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Cite as: [2002] IECA 4 (Notice)

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THE COMPETITION AUTHORITY

 

NOTICE IN RESPECT OF GUIDELINES FOR MERGER

ANALYSIS

 

Decision No. N/ 02/ 004

Date: 16 December 2002.

 

Page ii

 

 

 

Table of Contents

 

1. INTRODUCTION.............................................................................................. 1

 

2. MEASUREMENT OF MARKET DEFINITION ........................................... 4

PRODUCT MARKET...................................................................................................... 5

GEOGRAPHIC MARKET ............................................................................................... 6

SUPPLY SUBSTITUTION ................................................................................................ 7

 

3. EFFECT OF A MERGER ON MARKET STRUCTURE............................... 9

 

4. ANALYSIS OF IMMEDIATE COMPETITIVE EFFECTS......................... 13

UNILATERAL EFFECTS............................................................................................... 13

COORDINATED EFFECTS........................................................................................... 18

MERGER WITH AN ENTRANT..................................................................................... 21

 

5. OTHER COMPETITIVE EFFECTS ............................................................. 22

ENTRY ...................................................................................................................... 22

EFFICIENCIES............................................................................................................ 23

FAILING FIRMS.......................................................................................................... 26

 

6. NON-HORIZONTAL MERGERS ................................................................. 28

 

7. VOLUNTARY NOTIFICATIONS.................................................................. 31

 

ANNEX A: CALCULATION OF THE HHI......................................................... 33

 

Page 1

 

 

 

 

1. INTRODUCTION

 

1.1 This Notice offers guidance on how the Authority decides whether or not a

merger substantially lessens competition under the Competition Act 2002 (“The

Act”).

 

1.2 This Notice is intended to be accessible and, insofar as possible, everyday

language is used. Where technical terms are used, explanations are given.

(a) The word merger is used to mean a merger or acquisition as defined in

the Act (Section 16(1)).

(b) A horizontal merger is one between firms that produce substitute or

competing products. Non-horizontal mergers include vertical mergers

(e.g., manufacturer-retailer) or conglomerate mergers (e.g., bring together

non-competing, possibly complementary, products).

(c) The term SLC refers to substantial lessening of competition.

(d) The term HHI refers to the Herfindahl-Hirschmann Index of

concentration. This is explained in Section 2 and Annex A explains in

detail how it is calculated.

 

1.3 The SLC test is interpreted in terms of consumer welfare. Consumer welfare

depends on a range of variables including price, output, quality, variety and

innovation. In most cases, the effect on consumer welfare is measured by

whether the price in the market will rise. The conclusion that an SLC will result

from a merger is thus based on whether the price to buyers is expected to rise (or

output to fall). Where price is not the appropriate variable, welfare is measured by

the changes in the relevant variables.

 

1.4 This Notice applies to all mergers (including media mergers) notified under

Section 18 of the Act, whether arising from compulsory notification under

subsection 18(1) or voluntary notification under subsection 18(3). By virtue of

subsection 18(13), it also applies to any cases transferred from the European

Commission.

 

Page 2

 

 

1.5 The Authority considers that Sections 4 and/or 5 of the Act can apply to mergers,

other than where application is specifically excluded in 4(8) or 5(3) of the Act. In

deciding whether to bring proceedings against mergers that are not notified but

that raise competition concerns under Sections 4 and/or 5, the Authority

endeavours to apply the principles of competition analysis as set out in this

Notice insofar as this is consistent with the wording of the appropriate Section or

Sections under which proceedings are to be brought. Outline guidance on

voluntary notification is given in Section 7 of this Notice.

 

1.6 Horizontal mergers are analysed by assessing the following elements:

(a) Relevant geographic and product markets are defined to establish the

framework in which the analysis of competition takes place. Section 2

outlines the approach to be followed.

(b) For each relevant market identified, the effect on market structure is

measured (Section 3). For horizontal mergers, this involves calculating the

post-merger HHI and the change in the HHI resulting from the merger.

HHI thresholds outlined in Section 3 are used to screen relevant markets

into categories of likelihood of a SLC in the market.

(c) For the relevant markets, an assessment is made of whether the merger

has an effect on the level of rivalry among the existing competitors in the

market. Both unilateral and coordinated effects are examined, as

explained in Section 4.

(d) As well as considering the effect of the merger on rivalry among existing

competitors, the extent to which entry by a new competitor would be

sufficiently likely and timely so as to act as a competitive constraint, is

examined. This is discussed in section 5.

