BSc Economics and related programmes

1. BSc Economics and related programmes Economics of Competition and Regulation EC 3015 Week 4: Mergers

2. Overview • Economic justification • Legal framework and institutions • The elements of a merger inquiry Mergers

3. Economic justification • Prime competition abuse is collusion (cartels) • But same end can be achieved by merger • also dynamic effects • => need to close loophole MC1 Legal framework Inquiry elements Economic justification MC2 MCagg pM pc MR Mergers

4. Legal framework • EU: ECMR • UK: Enterprise Act 2002 Legal framework Inquiry elements Economic justification Mergers

5. 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 Legal framework Inquiry elements Economic justification Mergers

6. Enterprise Act 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) Legal framework Inquiry elements Economic justification Mergers

7. Enterprise Act . “Main 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 Legal framework Inquiry elements Economic justification Mergers

8. 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.” Legal framework Inquiry elements Economic justification Source: BERR web site Mergers

9. Merger inquiry elements • Process: OFT, CC, CAT • Analysis: market definition, finding on SLC • Decision: remedy – if applicable Legal framework Inquiry elements Economic justification Mergers

10. Process Analysis -market definition -SLC Remedy (?) 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 Legal framework Inquiry elements Economic justification Mergers

11. Process Analysis -market definition -SLC Remedy (?) 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 Legal framework Inquiry elements Economic justification Mergers

12. Process Analysis -market definition -SLC Remedy (?) 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 Legal framework Inquiry elements Economic justification Mergers

13. Process Analysis -market definition -SLC Remedy (?) 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 Legal framework Inquiry elements Economic justification Process must be complete in 6 months Mergers

14. Hearings: room layout Mergers

15. Which jurisdiction(s) does not require notification of intended mergers? • EU • UK • Applies to both • Applies to neither Mergers

16. Have you visited the new web site at cubbin.org.uk? • Yes –it was OK • Yes but did not work properly • No • No because I tried and it did not work • No because I did not know about it Mergers

17. Process Analysis -market definition -SLC Remedy (?) CC analysis • What is the relevant market or markets? • Does the proposed merger give rise to a significant lessening of competition (SLC)? Legal framework Inquiry elements Economic justification Mergers

18. Process Analysis -market definition -SLC Remedy (?) 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? Legal framework Inquiry elements Economic justification Mergers

19. Web page reminder • Go to http://cubbin.org.uk for materials Mergers

20. Go to workshop exercise 4 Mergers

21. Q1 a) Sketch the functions 80 SA=MCA 40 SB =MCB 20 10 5 800 1200 1600 Q Mergers

22. The competitive quantity is (to nearest 200…) • 500 or below • 700 • 900 • 1100 • 1300 • 1500 • 1600 or above

23. The competitive price is…. • Below 10 • 11 • 12 • 13 • 14 • 15 • 16 • Above16

24. The monopoly quantity is.. • 400 or below • 500 • 700 • 900 • 1100 • 1300 • 1500 or above Mergers

25. The monopoly price is 15 or below 25 35 45 55 65 75 or above

26. The scenario is… Realistic as an example of the effects of merger Somewhat simplified Highly simplified Totally unrealistic

27. Process Analysis -market definition -SLC Remedy (?) 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 Legal framework Inquiry elements Economic justification Mergers

28. Process Analysis -market definition -SLC Remedy (?) 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? Legal framework Inquiry elements Economic justification Mergers

29. Process Analysis -market definition -SLC Remedy (?) 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? Legal framework Inquiry elements Economic justification Mergers

30. Process Analysis -market definition -SLC Remedy (?) 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 Legal framework Inquiry elements Economic justification Mergers

31. Process Analysis -market definition -SLC Remedy 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 Legal framework Inquiry elements Economic justification Mergers

32. Process Analysis -market definition -SLC Remedy 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! Legal framework Inquiry elements Economic justification Mergers