The Competition Act provides that the Competition Authority is to review notifiable mergers and acquisitions from the perspective of whether there is a substantial lessening of competition. It has published Merger Guidelines as to how it applies the test. The Merger Guidelines apply to all mergers, whether subject to notification by law or referred voluntarily.
The primary focus is the welfare of consumers. The welfare of consumers involves consideration of issues price, quality, innovation and other factors. The basic yardstick of consumer welfare is price.
Where price rises are likely to result from the merger in consequence of a reduction in or a limitation of output, consumer welfare may be impaired. In other cases, price may not be the key factor and other issues, such as quality and innovation, may be the central considerations.
Assessing the Merger
Horizontal mergers are those between persons providing competing products or services in the market. The Competition Authority seeks to define the relevant product and geographic market.
For each market, it considers the post-merger HHI index (the Herfindahl–Hirschman Index) and the change that would arise from the merger. The purpose is to identify mergers that may lead to a significant lessening of competition.
The Authority, in considering whether the merger is likely to lessen competition, will have regard to the constraining influence that a potential competitor may exercise if it enters the market. It will also have regard to efficiency gains that may not otherwise be achieved without the merger.
The merger is considered with reference to its effect on market structure. The existing state of the market is considered. Where the market is dominated by a small number of firms with a large share, a further lessening of competition will have a more serious consequence than where there are more firms. The nature of the market, including issues of product differentiation, is important.
The HHI index is used to ascertain market concentration. It is calculated by adding the sum of the squares of the market shares of the existing competitors. The effect is to give to a greater weight to higher percentage market shares. Estimated market shares will be used where more precise figures are not available. Smaller shares may be excluded. The determination is made with reference to the relevant market and the relevant product. See the separate section in relation to the concepts employed.
If the HHI index figures cannot be calculated for the whole market, a more basic calculation may be made on the basis of the concentration of the top four firms. The index may be calculated on the basis of the firm’s number of units of output, revenue or capacity. The test will frequently produce similar results.
There are three broad categories or zones determined by the HHI index number. Zones A, B and C refer to the respective degrees of competition in the market with reference to the numbers yielded by the index. The pre-merger HHI and the post-merger HHI, are considered. The delta describes the change in the index caused by the merger.
Zone A is least likely to have adverse competition effects, having a relatively low HHI. Zone B may have significant concerns in particular contexts. Zone C identifies markets that are already concentrated, with existing potential adverse competition issues. The HHI risk may assist firms in undertaking self-assessment as to whether to notify mergers on a voluntary basis.
In Zone B or C, there would be a lesser risk of serious lessening of competition if there are low buyers to entry and potential competition. Potential impediments to competition in the higher parts of zones A and B will be considered. This may include history and market practice, barriers to entry and the possibility of a maverick firm being absorbed.
Effect on Rivalry
The Competition Authority looks at whether the merger might have an effect on the rivalry between existing market players. The existing market is looked at from the perspective of constraints on anti-competitive behaviour. Account is taken of the effect of the merger on other competitors.
If there are significant factors that will make it uncompetitive for the new entity to raise prices, there is less likely to be a lessening of competition. Where the merger involves an increase in market power and creates a greater possibility of cartel and collusion on a long to medium-term basis, there is a greater risk that there would be a lessening of competition.
The Authority considers the market structure in terms of its concentration, the change over time, technological issues, differentiation of products, innovation and the degree of vertical integration. Regard is had to the effect of the merger on the merging parties.
If there is a reduction in output, consideration is given to whether it is displaced to other firms. Factors which make it profitable to increase the price unilaterally are considered.
Consideration will be given to the reaction of other firms and how this will affect the structure of the market. The capacity of other firms to achieve sales if the merged entity increases prices, is of particular importance. If competitors may enter the breach, increase output and bid down prices, there is a lesser risk that competition may be impaired.
Existing brands may be able to change and adapt to become adequate and sufficient substitutes. Regard will be had to existing firms and to firms that may enter the market within a relatively short timeframe.
Effect on Buyers
The likely reaction of consumers is factored in. The cost of switching will be considered. Regard will be had to the nature of the products in the markets, consumer loyalty to brands, previous experience in switching the price elasticity of demand and market shares.
The strength of buyers will be considered. The greater the strong and market power of buyers, the less significant the risk of lessening competition by the merger of sellers. Buyers may be in a position to source alternative sources of supply.
A merger may increase the market power of buyers. An increase in the market power of buyers is not necessarily anti-competitive, as it may drive prices down. However, if it involves a reduction in output in the market, it may have adverse price effects at lower retail levels.
Effect on Market Power
The Authority considers the historic rivalry in the market, competitive pressures and propensity to switch brands. In some cases, the existing stock of products and second-hand products may have an impact on the market. The regularity of purchase and durability of the product may be relevant.
The Authority considers whether the merger will increase market power. If it might lead to a monopoly or a dominance which may be abused, it poses a greater risk to competition. Even if the merged firm does not have the largest market share, there may be, nonetheless, adverse effects and a significant lessening of competition.
Where the merging firms produce different but similar products, there is a greater risk that the removal of this competition will increase unilateral market power. If competitors cannot increase capacity, smaller firms with capacity may have greater market power, notwithstanding their scale. Where output or capacity is the basis of competition, there is a greater risk that a merger will incentivise a cutback in output, leading to price increases.
The number of participants in the market will be important. All things being equal, the greater the number of competing firms, the less the risk that a merger will lead to a significant lessening of competition.
The merger of a maverick, which formerly was willing to cut prices or deviate from norms of market behaviour, leads to a greater risk of exercise in unilateral market power.
A merger which facilitates greater coordination and behaviour carries a more significant risk of a lessening in competition. Collusion and coordination, lawful or unlawful, may be more likely to occur in certain circumstances.
In such cases, it may be more profitable to coordinate and align behaviour, whether lawfully or unlawfully. It can sometimes be difficult to prove that coordinated behaviour is a result of agreements, arrangements or practices restrictive of competition.
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