(e) Also, the extent to which the merger leads directly to efficiency gains that

cannot be realised by any means other than the merger is examined. This

is discussed in section 5.

 

Page 3

 

(f) The analysis from the areas from (c) to (e) listed above are brought

together in order to make a final assessment as to whether the merger

would result in a SLC.

The Authority may conclude that the merger will not lead to a SLC without

further analysis. In some cases, it will be possible to conclude that a merger will

not lessen competition without examining some of these elements.

 

1.7 Some of these elements may also enter into the analysis of the competition effects

of non-horizontal mergers in the manner outlined in Section 6.

 

1.8 Comments from all interested parties other than the parties to the merger are

welcome. In cases where competition issues are raised, and in full investigations

generally, the views of buyers are actively sought.

 

1.9 This Notice is based on likely or common scenarios and cases. Circumstances

may arise that are not clearly envisaged in this Notice, and the Authority considers

these on a case-by-case basis. These guidelines are interpreted in a flexible

manner, and the Authority reserves the right to deviate from the Notice if it

forms the view that to do otherwise would result in a perverse outcome.

Statements relating to effects of the merger in this document should be

interpreted as referring to the views of the Authority based on the information

available to it.

 

1.10 All lists of factors in this Notice are considered to be non-exhaustive unless

otherwise stated.

 

1.11 This Notice may be altered from time to time. Any such alteration will be

published.

 

Page 4

 

 

 

2. MEASUREMENT OF MARKET DEFINITION

 

2.1 This section describes how relevant markets are defined. The framework provides

a basis for analysis in which existing competitors and consumers who are likely to

provide the most immediate and timely competitive constraint are identified, and

distinguished from new entrants who may exercise a weaker or less immediate

constraint.

 

2.2 The approach to market definition described below is not mechanical, but rather

a conceptual framework within which relevant information can be organised. It is

not always necessary to reach a firm conclusion on market definition if more

direct measures of market power are available. This may hold, for example,

where it is clear that the merger does not raise competition concerns on any

reasonable definition of the market. Alternatively, a market may not be defined if

the transaction clearly gives rise to adverse competitive effects.

 

2.3 Where there is genuine ambiguity, rather than simple disagreement, about market

definition, less weight may be placed on any resulting measures of concentration.

However, the existence of such ambiguity does not necessarily imply that the

merger would not lead to a substantial lessening of competition.

 

2.4 The relevant market is defined by the products, rather than the undertakings.

This starts with the products of the merging parties and goes on to examine

substitute products within a specific geographic area. The substitutability of

products is looked at primarily from the standpoint of consumers (demand-side

substitutability), but (potential) suppliers (supply-side substitutability) may also be

examined. Conceptually a relevant market(s) is defined by taking each product

produced or sold by the merging firms and considering the concept of a

hypothetical monopolist applying the “SSNIP” test, outlined below. The relevant

components in both the product and geographic market are considered

simultaneously in practice.

 

Page 5

 

 

ProductMarket

 

2.5 The product market is delineated as a product or group of products such that a

hypothetical monopolist of that product would impose a “small but significant and

non-transitory increase in price” (“SSNIP”) above the prevailing level, when the

conditions of sale of all other products remained constant. If, in response to

this, there would be a reduction in sales of the relevant product large enough such

that the hypothetical monopolist would find it unprofitable to impose such an

increase in price, then the product that is the next-best substitute for the merging

firm’s product in the relevant market is included. It is then considered what

would happen if a hypothetical monopolist of that group of products imposed a

small but significant and non-transitory increase in the price of the products,

including the price of a product of at least one of the merging firms, when the

conditions of sale of all other products remained constant. In such successive

iterations of the price increase test, the hypothetical monopolist is assumed to

pursue maximum profits in deciding whether to raise any or all prices under its

control. Substitute products are iteratively added to the group of products already

determined to be in the relevant market until it would be profitable for a

hypothetical monopolist of those products to impose a small but significant and

non-transitory increase in the price of the group of products, including the price

of a product of at least one of the merging firms. This group of products forms

the relevant product market for the merging firm’s product(s). Generally the

relevant product market is the smallest group of products that satisfies this

process.

 

2.6 In determining the likely effect of a “small but significant and non-transitory

increase in price”, a price increase of five to ten percent, above prevailing levels,

lasting for one year is typically used. This may be determined using actual data or

may be used as a conceptual guide. This depends upon the particular features and

circumstances of the industry and, at times, a larger or smaller price increase

and/or a different time period may be used. In such analysis, the prevailing prices

of both the products of the merging firms and possible substitutes for such

products are used, unless such prices are not a relevant counterfactual.

