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CHAPTER 9: COMPETITIVE IMPACT ANALYSIS

9.1 INTRODUCTION

Competitive Impact relates to any change in the concentrationofmarket power due to the effects

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

technologyorreinforcing its competitive advantage or bymaking it economicallyunattractive forcompanies

to remain inthe marketplace at all or asseparate entities. Any lessening of competitioncanraise prices and

negatively impact consumers.Boththe Department ofEnergy and the Department ofJustice 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 inputs to the Competitive Impact

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

9.2 METHODOLOGY

Duringmanufacturerinterviews, 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 indicatorssuchasreturnoninvested 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. Mostsmallmanufacturers expressed this concern, but

the loss ofsmallmanufacturersfromthe market willdo little to reduce competition, evenat the regional and

local level. 

The major manufacturer 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 seek partners with greater access to those resources to be able to respond to the

requirements of the standard in a timely and effective manner.

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

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 onthe sale ofpremiumproducts. 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.

Referto Chapter 8, the MIA, for more detailed informationthat influencesthe Competitive Impact

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

competitive dynamics betweenmajor manufacturersbased ontheir coststructure and approachto market.

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