bsc economics and related programmes

BSc Economics and related programmes

Economics of Competition and Regulation EC 3015Week 4: Mergers

Overview

• Economic justification• Legal framework and institutions• The elements of a merger inquiry

2Mergers

Economic justification• Prime competition abuse is collusion (cartels)• But same end can be achieved by merger

• also dynamic effects• => need to close loophole

Economic justification Legal framework Inquiry elements

MCagg

MC1

MC2

pc

MR

pM

3Mergers

Legal framework

• EU: ECMR• UK: Enterprise Act 2002


4Mergers

ECMR“European Community Merger Regulation (ECMR)Large mergers with a European dimension ... European Community Merger Regulation

(ECMR) - Council Regulation No. 139/2004.... mergers involving enterprises with an aggregate world-wide turnover of more than

Euro 5bn (around £3.5bn) and where the aggregate Community-wide turnover of each of at least two of the enterprises concerned is more than Euro 250m (around £200m) will be investigated by the European Commission taking into account the views of Member States.

... mergers where more than two-thirds of the Community-wide turnover of each enterprise concerned is in the same Member State, are not caught by the ECMR.

There is also a supplementary set of thresholds designed to catch mergers which would otherwise fall to multiple jurisdiction ....

The Office of Fair Trading is responsible for UK input to the European Commission on cases being considered under the EC Merger Regulation.” Source: BERR web site


5Mergers

Enterprise ActEnterprise Act The Enterprise ...strengthens the UK’s competition framework, transforms our

approach to bankruptcy and corporate rescue, and empowers consumers.The Act builds on the progress made by the Competition Act 1998, recent insolvency

reforms and measures already implemented in the 1999 White Paper ‘Modern Markets: Confident Consumers’ (URN 99/1184).

Key Facts:The Enterprise Act contains measures that reform competition law, strengthen

consumer protection and modernises the insolvency regime.The Act included provisions formally creating the Office of Fair Trading, the

Competition Appeal Tribunal (CAT) and its supporting body the Competition Service.

The current newspaper merger regime will remain in place for the time being as it is being updated by the Communications Bill. (Source: BERR web site)


6Mergers

Enterprise Act

.

“Main Reforms in the Enterprise ActOffice of Fair TradingEstablishes the OFT as an independent statutory

body with a Board, and gives it a greater role in ensuring that markets work well to the benefit of all.” Source: BERR web site


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Enterprise Act“Competition MeasuresThe introduction of the ‘substantial lessening of competition’ test to

replace previous wider public interest test....The Competition Appeals Tribunal will hear cases by third parties

alleging that companies have infringed the competition laws.Criminal sanctions with a maximum penalty of five years in prison to

deter those individuals who dishonestly operate hardcore cartels...New power for the OFT to ask the High Court for directors to be

disqualified for up to five years for competition offences.Consumer bodies able to make complaints (known as

‘supercomplaints’) as a representative body to the Office of Fair Trading about markets that are not working well for consumers.

There are greater opportunities for victims of anti-competitive behaviour to gain redress. Consumer bodies will be able to make claims on behalf of individuals who have suffered.”


Source: BERR web site8Mergers

Merger inquiry elements

• Process: OFT, CC, CAT• Analysis: market definition, finding on SLC• Decision: remedy – if applicable


9Mergers

Basic process (UK)

• OFT becomes aware of merger– no notification required

• Decides if there may be a problem:– if so, seeks undertakings or makes reference to CC

• CC investigates:– decides if SLC from merger– if so orders remedy (e.g. prohibition, sale of assets)

• Parties may appeal to CAT

ProcessAnalysis -market definition -SLCRemedy (?)


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Basic process (EU)

• EC DG Comp becomes aware of merger– notification is required

• If there may be a problem, investigates:– mainly paper based, limited use of hearings

• Issues findings– orders remedy if appropriate

• Parties may appeal to Court of First Instance (CFI) thence to ECJ



11Mergers

Basic process (EU) - appeals

Three cases decided by the Court of First Instance, (CFI), Airtours, Schneider Electric and Tetra Laval, plus ECJ Tetra Laval appeal:

“the contested decision does not establish to the requisite legal standard that the modified merger would give rise to significant anti-competitive effects.”

=> change in DG Comp processes to give clearer reasoning and to reduce confirmation bias



12Mergers

CC process

• Appoint members and staff to group• Initial data collection, including questionnaires and

site visits• Hearings and analysis of evidence• Provisional findings• Consultation• Findings and provisional remedies• Remedies consultation• Final report and implementation



Process must be complete in 6

months

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Hearings: room layout

Mergers 14

Which jurisdiction(s) does not require notification of intended mergers?