Alternately, likely future prices, absent the merger, may be used when they can be

 

Page 6

 

predicted with some confidence, such as, for example, upcoming changes in

regulations that affect prices directly, or indirectly via costs and demand.

 

2.7 In considering the likely reaction of buyers to a price increase, all available

evidence is taken into account, including:

(a) Evidence that buyers have previously shifted or would consider shifting

purchases between products in response to relative changes in price or

other relevant variables;

(b) Evidence that sellers are basing business decisions on the prospect of

buyer substitution between products in response to relative changes in

price or other relevant variables;

(c) The costs and timing of switching products; and

(d) The influence of downstream competition faced by buyers in output

markets;

 

GeographicMarket

 

2.8 The geographic market for each relevant product is delineated as a region where a

hypothetical monopolist of the product in the region could profitably impose a

small but significant and non-transitory increase in price, holding constant the

conditions of sale for all products produced elsewhere. In other words, the

SSNIP test is applied again, this time beginning with the location of each of the

merging firms, and asking what would happen if a hypothetical monopolist of the

relevant product at that location imposed a small but significant and non-transitory

increase in price, and conditions of sale at all other locations remained

constant. If the reduction in sales of the product at that location, due to

consumers switching to suppliers in other locations in response to the price

increase, would be large enough such that the hypothetical monopolist producing

or selling the relevant product at that location would find it unprofitable to

impose such an increase, the next closest location where consumers may purchase

the relevant products is added. The process ends when a group of locations is

identified such that a hypothetical monopolist over that group of locations could

profitably impose a small but significant and non-transitory increase in price,

 

Page 7

 

including the price charged at one or more locations of the merging firms. The

“smallest market” principle applies as in product market definition.

 

2.9 The terms “small but significant” and “non-transitory”, are interpreted as they are

for product market definition. The prices from which an increase is postulated,

and the substitution decisions of consumers, are also determined in the same way

as in product market definition. In considering the probable reaction of buyers to

such a price increase, the evidence used is typically similar to the information used

to define the product market - for example, evidence that buyers have shifted

purchases between different geographic locations in response to relative changes

in price. The value of the product and the mobility of customers can also be

important factors. The potential for undertakings in neighbouring locations to

supply consumers currently supplied by the hypothetical monopolist is also

assessed. Again, the evidence used typically mirrors the information used in

product market definition, for example, evidence that buyers have shifted or have

considered shifting purchases between different locations in response to relative

changes in price or other competitive variables. The level of transport costs

relative to the price of the product is also an important issue.

 

SupplySubstitution

 

2.10 Supply substitutes are products not currently being supplied in the relevant

product market, but that could be supplied at short notice in response to a price

increase by the hypothetical monopolist. The period for determining whether

producers would switch to supplying the relevant products may vary from market

to market, but a six month period will be considered as the base time.

 

2.11 Supply substitutes are only included in the relevant market if there is identifiable

output that can be brought into market share calculations. This will usually occur

when the units of output are sufficiently homogeneous that they can usefully be

included. Where there are supply substitutes that exercise an immediate

competitive constraint but whose units of output cannot meaningfully be added,

the producers of these are considered under effects on rivalry, as described in

Section 4. Factors that exercise a longer-term competitive constraint come under

effects of entry in Section 5.

 

Page 8

 

 

2.12 If supply substitutes are included, evidence is taken into account, including:

(a) Whether substitution by potential suppliers is technically possible, the

costs of switching production and the time it would take to switch

production between products;

(b) Whether potential suppliers are free to switch production (for example,

whether they have spare capacity);

(c) Consumers’ views of potential suppliers, e.g., would their products be

considered substitutes; and

(d) Evidence of influential brands.

 

2.13 The relevant market includes all products that are demand substitutes and also

those that are supply substitutes, provided the units of output are sufficiently

homogeneous that they can meaningfully be included. The producers/suppliers

of all these products define the set of “existing competitors” for the purpose of

measuring concentration, as described in the next section.

 

Page 9

 

 

 

3. EFFECT OF A MERGER ON MARKET STRUCTURE

 

3.1 A central element in the process of assessing the effect of a merger on

competition involves identifying its effect on the market structure. One

dimension to market structure is the concentration of the market. A concentrated

market is one with a small number of firms with a large market share, and an

unconcentrated market is one with a large number of firms with a small market

share. Other aspects of market structure include the level of vertical integration,

cost and technology factors, and product differentiation.

