Measuring the Price Impact of Concentration in the Drilling Rig Market

Abstract

This article investigates the history of mergers and acquisitions in global offshore drilling markets from 1990 to 2005. Based on this history, the effect of increasing market concentration on prices is examined using regression analysis. Industry concentration is measured by the Herfindahl-Hirschman Index. Two segments of the global drilling rig market are examined: jackups and semisubmersibles. The results of this initial investigation provide evidence to support the conclusion that increased market concentration in the jackup drilling rig market has resulted in increased prices; the evidence is weaker for the semisubmersible drilling rig market, but there appears to be a positive impact in this sector also. These results provide insight into the industrial organization of an important exploration and production input market, and provide information to antitrust regulators who are charged with maintaining competitive markets. Future analysis is anticipated to investigate and control for more subtle aspects of market structure, and to specify additional econometric models.

Keywords:

• drilling rigs
• Herfindahl-Hirschman Index (HHI)
• market concentration

Notes

¹ Mueller and O'Connor (1993), in their critique on the 1992 Merger Guidelines, discuss the requirement for the proper definition of a relevant economic market. The definition of the relevant economic market pertains to the determination of the definition, or scope, of the product and geographic market, among others. The determination of the scope of the product concerned mainly with issues of product homogeneity and substitutes. Definition of the geographic market requires setting appropriate boundaries of a market.

²The HHI has proponents and detractors, but better alternatives remain elusive and thus it remains the most widely used measure of industry concentration in research and governmental regulatory agencies. Recent theoretical and empirical example of work on the issue of HHI include Calkins (1983), Rhoades (1995), Hannan (1997), and Pilloff and Rhoades (2002).

³For additional technical background, see Baltagi and Li (1992) and Baltagi (2001). For examples of empirical applications see Lillard and Willis (1978) and Berry et al. (1998).

⁴It is not clear that there is much to gain in estimation efficiency by also pooling the s rig type panels, but this is worthy of future investigation.

⁵The fixed regional effects can be construed as proxies for regional HHI. Note that regional HHI may be high even when the global HHI is not. In this sense, regional HHI's are not interesting insofar as the research objectives of this study, and controlling for the effect of regional HHI using a fixed effect is probably adequate.

⁶In fact, rigs are differentiated within class by water depth rating. This means, for example, that shallow water jackup rigs do not compete for projects in deep water, but that deeper water jackup rigs can compete for projects in shallow water. The historical drilling data shows that higher water depth rated specification rigs can be observed drilling wells in shallow water, resulting in a water depth sub-market. The authors are constrained by the available data and assume product homogeneity within rig class, and compute HHI accordingly.