Antitrust and Consumer Groups Oppose Two Proposed Cruise Line Mergers

Jul 09 2002
Testimony and Interventions

The American Antitrust Institute and the National Consumers League have announced their opposition to two merger proposals that would further concentrate the cruise line industry in North America. In a letter to Federal Trade Commission Chairman Timothy Muris, the AAI urged the Commission not to allow the proposed mergers of Royal Caribbean Cruises and Princess Cruises, or Carnival Cruise Lines and Princess, to proceed as proposed. Carnival is the largest cruise line, Royal Caribbean the second largest, and Princess the third largest. The merger is also under review in the European Union.

Linda Golodner, President of the National Consumers League, said, "Thousands of consumers, especially retirees on fixed incomes, depend on effective, vigorous competition in the cruise industry to assure quality service and a fair price. The NCL urges the Federal Trade Commission to oppose the proposed mergers."

Robert Lande, Senior Research Scholar of the AAI and a Professor of Law at the University of Baltimore, said, "After a rigorous and independent review of the proposed combinations, using the best information available to us, the AAI concludes that either combination raises significant competitive issues in the North American market for premium cruises. We also note that there are possible anticompetitive effects in upstream cruise ship markets, which could make it difficult to accomplish any divestitures that might cure either of the mergers of their anticompetitive potential."

The AAI's letter states that the relevant market in which to evaluate either proposed combination is the North American premium cruise market because in response to a hypothetical post-merger price increase, most cruisers would appear less willing to substitute other types of vacations, and suppliers could not easily undercut a post-merger price increase because of the difficulty in repositioning ships and developing infrastructure in regions they do not serve. Moreover, there are barriers to entry because of the high costs and time necessary to build new ships, loyalty to incumbent brand-names, and infrastructure requirements. In North America, the cruise market definition is virtually the same as a "premium cruise market," since economy cruises are only a small proportion of the North American market.

"Market definition," said economist Diana Moss, another AAI Senior Research Fellow, "is the crucial antitrust issue presented by these mergers. Once we concluded that the relevant market is cruise vacations in North America rather than something broader, such as all vacations, it was very clear that either of the proposed combinations would significantly increase market concentration beyond the thresholds set forth in the Department of Justice/Federal Trade Commission 1992 Horizontal Merger Guidelines, and that either would present a substantial risk of anticompetitive effects."

The AAI letter also notes that the proposed combinations could have competitive consequences in the upstream market for premium cruise ships. The exercise of monopsony power could lower post-merger prices for new cruise ships, reduce purchases of new cruise ships, and ultimately raise prices for cruises if other cruise lines cannot maintain capacity growth. In its letter to the FTC, the AAI urges the Commission to carefully examine specific competitive effects in the upstream cruise ship markets.

"It is clear," said Moss, "that either the Carnival/Princess or Royal Caribbean/Princess combination would bring about a significant increase in concentration in highly concentrated downstream cruise and upstream cruise ship markets. While it may be possible to predict more adverse effects from one combination than the other, the AAI does not believe that this should be a basis for accepting the "lesser of two evils." If either merger by itself raises significant competitive concerns, then it should be halted."

The American Antitrust Institute,, is an independent, non-profit research, education, and advocacy organization that favors a strong role for antitrust in the American economy. In evaluating these mergers, it set up a committee of four AAI research fellows, Chaired by Southwest University Law Professor Warren Grimes. Also on the committee were economists Diana Moss of the AAI and John Kwoka of Northeastern University, and business professor Norman Hawker of Western Michigan University. Their letter was approved by AAI Directors Robert Lande and Jonathan Cuneo. The AAI's third director, AAI president Albert Foer, recused himself because of his wife's public relations representation of one of the companies proposing to merge.

The National Consumers League, founded in 1899, is a national nonprofit consumer advocacy organization representing consumers and workers in marketplace and workplace issues.

The letter can be read in Adobe Acrobat format here