 

3.2 The Herfindahl-Hirschmann Index (HHI) is used to describe market concentration.

In rare cases, usually when figures for the HHI are not available, the individual

market shares, the 4-firm concentration ratio (the sum of the market shares of the

largest four firms) or the number of firms in the market, may be used to describe

concentration.

 

3.3 The HHI is calculated by adding the sum of the squares of the market share of

each current competitor. The determination of the set of current competitors

from the market definition analysis is described in paragraph 2.13 above. This

measure gives proportionately greater weight to the market shares of the larger

firms. Market share figures, or estimates of them, for all market participants are

used to calculate the HHI. The HHI can be truncated if data are not available for

very small market shares.

 

3.4 Sales that are specific to the relevant market are included in the calculation of the

HHI. For example, sales data are not limited to Ireland or the Irish market if the

geographic market is wider than the Republic of Ireland. Conversely, if the

geographic market is relatively local, then only those local sales are included.

Adjustments will be made on the inclusion of international sales if quotas, tariffs

or other trade barriers make this appropriate.

 

3.5 The HHI may be calculated on three different bases:

(a) Volume as measured by the number of units supplied;

(b) Capacity as measured by the maximum possible volume; or

 

Page 10

 

(c) Value as measured by the revenue.

For many cases, these produce similar results and the simplest is chosen. For

example, where the units are non-homogeneous or pricing is non-uniform, value

market shares are easier to use. Where different measures may result, either

because of differing capacities, or non-uniform prices, several measures may be

identified.

 

3.6 The most recent data available are used to calculate market shares. Historic data

may also be used, especially if there is volatility.

 

3.7 The level of the post-merger HHI gives a snapshot of market concentration. The

 

change in the HHI (known as the “delta”) arising from the merger describes the

change in market concentration resulting directly from the merger.

 

3.8 Together, the level and the change of the HHI are used to form a threshold of

market concentration. The calculation of the thresholds is set out below. For

clarity, zones called A, B, and C, are used. All HHI figures are post-merger.

 

3.9 The Authority uses these thresholds as a screen for deciding whether to intensify

its analysis of effects on competition. It is emphasised that these thresholds are

intended mainly to give initial guidance to the merging parties and practitioners,

and thus provide a rule of thumb indicator of the likelihood of the deepening of

an examination of competitive effects, and not a hard and fast rule to be applied

in all cases.

 

Page 11

 

Zone

Definition

HHI

Delta

A

Less than 1000

Between 1000 and 1800

Above 1800

Any

Less than 100

Less than 50

B

Between 1000 and 1800

Above 1800

Greater than 100

Between 50 and 100

C

Above 1800

Greater than 100

 

 

3.10 Mergers in zone A are less likely to have adverse competitive effects. Mergers

falling in zone B may raise significant competitive concerns. Zone C mergers

occur in already highly concentrated markets and more usually be those that raise

competitive concerns.

 

3.11 While the zones do not constitute a “safe harbour”, deviations from the screening

rule are generally based on market factors. For example, factors that affect

whether mergers in zones A and B might raise competitive concerns include:

(a) A regulatory barrier to entry;

(b) Very high customer switching costs;

(c) A merger involving a new or potential entrant with minuscule market

share;

(d) A merger involving a maverick firm; and

(e) A history of collusion, or other competition concerns, in the market.

Factors that affect whether mergers in zones B and C may not raise competitive

concerns include:

(f) Clear indications, from the market definition stage, of low barriers to

entry; and

 

Page 12

 

(g) The existence of an entrant already committed to production but not yet

selling in the market.

 

3.12 HHI calculations may be particularly useful for merging parties in:

(a) Self-assessment by firms generally; and

(b) In helping firms decide whether to notify voluntarily (see Section 7).

 

Page 13

 

 

 

4. ANALYSIS OF IMMEDIATE COMPETITIVE EFFECTS

 

4.1 This section outlines the analysis of the effects of a merger on rivalry among the

existing competitors. It includes the effects of the merger on the behaviour of

the merging parties and on the reactions of other market participants such as

existing competitors and buyers. The focus is on identifying the immediate

constraints on the exercise of market power. In other words, what are the factors

that would immediately make it unprofitable for the merged parties to raise price

or limit output?

