2009 ICN MERGER WORKSHOP Plenary Session “Entry and Other Competitive Effects”

Topics Will the merged firm be constrained from reducing output and raising its prices (and/or reducing quality) by: expansion of existing competitors actual or potential entry of new competitors the countervailing power of the firm’s customers, and will efficiencies arising from the merger reduce the firm’s incentive to raise prices

Expansion/Entry Expansion and entry are considered together under “entry” for brevity The question is whether entry or potential entry would act to constrain price rises by the merged firm in the factual To answer the question apply the LET test – is entry Likely, sufficient in Extent, and will it be Timely?

Is Entry Likely? – Factors to Consider Would entry be profitable, if the merged firm raised its prices? Has there been a history of entry (or exit) in the relevant markets? Are there any barriers to entry into the relevant markets – costs or disadvantages that an entrant faces that an established incumbent does not face and which might allow incumbents to raise prices above competitive levels without inducing entry

Is Entry Likely (continued) Barriers to entry may include some or all of: regulatory structural Strategic The question, is not whether something is defined as a barrier to entry. The real question is would an potential entrant be able to scale those barriers and enter in a timely manner

Would Entry be Sufficient in Extent and Timely merged firm will be constrained only if entry (or the threat of entry) is of a scale that causes the firm to return prices to competitive levels small scale or local (c/f national) entry may be insufficient in general entry should occur usually within two years of the exercise of market power, although this would depend on the circumstances of the market concerned

Customers’ Countervailing Power The merged firm may be constrained if buyers can influence the price, quality or terms of supply of its goods/service because: the buyers are large in comparison to the merged firm the buyers can easily and quickly switch to alternative suppliers or buyers can self supply the classic example of the use of buyer power is supermarket chains v their suppliers but this example has its limits - think Coca Cola – would any rational supermarket in the world refuse to stock that product

Efficiencies For example, better utilisation of existing assets may reduce merged firms incentive to raise prices. Lower marginal costs can lower a firm’s profit maximising price. often hard to quantify must be merger specific reductions in variable, rather than fixed, costs more likely to be quickly passed onto consumers has not been decisive in merger decisions (at least in New Zealand)