Basic Concepts of Competition Law

1
Basic Concepts of Competition Law

• Workshop I
• October 28th, 2009
• Dr. C. Gastle and Murdoch Martyn

2
Market Power

• The ability of a firm to increase its profits by
  reducing output and charging more than a
  competitive price for its product.
• The ability to raise prices without losing so
  many sales that the price increase is
  unprofitable.
• A positive correlation between market share and
  market power

3
Defining the Market

• Where market power must be proved, court
  determines the relevant market, relevant
  geographic market and the market share.
• A firm with a large share of a properly defined
  relevant market likely has market power.

4
Defining the Market

• A relevant market is the smallest grouping of
  sales for which the elasticity of demand and
  supply are sufficiently low that a firm with 100
  of that grouping could profitably reduce output
  and increase price substantially above marginal
  cost.
• Must have both a low elasticity of demand and
  supply
• Must define the product which depends on
  substitutability in the consumers eyes.

5
Competition Law Three Problem Areas

• Abuse of Dominant Position
• Problem areas are where a market participant has
  used market power to extract monopoly rents or to
  extend its monopoly into other market segments
• Nothing illegal about acquisition of market
  power, it is only the abuse of this position of
  dominance once acquired that is illegal
• Horizontal and Vertical Restraints
• Exploitation of market power by imposing
  restraints upstream or downstream
• Cartels collusion leading to an abuse of market
  power as a group

6
Competition Law Three Problem Areas

• Mergers
• Create a dominant firm possessing market power
• But also increased risk of collusion or
  oligopolistic pricing if concentration of
  industrial sector grows
• Concern arises at levels below the creation of a
  dominant firm

7
Abuse of Dominant Position
8
Thai Sec 25 Abuse of Dominant Position

• A business operator having market domination
  shall not
• (1). Unreasonably fix or maintain prices
• (2). Unreasonably fix conditions of sale,
  restrict services, production, purchase or
  distribution of goods/services or securing credit
  for business operators
• (3). Suspend, reduce, restrict services,
  production, purchase, distribution or import
  without justifiable reasons, destroy or cause
  damage to reduce quality below lower demand
• (4). Intervening in the operation of business of
  other persons without justifiable reasons.

9
Thai Sec 25, Abuse/Dominant Position

• Market definition
• Business operator with market share in the
  previous year over 50 and at least 1,000 million
  baht turnover or
• Top three business operators, with combined
  market share in the previous year over 75 and at
  least 1,000 million baht turnover.
• Exception for a business operator with market
  share less than 10 of turnover less than 1,000
  million baht in the previous year.
• Section 25 criticized on basis that no guidelines
  for price discrimination, predatory pricing
• No definition as to what constitutes price
  discrimination or predatory pricing and what
  standards should be applied

10
Cdn Law Sect. 78(1)

• (1), for purposes of section 79, anticompetitive
  act without restricting the generality of the
  term, includes
• (a). Squeezing by a vertically integrated
  supplier
• (b). Acquisition by a supplier of a customer
• (d). Using fighting brands introduced selectively
  
• (e) preemption of scarce facilities or
  resources
• (f). Buying up of products to prevent price
  erosion
• (g). Adoption of product specifications
  incompatible with others
• (h). Requiring or inducing a supplier to sell
  only to certain customers
• (i). Selling articles at a price lower than
  acquisition cost for the purpose of disciplining
  or eliminating a competitor

11
Cdn Law Abuse of Dominant Position

• Requirements
• One or more persons substantially or completely
  control a class or species of business (i.e., has
  market power)
• In Canada, market shares of less than 35 (or 60
  in a joint dominance case) will generally
  indicate an absence of market power
• That person has engaged in a practice of
  anticompetitive acts enumerated in the section
  (non-exhaustive list)
• an anticompetitive act is one whose purpose is
  an intended negative effect on a competitor that
  is predatory, exclusionary or disciplinary.
• Can be established through direct evidence of
  subjective intent, or indirectly by reference to
  reasonably foreseeable consequences of the acts
  themselves

12
Abuse of Dominant Position Canadian law

• The practice has had, is having or is likely to
  have the effect of preventing or lessening
  competition substantially in a market.
• Notice the threshold preventing or lessening
  competition
• It is not enough to be found to have engaged in a
  listed infraction, but must lessen competition.

