Download - BSc Economics and related programmes
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BSc Economics and related programmes
Economics of Competition and Regulation EC 3015Week 4: Mergers
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Overview
• Economic justification• Legal framework and institutions• The elements of a merger inquiry
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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
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Legal framework
• EU: ECMR• UK: Enterprise Act 2002
Economic justification Legal framework Inquiry elements
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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
Economic justification Legal framework Inquiry elements
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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)
Economic justification Legal framework Inquiry elements
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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
Economic justification Legal framework Inquiry elements
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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.”
Economic justification Legal framework Inquiry elements
Source: BERR web site8Mergers
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Merger inquiry elements
• Process: OFT, CC, CAT• Analysis: market definition, finding on SLC• Decision: remedy – if applicable
Economic justification Legal framework Inquiry elements
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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 (?)
Economic justification Legal framework Inquiry elements
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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
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
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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
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
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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
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
Process must be complete in 6
months
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Hearings: room layout
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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
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Have you visited the new web site at cubbin.org.uk?
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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
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CC analysis
• What is the relevant market or markets?
• Does the proposed merger give rise to a significant lessening of competition (SLC)?
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
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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 justification Legal framework Inquiry elements
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ProcessAnalysis -market definition -SLCRemedy (?)
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GO TO WORKSHOP EXERCISE 4
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80
5
1600
10
20
40
Q
1200800
SA=MCA
SB =MCB
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Q1 a) Sketch the functions
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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
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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
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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
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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
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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
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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
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
27Mergers
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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?
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
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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?
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
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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
ProcessAnalysis -market definition -SLCRemedy (?)
Economic justification Legal framework Inquiry elements
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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
Economic justification Legal framework Inquiry elements
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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
Economic justification Legal framework Inquiry elements
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