Merger Policy

1. Which are the main difficulties normally encountered when defining the relevant market for competition analysis?

First of all, it has to be said that market definition is the first step to determine wheter the merging firm has or will have after the merger market power. By doing this the authority will try to assess the effects of the merger on competition.

There are many aspects that have to be taken into account when defining the relevant market for a firm:

  • Geographic market
  • Real product
  • Product positioning
  • Real market: consumers and competitors (observation of consumers’ behavior and of the relationships between suppliers and firm)
  • Substitutability of products: supply-side and demand-side (kind of reactions to changes in the market)

It is important to remember that the analysis of these factors can be considered only a frame of reference, since markets are dynamic and their conditions and the level of competition may change over time.

2. How would you describe supply-side substitutability and when does it matter?

As supply-side substitutability we define the possibility to chose indifferently one or another among the actors in the network of retailers, distributors, transporters,storage facilities and suppliers that participate in the sale, delivery and production of a particular product.
The more the products sold by suppliers are substitutable, the lower is their bargaining power, that is the advantage that results when

  • suppliers are concentrated
  • too few goods are chased by too many buyers
  • a supplier's goods are unique or highly differentiated with few or no substitutes
  • suppliers are forward integrated
  • high costs are involved in switching from one supplier to another

i.e. sthe advantage that allow suppliers to demand premium prices, being in a strong market power position.
As the commodities are usually sold by small companies, these can be tempted to find an agreement, in order to rise their bargaining power.

(Are we sure about what written here above? Isn't it referred to DEMAND-side substitability?)

3. How can concentration ratios be useful in merger analysis?

Key aggregation indicators used in assessing market structure and concentration include market shares, concentration ratios and the Herfindahl-Hirschman Index (HHI).
Concentration refers to the number, distribution and size of the firms competing in a market.
The ratios measuring the concentration usually take no account of differences in the relative size of the firms that make up the leading group.
The concentration ratios are useful in merger analysis as they are considered as indicators of market power. In competition policy there is a presumption that a big market share indicates a dominant position and consequently a possible abuse of it. In the case of mergers the competition authorities look at the ratios in order to establish how the new firm resulting from the merger is going to affect the concentration of the market and in this way the competition in it. The measures may be used as an initial indicator or screen of potential competition concerns, but will not be determinative in itself. An investigation beyond these quantitative indicators, including a detailed analysis of other market features as well as unilateral and/or coordinated effects, is always required before conclusions can be drawn regarding the competitive effects of a merger.
Notwithstanding they are mere indicators, and may be rather inaccurate in some markets, ratios can increase the predictability of merger control and allow competition authorities to allocate investigation resources to cases which are more likely to result in consumer harm.
For instance in the EU, mergers are unlikely to raise competition concerns if the combined market share is below 25%. By contrast, large market shares - 50% or more - may be in themselves evidence of the existence of a dominant market position. Also the US Guidelines set out that where market shares exceed 35%, competition concerns may arise in the context of unilateral effects.

4. How would you describe non-coordinated anticompetitive effects?

There are two distinct way for a horizontal merger to affect competition, the first is by producing unilateral effects or non-coordinated effects. These outcomes are revealed as a result of the merger when competition between the products of the merging firms is eliminated, allowing the merged entity to unilaterally exercise market power, for instance by profitably raising the price of one or both merging parties’ products, thus harming consumers. In theory, all horizontal mergers involve firms active in the same relevant market and therefore remove some competitive constraint.

5. How would you describe coordinated anticompetitive effects?

As coordinated effects we define the outcomes that arise when, under certain market conditions (see answer 7 for details), the merger increases the possibility for the parties to successfully coordinate behaviours in an anti-competitive way. The main issue is not the market power of the merging parties resulting from the merger, but, instead, whether the merger will create or strengthen certain market conditions which allow firms in the market facilitating the promotion of coordinated practices and actions that affect the consumers’ welfare. (economic notion of surplus) For further information on co-ordinated effects click here

6. How would you assess unilateral anticompetitive effects in bidding markets?

It is usefull to focus on the specif features of the bidding market:

  • the size of the tender
  • the frequency of the auction
  • the presence of capacity constraints
  • the characteristic of the supplier

For example, in the case of large and and infrequent actions, if the supplier are able to place competitive bids (due to the absence of capacity constraints), then the merger would not produce significant negative effects on competition (also in presence of firms with high market share).

7. What market conditions are most likely to give rise to coordinated effects?

  • High concentration ratios of the market
  • Low number of firms and relative high market power
  • Conditions to collude suggested by the game theory, such as transparency, information sharing, repetition of the relationship, possibility of retaliation
  • Characteristics of the product
  • Substitutability of the product
  • Low degree of openness of the market (barriers to entry, fixed costs, market power of competitors)
  • Low dynamicity of the market (speed of the reaction)
  • Low level of innovation in the market

8. When do new entry or expansion by competitors pose a real competitive constraint on merging parties?

A real competitive constraint on merging parties may arise when some conditions are met:

  • low barriers to enter (absolute or structural barriers)
  • presence of potential new comers
  • products are perfect substitutes
  • large number of competitors active in the market
  • absence of economies of scale and/or scope

In order to asses the possible effects of the merger in the market, the Authority should be focused on the presence of potential entrants.
In fact, even if no firms will enter in the market, the merging firm will behave correctly. In order to do it, it is important to look at the expected profitability of entry by new comers.

9. In your opinion, which efficiencies should be considered in merger review and why?

Thanks to a merger two firms can share the efforts for production, thus fixed costs can be reduced and economies of scale and of scope can be exploited. It is a controversial issue whether this can be considered an efficiency by competition authorities, as there are two main philosophy about what practices should be considered anticompetitive and what should be analyzed deeply in their effects.
From the point of view of the effieciency in allocation, the optimal situation is the one in which the social welfare is optimized; the dilemma is whether we should consider as social welfare the global welfare or the consumers’ welfare (efficiency as increase of the consumers’ surplus or as increase of the total surplus, no matter the allocation of the profits).
Competition policies usually prefers a perspective of protection of consumers’ welfare.
In this sense a merger can bring efficiency in terms of consumer surplus when the reduction of costs is transferred on a cut in prices.
A further efficiency issue linked to mergers is the possibility to “merge” knowledge, fostering innovation.
The merging parties are considered not to foster efficiency and consumer welfare unless they can prove that there are real positive effects as a result of the merger.
The tricky issue is to understand and state how firms can effectively prove the existence of such results.

10. How would you describe the so called “failing firm defence”?

In general, a "failing firm" is a firm that is going to lose all its asset and disappear from the market. In this case, the acquisition of a failing firm's asset by another firm maight be one of the possibility to avoid the exit from the market of the Failing firm.
However, in order to be sure that merger would not be anti-competitive some aspects must be taken into account:

  • a deteriorated financial situation of the firm
  • no serious prospect of re-organization the business
  • no less-anticompetitive alternative to the merger

It is important to say that it is part of competitive process that firm might fail into the market, so a merger could be preferable in order to prevent the exit of that firm only if this does not raise competition concerns and lead to consumer benefit.

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