13
Abuse of Dominant Position

• An example is predatory pricing
• Related to antidumping measures
• Predatory pricing involves a dominant company
  pricing its products so low that competitors are
  driven out and then recouping losses
• Issue What is the pricing threshold?
• In late 70s, Areeda and Turner proposed average
  variable cost as a surrogate
• Canada average avoidable costs.
• Thailand ??

14
Abuse of Dominant Position

• In Brooke Group U.S.S. Ct. held complainant must
  show that
• (1). the prices complained of are below an
  appropriate measure of its rivals cost and,
• (2), the competitor had a reasonable prospect or
  dangerous probability, of recouping its
  investment.
• Recoupment makes predatory pricing difficult if
  not impossible to establish
• a strong bias in American antitrust law to
  protect price competition

15
Predatory Conduct Example 1 (Cda)

• A competitor of A Co, a wholesale distributor of
  a major brand of consumer products, has alleged
  that A Co. is selling at below cost prices in
  Canada
• A Co. is located in the U.S. and has no office in
  Canada
• There are several firms similar to A Co in
  Canada, one of which has more than a 35 percent
  share of the market.
• A Co has a 17 percent market share, down from 20
  three years earlier.
• Typically, each distributor supplies a wide range
  of products to retailers. There are no exclusive
  territories or other types of restrictions in
  their distribution networks.

16
Predatory Conduct Example 1

• Each distributor maintains warehouses and
  delivery facilities in several Canadian cities,
  and employs commissioned sales agents operating
  in the filed.
• A Co. sells to an independent Cdn distributor and
  uses its sales force
• A Co. forces distributor to adopt low pricing
• The customers in the market are retail outlets
  ranging in size from small independent stores to
  large national chains.
• The various competing brands of the products are
  somewhat differentiated in terms of both styling
  and operating features, but the major determining
  factor on the demand side is price.

17
Predatory Conduct Example 1

• A Co is aware of the complaint and provides
  confirmation that it lowered its prices
  considerably.
• A Co confirms that the reduced prices are above
  its average avoidable costs.
• The short-run effect has been to secure
  additional market share at the expense of several
  of its competitors, some of whom held their
  prices firm.
• The complainant indicates that it would be
  unprofitable to match A Cos price reductions.

18
Predatory Conduct Example 1

• DISCUSSION
• Canada should have jurisdiction because of
  effects doctrine, conduct designed to impact
  Canada
• Not resale price maintenance because a suggested
  retail price
• Also, forcing down the price doesnt constitue
  RPM
• a per se offence under Section 61
• Must establish that A Co attempted to influence
  upward or discourage reduction of price
• Must be analyzed then as part of predatory
  pricing scheme

19
Predatory Conduct Example 1

• DISCUSSION Conditions of entry are relatively
  easy. There are not institutional barriers
  present and sunk costs are not a major factor in
  the start-up cost considerations because
  warehouse facilities can be converted to other
  uses.
• There is no dominant firm in the market, and
  little brand loyalty due to price sensitivity.
• A Co. does not have market power, on the basis of
  favourable entry conditions and A Co.s share of
  17 percent.
• The complaint would not be pursued. A Cos
  pricing looks like an attempt to recapture lost
  market share in a dynamic market.

20
Predatory Conduct Example 2 (Cda)

• A Co is a manufacturer of a product sold directly
  to large wholesalers serving the home
  construction industry. Five years ago there were
  several competitors but now there are only three
  firms. Companies B and C allege that A Co. has
  been using a low-pricing strategy to drive one or
  both from the market.
• A Co with 40 sales share, is the largest
  manufacturer. Companies B and C have 30 percent
  of product sales.
• All of the firms have excess capacity, and are
  under pressure from several close substitute
  products which are 10 percent cheaper. All three
  companies are unprofitable at the moment.