 

4.2 The section is divided into parts dealing with situations where the merger results

in an increase in unilateral market power for the merging parties and situations in

which the merger results in a higher likelihood of collusion among existing

competitors (known as coordinated effects). In both cases, the increase in market

power must be sustainable over time. The section concludes with a discussion of

mergers where one merging firm is about to enter the other merging firm’s

market.

 

4.3 It is possible that a merger could result in increased market power on the buying

side of the market, known as monopsony. This possibility is examined where

relevant. One caveat should be noted. Buyer power cannot be tested by a

reduction in the price paid, because this could be part of a pro-competitive

process in which the firms are passing a price reduction in the final downstream

market. Instead, buyer power must be identified either by an overall reduction in

output in the market, driven by a reduction in inputs purchased, or by evidence

that the downstream selling price is simultaneously increased.

 

UnilateralEffects

 

4.4 Unilateral effects refers to the general case of a market characterised by a non-cooperative

oligopoly, i.e., a market with a relatively small number of participants,

each of which maximises its own profits, but is taking account of the actions of

other participants in the market. Unilateral effects arise where, as a result of the

merger, the merged firm finds it profitable to raise price, irrespective of the

reactions of its competitors or customers. The term unilateral effects also

 

Page 14

 

captures the situation where, as a result of the merger, the non-cooperative

equilibrium changes, and some or all of the firms modify their behaviour.

 

4.5 First the market structure is examined and described, possibly including:

(a) Market concentration, including the market share of the merged firm

relative to the market shares of its competitors;

(b) The stability of market concentration over time;

(c) The level of vertical integration;

(d) Cost and technology factors;

(e) Product differentiation; and

(f) The intensity of research and development.

If the key strategic variable is other than price (e.g., location, quantity, innovation,

quality, variety, etc.), this is noted.

 

4.6 Second, the effect of the merger on the behaviour of the merging party is

examined. One test that may be used here is the displacement concept. This

refers to the incidence of any sales lost as a result of a price increase by the

merging firm. If a sufficient proportion of the sales lost would be gained by the

other firm in the merger, then these sales would not be lost post-merger. This

ability to internalise sales that would be lost absent the merger would make it

profitable for the merged firm to increase the price. This would happen if the

two products were close substitutes. This test for substitutability within the

market involves a lower threshold than the test for substitutability at the market

definition level, with a 3% price increase being typically used.

 

4.7 Third, the reactions of existing competitors are examined. Of central importance

here is whether capacity or other constraints limit the ability of competitors to

win sales if the merged firm increases its price. If competitors were not able to

increase output to satisfy customers who switch, market power would result.

Also relevant is the ability of other firms to reposition existing products or brands

or otherwise develop substitutes of sufficient homogeneity, substitutability,

 

Page 15

 

quality and status to overcome consumer stasis. This includes any firms identified

during the market definition process as potentially able to supply the market at

short notice (supply substitution), but that were not ultimately included in the

market as their output could not meaningfully be brought into market share

calculations. Any firm making the product for its own internal use (so-called

“captive sales”) may also be examined where the firm is capable of selling its

product directly in the market.

 

4.8 The analysis of the reaction of other firms may also, as noted above in 4.4,

include a change in the non-cooperative equilibrium that formerly operated in the

market. If the merger creates a change in circumstances such that some or all

firms may have the power to unilaterally raise price, this will be considered in the

analysis. Such a change could be related to one of the merging firms being a

“maverick” firm that previously priced aggressively, but could be a result of other

factors also.

 

4.9 Fourth, the reactions of customers are analysed so as to see whether there are

consumer switching costs or other impediments to consumers switching from the

merged firm to competing suppliers in the event of a price increase. Evidence

used to determine substitutability may include: the market shares of the merging

parties and competitors; cross-price elasticities of demand as between the

products; product characteristics; level of product differentiation; customer

switching patterns in the past; customer loyalty in response to previous price

changes. Reactions of customers and reactions of competing firms are

intertwined in the sense that if consumers can switch easily, then firms may have

greater incentives to respond. In some cases where this interaction is important,

it may be appropriate to integrate paragraphs 4.7 and 4.9.

 

4.10 Countervailing buyer power is also examined at this stage. The fact that buyers

are large and have a degree of bargaining power is not sufficient to conclude that

market power is effectively constrained. Effective buyer power requires that

buyers have alternative sources of supply, or are capable of credibly threatening to

set up alternative supply arrangements.

