### Potential Competitive Effects of Shifting to a Vehicle- Only Emission Standard for Phase 2 GHG Standards for Heavy- Duty Trucks David Harrison, Ph.D. Carl McPherson Presentation to U.S. Office of Management and Budget April 21, 20151 

### NERA Study Context: Key Elements of U.S. Truck Market
 Large number of vehicle types (18 - wheelers, garbage trucks, fire trucks, etc.) and smaller number of engine types  Mix of competitors include integrated (engine -vehicle), engine - only, and vehicle - only manufacturers  Vehicle - only manufacturers— i.e., those with no engine or powertrain capability, including many relatively small firms—compete with integrated manufacturers through access to engines from engine - only manufacturer  A given engine design/calibration is used in many applications by many customers (including vertically integrated as well as vehicle - only manufacturers)2 

### NERA Study Objectives

 Overall objective: evaluate the potential competitive effects of a shift to “vehicle - only” approach for Phase 2 emission standard  Step 1: Qualitative assessment based on potential concerns  Step 2: Quantitative “bounding” estimates based on simulation models

“r egulations that increase market power for selected entities should be

avoided” – OMB Circular A -4, p.4-53 

### Qualitative Assessment of Potential Competitive Effects

 Economic literature: “strategic” use of regulation to impose costs on competitors can harm competitors and consumers (price increases)  Shift to vehicle- only approach provides potential competitive advantages to integrated manufacturers by imposing costs on non - integrated competitors

– C ould set “de facto” engine emission standards on their engine competitors who are currently also their suppliers, raising costs for engine - only manufacturers (technology, uncertainty, capital costs)

– Higher engine costs and higher certification costs would disadvantage vehicle - only manufacturers  Potential market/societal welfare impacts

– Greater market control by large integrated manufacturers

– Higher vehicle prices and fewer vehicle alternatives4 

### “Bounding” Estimates of Effects on Concentration and Prices

 Illustrative estimates developed for three segments 1. Transit buses 2. Tractors 3. Refuse trucks  “Bounding”: non - integrated firms leave (merger or exit)

– Mergers lead to incentives to raise prices (due to “diversion” of some sales to merged partner)

– Exits lead to increases in market concentration and resulting price increases (oligopoly)  Two models used in DOJ investigations 1. “Simple Model” (Shapiro 1996) to predict price impacts of merger 2. “Market Model” (DOJ Antitrust ) to predict concentration and price impacts of market exit5 

### Illustrative “Bounding” Price Effects of Mergers in the Simple Model
 Illustrative mergers of Integrated and Non - Integrated companies show substantial price increases

Price impacts of mergers depend on the merged party and on the nature of the “demand system”6 

### Illustrative “Bounding” Concentration Effects of Exit in the Market Model

US Department of Justice guidelines note that HHI levels above 2,500 and changes above 100 “raise significant competitive concerns” (p. 22)  Herfindahl – Hirschman Index (HHI) is a common measure of market concentration (sum of squared market shares)  Exit of non - integrated firms would increase market concentration7 

### Illustrative “Bounding” Price Effects of Exit in the Market Model

 Exit of non - integrated firms could lead to substantial price increases

Price impacts of exit by non -integrated firms depend on overall market

elasticity and price elasticity for exited firm8 

### Conclusions

 Sound conceptual basis for concern about the welfare effects of removing the separate engine standard (“use of regulation to raise competitors costs”)

– Adverse welfare effects include increases in market concentration and market prices for trucks  “Bounding” estimates use simulation models to predict effects if non - integrated firms leave (merger or exit)

– Results show market concentration effects that DOJ indicates would “raise significant competitive concerns”

– Results for market price increases vary widely but simulations show they may be large  Sum: qualitative assessments and “bounding” estimates suggest potential adverse effects of switching to a vehicle - only truck emission standardDavid Harrison, Ph.D.

Senior Vice President NERA Economic Consulting Boston, MA 02116 +1 617 927 4512 David.Harrison@nera.com Carl McPherson Research Associate NERA Economic Consulting Boston, MA 02116 Carl.McPherson@nera.com