21
Predatory Conduct Example 2

• The conditions of entry are relatively easy. Raw
  materials are in abundant supply at competitive
  prices. Sunk costs do not represent a significant
  barrier to entry since the machinery can be put
  to other uses.
• Prices have been declining in the industry for a
  year, in the face of competition from the
  substitutes.
• A Co has lowered price to a level just above its
  average avoidable cost, but less than its average
  total costs.
• A competitor has provided a document from A Co
  suggesting that it intends to drive its
  competitors from the industry.

22
Predatory Conduct Example 2

• DISCUSSION
• The relevant market includes the close substitute
  products, which have a constraining price
  increases above competitive levels. The reason
  for the price reduction appears to be to protect
  its business from being eroded by the close
  suppliers.
• A Co. likely does not have market power and its
  costs are above its average avoidable costs.

23
Predatory Pricing Example 3 (Cda)

• A Co is the largest of several vertically-integrat
  ed firms supplying an intermediate product.
  Company has a market share in excess of 50
  percent. Largest rival has a share of about 12
  percent, with remaining firms accounting for less
  than 10 percent each.
• There has been steady market growth each year and
  demand is projected to increase considerably over
  the next ten years. With no close substitutes in
  the market, most firms are considering investing
  in expanding capacity.
• Vertically-integrated firms control the sources
  of raw materials in the production processes.
  There is little third party trade in these raw
  materials.

24
Predatory Pricing Example 3

• The equipment used in the production process is
  highly specialized and accounts for a large
  proportion of start-up costs. Sunk costs are a
  significant barrier to entry.
• Economies of scale play an important role on the
  product side. Most participants enjoy economies
  of scale.
• Customer side ahs numerous buyers both large and
  small, all engaged in the manufacturer of
  finished goods. The goods sold by A Co. represent
  input costs to the buyers and are extremely
  price-conscious. Price cutting has been matched
  quickly by other suppliers.

25
Predatory Conduct Example 3

• Prices and market shares have tended to be fairly
  stable in recent times.
• A Co. has disrupted this stability by reducing
  prices by more than 25 percent. Two of the
  smallest competitors have claimed that the
  price-cutting is to drive them from the market.
  They allege that pricing will rise to levels
  above the previous competitive levels. Each
  competitor was thinking of expanding capacity but
  now has put those plans on hold.
• According to complainants, current market pricing
  is very close to average avoidable cost of
  production.

26
Predatory Conduct Example 3

• DISCUSSION Industry has difficult conditions of
  entry. A Cos market share is far above those of
  its competitors. Its large market share plus
  barriers to entry suggests that A Co. has market
  power. The complainants have cancelled plans to
  expand and price-cutting is contrary to what one
  would expect in the face of increasing market
  demand with no external reason for lowering the
  price.
• Fact that market prices are close to but not
  below average avoidable costs, is not sufficient
  to establish predation.
• Competition authority would be concerned enough
  to examine whether prices were below average
  avoidable costs.

27
Predatory Pricing Example 3

• DISCUSSION some of the market effects of
  predatory pricing behavior are already evident,
  in that two competitors have stopped their
  expansion plans. If prices remain at their
  current level, a competitor could be eliminated.
• Even if a competitor is not forced to exit the
  market, the competition authority would want to
  know if the purpose of A Co.s price cutting was
  to demonstrate its market power.
• A Co may have been intended to force other
  competitors to accept its role as price leader in
  the industry.
• With little chance of entry into the market, A Co
  will likely be able to exercise market power.
• It might be able to raise prices back above the
  competitive level to achieve supra-competitive
  profits.

28
Predatory Pricing Example 3

• DISCUSSION
• The Competition authority would have reasonable
  grounds to initiate an inquiry under the abuse of
  dominance provision. Would review all aspects of
  the pricing behaviour. It would likely require
  the use of formal investigative powers whether A
  Co.s costs are below its avoidable costs as well
  as whether the continuation fo the practice would
  likely prevent or lessen competition
  substantially.

