as follows: (1) post-merger HHI concentration in the U.K. cruise market following a Royal Caribbean/Princess combination would be 1,419; (2) in the North American cruise market, HHI concentration would increase by 862 to a level of 3,443 due to a Carnival/Princess combination, and by 693 to a level of 3,274 HHI due to a Royal Caribbean/Princess combination. DM, 7-31-02.