 

Page 16

 

 

4.11 Factors that may enter the analysis in these four steps include:

(a) The history of rivalry in the market, particularly patterns of consumer

switching and competitor responses;

(b) Whether there is stock of second-hand product that would exert a

competitive constraint, and who controls that stock;

(c) Whether the product is durable, so that the customer’s ability to delay sales

may limit market power;

(d) Whether the ability of customers to copy the product limits market power;

and

(e) Whether network effects are a constraint on market power.

 

4.12 This approach outlined in paragraphs 4.5 to 4.11 eschews a structural approach,

and focuses directly on whether the merger increases short run market power.

The approach may be applied to a number of different market scenarios.

 

4.13 One scenario is where the merger results in monopoly, near-monopoly or single-firm dominance by the merged firm. The larger the market share of the merged

firm relative to its competitors, the more likely it is that market power of the kind

described as monopoly would be created by such a merger.

 

4.14 There are several other possible circumstances where unilateral effects could exist

even if the merged firm would not be the largest in the market or could not easily

be described as monopoly or dominance (as in the previous paragraph). In such

cases, the market share of the merging firms may not be particularly relevant.

These cases include:

(a) Where the merging firms produce two close substitutes in a market for a

differentiated product. Because differentiated products are not perfect

substitutes for each other, it is possible that some products are closer

substitutes than others within a given relevant market. The merger of two

very close substitutes could increase unilateral market power, even if the

market shares are not particularly high. Paragraph 4.6 above is particularly

relevant to this example.

 

Page 17

 

(b) Where competitors are capacity constrained. Again, if the largest firms in

the market are capacity constrained, it is possible that smaller firms with

extra capacity could have market power. Important factors to consider are

whether the non-merging market participants are operating at close to full

capacity, whether capacity can be increased relatively speedily and

economically, and historical evidence on capacity limits.

(c) Where output or capacity is the strategic variable in which firms compete.

If one firm reduces its output, it pushes up the market price and benefits

from the price increase in proportion to its market share. A merger that

increases market share would increase the incentive to cut output, as the

price increase would be obtained over a larger range. In applying this

theory, known as the Cournot theory, it would be necessary to show that

output, and not price, was indeed the strategic variable. This would

require evidence of a commitment to output levels, such as advance

purchase. Evidence on the stability of market shares over time would also

be relevant.

(d) Where competition depends on the actual number of firms in the market.

One example is an auction market where the presence of three or more

firms may increase the intensity of bidding. Another example might be

where reliability is important to the customer so that each buyer requires a

main supplier and a secondary supplier. In this case, if the market only

had two suppliers, there would be no choice of secondary supplier.

(e) Where one of the merging firms is a “maverick”. A maverick is a firm that

has a history of cutting price or otherwise deviating from conventional

market behaviour in a pro-competitive manner. Even a merger involving

low market shares that eliminated such a presence from a market could

result in unilateral market power.

Several of these factors may also be relevant in considering coordinated effects.

This illustrates that many mergers are capable of being analysed under either

coordinated or unilateral effects.

 

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4.15 Conversely, there may be mergers in highly concentrated markets that do not

lessen competition because rivalry is intense and exogenously determined (i.e., is

not determined by the participants).

 

4.16 Some markets are particularly subject to dynamic and rapid change. In such

markets, high concentration in general, or high market shares of one or two firms,

may be a relatively temporary phenomenon, and how competition is likely to

develop in the future in such markets is closely examined rather than a specific

focus on concentration. The same may be true of bidding markets characterised

by auctions for contracts. Past measures of concentration may not be a useful

guide to future sales, and again the focus is directly on how competition is likely

to evolve.

 

CoordinatedEffects

 

4.17 A merger may diminish competition if it facilitates competitors engaging in

coordinated interaction to raise price. Such interaction refers to actions that are

profitable for each of them only as a result of accommodating the reactions of the

others. This behaviour includes tacit or explicit collusion. In essence, each firm

would forego profitable sales in the expectation that others would do likewise.

Such behaviour is known as coordinated effects.

 

4.18 In order for such interaction to be successful, the group of firms must reach

terms of coordination that are profitable to all concerned, and must have some

ability to detect and punish deviations from the coordinated behaviour. The

ability to detect and punish reduces the incentive for any firm to deviate in the

pursuit of short-term profits.

 

4.19 The first step is to identify whether the market is characterised by factors that are

conducive to such coordination. Of particular importance are the subset of those

factors that could possibly be changed as a result of the merger, and these include:

(a) The degree of transparency about market conditions, particularly the

availability to competitors of information concerning market prices and

other variables;

 

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