No Smooth Sailing for Cruise Line Merger
Subject Anti-trust regulation
Topic Market failure, regulation, and public choice
Key Words Merge, hostile offer, Federal Trade Commission, European Commission, market, market segments, competition
News Story

A struggle is ensuing between Carnival and Royal Caribbean over who should merge with P&O Princess Cruises. Royal and Princess wish to merge, but Carnival has made a rival hostile offer.

The Federal Trade Commission (FTC) is examining both possible deals. The combination of Carnival and P&O would trigger a European Commission review, while a Royal/P&O merger is already being considered by the national authorities in the UK and Germany.

The first task is to define the market. Carnival and P&O argue that cruising is only 5 percent of the vacation market. Such a market definition might be acceptable in the U.S., but the European Commission is more likely to consider a narrower definition focusing on all cruises or cruise market segments such as luxury and mid-market cruises.

Then there is the issue of whether to consider the global market (where Carnival has 28 percent of berths, Royal has 20 percent, and P&O has 11 percent), or the Caribbean (where the shares are 40, 27 and 12 percent respectively), or the European market (where P&O dominates with 25 percent, Carnival has 9 percent, and Royal 6 percent). Any merger would be more of a problem in the Caribbean market than in Europe.

The authorities also have to consider the implications of market dominance for competition. In the Caribbean, Royal and Princess might argue that, together, they would provide more effective competition for Carnival. However, some are concerned that the two companies would then have nearly 80 percent of the market, and consumers could be harmed.

(Updated April 1, 2002)

1. Why is the definition of the market so critical in merger regulation? Give examples from the news story to substantiate your argument.
2. a) What is the three-firm concentration ratio in the global, Caribbean, and European markets?
b) Why would the proposed merger be more of a problem in the Caribbean market than in the European market?
3. a) Why does the FTC not rely solely on levels of concentration in making judgments concerning mergers?
b) The news story counterposes two views concerning the effect of a merger in the Caribbean cruise market. Both are possible. Using your knowledge of product market behavior, explain how a market dominated by two firms could have such contrasting outcomes.
Source Scheherazade Daneshkhu, "Global Issues Disturb Around P&O," Financial Times, January 24, 2002.

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