9-1 CHAPTER 9: COMPETITIVE IMPACT ANALYSIS

9.1 INTRODUCTION

Competitive Impact relates to any change in the concentration of market power due to the effects

of standards. New standards may al ter industry competitiveness by favoring a company’s proprietary

technology or reinforcing its competitive advantage or by making it economically unattractive for companies

to remain in the marketplace at all or as separate entities. Any lessening of competition can raise prices and

negatively impact consumers. Both the Department of Energy and the Department of Justice are interested

in assessing any potential impact that a new standard may have on competition.

The Framework (Chapter 2) separates the Competitive Impact Analysis from the Manufacturer

Impact Analysis (Chapter 8). The two are closely related since the input s to the Competitive Impact

analysis, primarily financial impacts, come directly from the MIA.

9.2 METHODOLOGY

During manufacturer interviews, we asked manufacturers to describe likely competitive responses

to new standards, focusing specifically on whether any firms would likely enter or exit a market, merge, or

gain a significant competitive advantage. To the extent possible, we used the GRIM to evaluate industrywide financial indicators such as return on invested capital and net cash flow that can indicate whether the

market can sustain the current number of competitive firms. Since the GRIM cannot simulate changes in

price due to lessening of competition, we could not assess impacts on consumers.

9.3 RESULTS

None of the seven large manufacturers we interviewed expected new standards to place them at

a significant competitive advantage or disadvantage. Most small manufacturers expressed this concern, but

the loss of small manufacturers from the market will do little to reduce competition, even at the regional and

local level.

The major manufact

urer manufacturers do expect companies to continue to merge and large

manufacturers to continue to acquire smaller manufacturers, and they expect new efficiency standards to

accelerate or reinforce that trend. Since much of the redesign and testing costs associated with new

standards could be shared among merged firms, there is an incentive to merge and reduce the burden on

the combined company. Furthermore, manufacturers will less ample research and product development

resources would se ek partners with greater access to those resources to be able to respond to the

requirements of the standard in a timely and effective manner.9-2

The GRIM does suggest that standard levels of TSL2, TSL3, and TSL4 place a significant strain

on the cash flows and return on invested capital of firms and business units with higher operating costs

whose profits depend to a great extent on the sale of premium products. It is possible, therefore, that a new

standard set at any of those levels will stimulate firms to sell their air conditioning assets to restore their

company’s ROIC or avoid the drain on cash flow.

Refer to Chapter

8, the MIA, for more detailed information that influences the Competitive Impact

Assessment. Section

8.5, Subgroup Impacts, is particularly relevant since it provides insight into the

competitive dynamics between major manufacturers based on their cost structure and approach to market.