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You are here: BAILII >> Databases >> Irish Competition Authority Decisions >> Irish Competition Authority Decisions (Notice Division) >> Notice in Respect of Guidelines for Merger [2002] IECA 4 (Notice) (16 December 2002) URL: http://www.bailii.org/ie/cases/IECA/Notice/2002/4.html 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.
Page 18
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;
Page 19