29
Abuse of Dominant Position-Refusal to deal

• Canadian Competition Act, Section 61(6)
• No person shall, by threat, promise or any like
  means, attempt to induce a supplier, whether
  within or outside Canada, as a condition of his
  doing business with the supplier, to refuse to
  supply a product to a particular person or class
  of persons because of the low pricing policy of
  that person or class of person.
• Appear to be contrary to Thai TCA, 25(3) A
  business operator having market domination shall
  not
• (3). Suspend, reduce, restrict services,
  production, purchase, distribution or import
  without justifiable reasons, destroy or cause
  damage to reduce quality below lower demand

30
Abuse of Dominant Position-Refusal to deal

• Five requirements according to Canadian law
• A person must be substantially affected in its
  entire business and not just one business line,
  and cant get supplies elsewhere
• Affected person must be unable to obtain adequate
  supplies of the product because of insufficient
  competition among supplies of the product in the
  market
• Affected person must be willing and able to meet
  the usual trade terms of the supplier
• Product must be in ample supply
• Refusal must be having or likely to have an
  adverse effect on competition in the market. (NB)

31
Abuse of Dominant Position-Refusal to deal

• Sears Canada v. Parfums Chrstian Dior Canada Inc.
  
• Sears operated 196 company stores in Canada
• In 2007, Dior and Givenchy advised Sears that
  they would not longer be doing business with
  Sears
• Sears speculated that the refusal to supply was
  prompted by the discounts it offered at the end
  of 2006 on all cosmetic products
• Application dismissed
• Although Sears would be directly affected by the
  refusal to supply, the effect on Sears entire
  business would not be substantial
• When defining business, looked at entire
  department store and not just the perfume
  business.

32
Abuse of Dominant Position-Refusal to deal

• Sears Canada v. Parfums Chrstian Dior
• Sears speculated that the refusal to supply was
  prompted by the discounts it offered at the end
  of 2006 on all cosmetic products.
• Although Sears would be directly affected by the
  refusal to supply, the effect on Sears entire
  business would not be substantial
• In determining business, held that it represented
  the entire department store business and not just
  the perfume line.

33
Horizontal Restraints Cartels
34
Horizontal Restraints Cartels

• Purpose to reduce competition by fixing prices
  and allocating markets, in a manner permitting
  them to earn near-monopoly profits
• Certain cartels tolerated including, crisis
  cartels to prevent an industry from collapsing,
  as well as export cartels
• Rationale for export cartels to enable small
  firms to combine to sell their products abroad
• Cartels set prices, conditions of sale, fix
  market shares, limit production or sales,
  establish monitoring and enforcement mechanisms
• Median mark up to consumers has been a 25 percent
  price premium, with mark ups varying from zero to
  2500 percent

35
Horizontal Restraints Cartels

• Cartels are usually considered on a per se basis
  
• Pursuant to U.S. law, four elements must be
  established on a criminal charge
• Conspiracy or explicit agreement exists
• Parties knowingly and intentionally participated
  
• Conduct must involved unreasonable restraints and
  naked collusion always qualifies
• Conduct must spill across state or international
  borders

36
Agreements Among Competitors Ex. 1 (U.S.)

• Net-Business and Net-Company are two start-up
  companies. They independently developed, and have
  begun selling in competition with one another,
  software for the networks that link users within
  a particular business to each other and, in some
  cases, to entities outside the business.
• Both Net-Business and Net-Company were formed by
  computer specialists with no prior business
  expertise, and they are having trouble
  implementing marketing strategies, distributing
  their inventory, and managing their sales forces.

37
Agreements Among Competitors Example 1

• The two companies decide to form a partnership
  joint venture, NET-FIRM, whose sole function will
  be to market and distribute the network software
  products of Net-Business and Net-Company.
• NET-FIRM will be the exclusive marketer of
  network software produced by Net-Business and
  Net-Company.
• Net-Business and Net-Company will each have 50
  control of NET-FIRM, but each will derive profits
  from NET-FIRM in proportion to the revenues from
  sales of that partners products.
• The documents setting up NETFIRM specify that
  Net-Business and Net-Company will agree on the
  prices for the products that NET-FIRM will sell.

