Merger controls recognise that it may be preferable, on occasion, to prevent the acquisition of market power since it can frequently prove difficult to control the exercise of such power once it has been acquired. An efficient merger control regime should:
For competition analysis mergers can be categorised into three types.
Competition problems arise most frequently in the case of horizontal mergers as they involve a reduction in the number of competitors. In general, however, concerns only arise in markets where there are relatively few competitors or where the merging firms have a disproportionately large market share. Vertical mergers may create competition concerns if they block rivals' access to essential raw materials or to distribution outlets. Conglomerate mergers are generally considered less likely to pose a threat to competition, although there may be the risk that the merged firm will use profits in one sector to finance predatory pricing in another.
Horizontal mergers may give rise to competition problems in one of two ways:
Unilateral effects may arise in a number of ways.
A merger may create or strengthen a dominant position, thus enabling the firm to raise price unilaterally. Competition law may be ineffective at preventing ‘monopoly pricing’ once a dominant position has been established, as the remaining ‘competitive fringe’ firms will tend to raise their prices also. In Kimberley-Clark/Scott the EU Commission concluded that retailers would have little incentive to resist any price increase because it would enable them to increase the prices of their own private label brands.
Economic analysis has also shown that unilateral effects problems may arise even though the merged entity may not satisfy the traditional requirements to be found dominant. In differentiated products markets, if the products of the merging firms are the closest substitutes for one another, the merger may enable the parties to impose a unilateral price increase.
Coordinated effects arise because a merger may facilitate the operation of a cartel. The decline in the number of competitors may make it easier to detect cheating and thereby ensure that the remaining firms adhere to a cartel arrangement. In tightly oligopolistic markets non-competitive outcomes can result without formal collusion. A merger may reduce the number of firms to the stage where each of those remaining are far more likely to recognise that they can gain by competing less vigorously. In Nestle/Perrier the Commission concluded that the incentive and possibility to increase prices jointly had already been recognised by the companies and that the proposed concentration would facilitate and reinforce the likelihood of such a strategy. The concept of joint dominance as a basis for blocking a merger was endorsed by the European Court of Justice in Kali and Salz. In Airtours, however, the Court of First Instances overturned a Commission decision which sought to extend the concept of joint dominance to a situation where the merger would have reduced the number of firms from four to three. The CFI found that the Commission had not shown that coordinated effects were likely to arise. (For further details on this case click here.)
Comprehensive merger appraisal requires that both unilateral and coordinated effects should be considered. The characteristics of the particular market involved will determine which of the two types of problem might arise. For example, in differentiated product markets coordinated effects are of much less importance than unilateral effects. In analysing the competitive effects of horizontal mergers a number of factors have to be considered.
Where the level of market concentration post merger falls below a certain level neither dominance nor oligopoly is likely to pose a problem and a more detailed analysis is usually not required. In cases involving higher levels of market concentration a more detailed examination is merited but this does not mean that such mergers are presumed to be anti-competitive.
The most commonly used measures of market concentration are the Herfindahl Hirschman Index (HHI) and the four firm concentration ratio (CR4). The HHI is the sum of the squares of the market shares of all firms in the market. The CR4 aggregates the market share of the four largest firms.
A merger may give rise to either unilateral or coordinated effects. Consequently in analysing possible anti-competitive effects, it is necessary to ascertain whether the market characteristics would favour either of these outcomes. For example, as the CFI pointed out in Airtours, coordinated effects generally require a high degree of price transparency, easy detection of cheating and credible punishment strategies to deter cheating.
Even where markets are relatively highly concentrated, mergers are unlikely to prove problematic in the absence of entry barriers. A firm with a large market share cannot exercise market power to the detriment of consumers if there is relatively free entry and exit. Views differ regarding what constitutes a barrier to entering a market.
Where a merger leads to a reduction in competition any adverse effects on prices may be more than offset by cost reductions due to efficiency gains. Alternatively if a merger creates efficiencies but prices rise due to reduced competition consumers may lose out while producers gain. The effect on total welfare will depend on the relative size of such gains and losses. Merger analysis involves weighing up any diminution in competition against any efficiency gains that might arise as a result of the merger.
A merger or take-over may provide a means of preventing company collapse and such mergers may be permitted even though they might reduce competition. However, there must be no possibility of a less anti-competitive outcome which means there must be no prospect of an alternative buyer who would be prepared to pay more than the liquidated value of the assets of the failing firm. In addition the assets must remain employed in the industry as otherwise output and welfare would fall.
© Compecon Limited 2003.
Summary of EU and Irish merger control regimes.
For details of published articles on this topic click here.
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