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COMPETITION AND COOPERATION: how to evaluate joint- bidding

by Rossella Mossucca

On December 12, 2018 the Italian Competition Authority (ICA) found that the agreement between Grifols and Kedrion to submit a joint bid for the contract manufacturing of plasma therapeutic products derived from blood donations to a consortium of Italian Regions led by Emilia Romagna, was not anticompetitive, but rather enhanced the welfare of the Italian Healthcare System. Lear assisted Grifols in the proceedings and its economic analyses have been key to demonstrate that the agreement with Kedrion did not breach Article 101 TFUE.

The evaluation of whether a joint bid is anti-competitive can require a general assessment of whether and to what extent the members of the the joint bid compete in the relevant market. As a competition authority may consider a specific tender procedure to identify a market for the application of antitrust rules, the evaluation boils down to establishing whether the parties in the joint bid agreement are potential or actual competitors in the context of the specific procedure. In this case, the evaluation may:

  1. consider the formal requirements to participate as a solo bidder into the tender process;
  2. extend the assessment to the effective chances of the parties to obtain the contract by bidding separately.

The first approach is driven by the idea that a joint bid may not harm competition only if it enlarges participation, i.e. it allows the involvement in the tender of suppliers that would otherwise be prevented from bidding.

The second approach takes a less formalistic view. It aims at ascertaining whether joint bidding reduces or enhances effective competition in the specific tender procedure. To address this issue one has to take into consideration the selection mechanism envisaged by the contracting authority, which reflects its preferences over all dimensions of the supply (price and quality characteristics). In a tender procedure these preferences are conveniently summarized by the scoring rule that translates the price and non-price features of each bid in a score and allows the contracting authority to rank the offers received and select the winner, i.e. the supplier that best meets its needs.

Needless to say, the second approach is more complex but can avoid false positives and help firms improve their efficiency and serve the clients’ demand.

In the Grifols-Kedrion case the application of an effect-based approach required an understanding of the market and the objectives pursued by the procurement entities. Italian Regions, that manage the Italian Healthcare System (SSN), purchase therapeutic products derived from plasma in two ways:

  • through contract manufacturing, that allows the SSN to make use of domestic donated plasma, that they historically collect, as the sole input to fractionate proteins and other products for clinical needs;
  • as final goods on the open market, from international manufacturers which directly collect or buy the human blood input as part of their own supply chain across diverse geographical markets.

Currently, about 60%-70% of the total demand of plasma-derived therapeutic products is satisfied through contract manufacturing. As blood collection costs are largely fixed, it is economically sound to exploit it as much as possible. Ethical considerations also call for obtaining the largest possible quantity and variety of therapeutic products from donated plasma. As a result, the Italian regulatory framework aims at increasing blood donation and optimizing contract manufacturing to make the SSN self-sufficient in satisfying its clinical needs from proprietary donated plasma. Accordingly, public procurement is switching toward a tender design that recognises a high score to the variety of the product portfolio offered by firms in this market and to yields for each product.

Given this scoring mechanism, a proper competitive assessment of the Grifols-Kedrion joint-bidding had to ascertain whether Grifols, as a solo bidder, would have been able to effectively compete for obtaining the contract. Indeed, even if Grifols met all the formal requirements to participate in the procedure, it would not have been a competitive constraint on other bidders if it lacked the ability to make a truly competitive offer.

Moreover, a full competitive assessment had also to establish if, by joining forces, Grifols and Kedrion increased the two firms’ ability to provide a better product, that is to meet the demand for a wider portfolio of products.

Lear’s analyses helped answer the above questions, demonstrating:

  • that the technical score that Grifols would have obtained because of its narrow range of products, could have been overcome only by lowering its price to an economically unaffordable and abnormally low level. Thus, Grifols had no ability of obtaining the contract as a solo bidder and was not an effective competitor of Kedrion;
  • that the integrated offer enabled exploiting complementarities that were valuable from the point of view of the contracting authority’s preferences.

Even if within the realm of Article 101, the assessment of joint-bidding is analogous to the one required for the valuation of a horizontal merger: we have to look at how close and strong competitors the members of the consortium are, and we have to assess the impact on welfare of consortium-specific efficiencies due to product or service complementarities.