Mergers 15

EU UK

Applies t

o both

Applies t

o neither

10%0%

13%

77%

1. EU2. UK3. Applies to both4. Applies to neither

Have you visited the new web site at cubbin.org.uk?

Mergers 16

Yes –it w

as OK

Yes but d

id not work

pr... N

o

No beca

use I t

ried an

d it...

No beca

use I d

id not kn..

77%

0%7%3%

13%

1. Yes –it was OK2. Yes but did not work

properly3. No4. No because I tried

and it did not work5. No because I did not

know about it

CC analysis

• What is the relevant market or markets?

• Does the proposed merger give rise to a significant lessening of competition (SLC)?



17Mergers

Market definition• See last week’s lecture for methods:

– Price level comparisons– Price correlations– Demand elasticities– Critical loss analysis– Diversion ratio analysis– Price-concentration studies– Transport costs– Journey time analysis (“isochrones”)

• lessening of competition?


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Web page reminder

• Go to http://cubbin.org.uk for materials

Mergers 19

http://cubbin.org.uk/

GO TO WORKSHOP EXERCISE 4

Mergers 20

80

5

1600

10

20

40

Q

1200800

SA=MCA

SB =MCB

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Q1 a) Sketch the functions

The competitive quantity is (to nearest 200…)

500

or b

elow

700

900

1100

1300

1500

160

0 or a

bove

4%

8%

32%

4%4%

36%

12%

1. 500 or below2. 7003. 9004. 11005. 13006. 15007. 1600 or above

The competitive price is….

Bel

ow 10 11 12 13 14 15 16

Above

16

13%

8%

13%

0%

4%

54%

0%

8%

1. Below 102. 113. 124. 135. 146. 157. 168. Above16

The monopoly quantity is..

Mergers 24 400 or b

elow 500700

9001100

1300

1500 or above

0%

9%

22%

9%

0%

22%

39%1. 400 or below2. 5003. 7004. 9005. 11006. 13007. 1500 or above

The monopoly price is

15

or b

elow 25 35 45 55 65

75

or a

bove

16%

28%

0%

8%

4%

12%

32%

1. 15 or below2. 253. 354. 455. 556. 657. 75 or above

The scenario is…

Rea

listic

as

an e

xam

...

Som

ewhat

sim

plifie

d

Hig

hly s

implif

ied

Tota

lly u

nreal

istic

28%

8%

16%

48%1. Realistic as an example of the effects of merger

2. Somewhat simplified

3. Highly simplified4. Totally unrealistic

Analysis

• How does competition work in this market?• What is the degree of market concentration?• What share of the market is held by merger

participants?• Are there entry barriers?• What will the merger do to change competition? • What is the counterfactual?• =>overall assessment of SLC



27Mergers

Analysis: how this market works

• Is the product homogeneous or differentiated?• Large or small consumers? Expert or uniformed?

Concentrated or dispersed?• What is the frequency of purchase?• Size of order?• How much technical change?• Price change history?• Other special features?



28Mergers

Analysis: concentration &entry barriers

• Market shares of leading players?• Market share of merged firm? Will it be a market

leader or still quite small? How will the merger change competition?

• Recent experience of entry and exit?• Recent profitability? Price changes?• Technical and strategic barriers to entry?• Segments within the market?• Other special features?



29Mergers

Analysis: finding an SLC

– See CC merger guidelines (on week 3 web page)– If there is no SLC – merger may go ahead with no

constraint– If SLC is found => need to consider possible

remedy



30Mergers

Remedies– Behavioural

• undertakings

– Structural• prevention or divestment

• With completed mergers there may have “hold separate” undertakings. Monitoring trustees & “hold separate” managers may be appointed. See CC Stericycle case

ProcessAnalysis -market definition -SLCRemedy


31Mergers

http://www.competition-commission.org.uk/inquiries/ref2006/stericycle/index.htm

Remedies: Vue/A3Vue eventually sold one of its Basingstoke

cinemas to Odeon.

Although a small case, issues fairly clear and manageable, with examples of quantitative analysis – and report is not too long!

ProcessAnalysis -market definition -SLCRemedy


32Mergers

bsc economics and related programmes

Documents

competition act

competition service

competition laws

competition offences

uks competition framework

reform competition law

ec merger regulation

merger inquiry