BSc Economics and related programmes Economics of Competition and Regulation EC 3015 Week 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 justificationLegal frameworkInquiry elements MC agg MC 1 MC 2 pcpc MR pMpM 3Mergers

Legal framework EU: ECMR UK: Enterprise Act 2002 Economic justificationLegal frameworkInquiry elements 4Mergers

ECMR “European Community Merger Regulation (ECMR) Large mergers with a European dimension... European Community Merger Regulation (ECMR) - Council Regulation No. 139/ 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 Economic justificationLegal frameworkInquiry elements 5Mergers

Enterprise 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) Economic justificationLegal frameworkInquiry elements 6Mergers

Enterprise Act. “M ain Reforms in the Enterprise Act Office of Fair Trading Establishes 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 Economic justificationLegal frameworkInquiry elements 7Mergers

Enterprise Act “Competition Measures The 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.” Economic justificationLegal frameworkInquiry elements Source: BERR web site 8Mergers

Merger inquiry elements Process: OFT, CC, CAT Analysis: market definition, finding on SLC Decision: remedy – if applicable Economic justificationLegal frameworkInquiry elements 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 Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 10Mergers

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 Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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 Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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 Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements Process must be complete in 6 months 13Mergers

Hearings: room layout Mergers14

Which jurisdiction(s) does not require notification of intended mergers? Mergers15 1.EU 2.UK 3.Applies to both 4.Applies to neither

Have you visited the new web site at cubbin.org.uk? Mergers16 1.Yes –it was OK 2.Yes but did not work properly 3.No 4.No because I tried and it did not work 5.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)? Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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? Economic justificationLegal frameworkInquiry elements 18Mergers Process Analysis -market definition -SLC Remedy (?)

Web page reminder Go to for materialshttp://cubbin.org.uk Mergers19

GO TO WORKSHOP EXERCISE 4 Mergers20

Q S A =MC A S B =MC B 21Mergers Q1 a) Sketch the functions

The competitive quantity is (to nearest 200…) or below or above

The competitive price is…. 1.Below Above16

The monopoly quantity is.. Mergers or below or above

The monopoly price is 1.15 or below or above

The scenario is… 1.Realistic as an example of the effects of merger 2.Somewhat simplified 3.Highly simplified 4.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 Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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? Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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? Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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 Process Analysis -market definition -SLC Remedy (?) Economic justificationLegal frameworkInquiry elements 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 caseStericycle Process Analysis -market definition -SLC Remedy Economic justificationLegal frameworkInquiry elements 31Mergers

Remedies: Vue/A3 Vue 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! Process Analysis -market definition -SLC Remedy Economic justificationLegal frameworkInquiry elements 32Mergers