38
Agreements Among Competitors Example 1

• DISCUSSION Net-Business and Net-Company will
  agree on the prices at which NET-FIRM will sell
  their individually-produced software.
• The agreement is one not to compete on price,"
  and it is of a type that always or almost always
  tends to raise price or reduce output.
• The agreement to jointly set price may be
  challenged as per se illegal, unless it is
  reasonably related to, and reasonably necessary
  to achieve procompetitive benefits from, an
  efficiency-enhancing integration of economic
  activity.

39
Agreements among Competitors Example 2

• Firm A and Firm B are two of only three producers
  of automobile carburetors.
• Minor engine variations from year to year, even
  within given models of a particular automobile
  manufacturer, require re-design of each years
  carburetor and re-tooling for carburetor
  production.
• Firms A and B meet and agree that henceforth Firm
  A will design and produce carburetors only for
  automobile models of even-numbered years and Firm
  B will design and produce carburetors only for
  automobile models of odd-numbered years.
• Some design and re-tooling costs would be saved,
  but automobile manufacturers would face only two
  suppliers each year, rather than three.

40
Agreements among Competitors Example 2

• DISCUSSION
• Two of the three suppliers, together would have
  market power
• The agreement allocates sales by automobile model
  year and constitutes an agreement not to compete
  on . . . output."
• The participants do not combine production
  rather, the collaboration consists solely of an
  agreement not to produce certain carburetors.
• The mere coordination of decisions on output is
  not integration, and cost-savings without
  integration, such as the costs saved by
  refraining from design and production for any
  given model year, are not a basis for avoiding
  per se condemnation.

41
Agreements among Competitors Example 2

• The agreement is of a type so likely to harm
  competition and to have no significant benefits
  that particularized inquiry into its competitive
  effect is deemed by the antitrust laws not to be
  worth the time and expense that would be
  required.
• Consequently, the evaluating Agency likely would
  conclude that the agreement is illegal.

42
Agreements among Competitors Example 3

• Each of the three major producers of flashlight
  batteries has a patent on a process for
  manufacturing a revolutionary new flashlight
  battery -- the Century Battery -- that would last
  100 years without requiring recharging or
  replacement.
• There is little chance that another firm could
  produce such a battery without infringing one of
  the patents. Based on consumer surveys, each firm
  believes that aggregate profits will be less if
  all three sold the Century Battery than if all
  three sold only conventional batteries, but that
  any one firm could maximize profits by being the
  first to introduce a Century Battery.

43
Agreements among Competitors Example 3

• All three are capable of introducing the Century
  Battery within two years, although it is
  uncertain who would be first to market.
• One component in all conventional batteries is a
  copper widget.
• An essential element in each producers Century
  Battery would be a zinc, rather than a copper
  widget.
• Instead of introducing the Century Battery, the
  three producers agree that their batteries will
  use only copper widgets.
• Adherence to the agreement precludes any of the
  producers from introducing a Century Battery.

44
Agreements among Competitors Example 3

• DISCUSSION The agreement to use only copper
  widgets is merely an agreement not to produce any
  zinc-based batteries, in particular, the Century
  Battery.
• It is "an agreement not to compete on . . .
  output and is of a type that always or almost
  always tends to raise price or reduce output.
• The participants do not collaborate to perform
  any business functions, and there are no
  procompetitive benefits from an
  efficiency-enhancing integration of economic
  activity.
• The evaluating Agency likely would challenge the
  agreement to use only copper widgets as per se
  illegal.

45
Vertical Restraints
46
Thai TCC S.27 Horizontal Vertical Restraints

• Any business operator shall not enter into an
  agreement with another business operator to do
  any act amounting to monopoly, reduction of
  competition or restriction of competition in
  any of the following manners
• 1). fixing selling prices of goods or services
  as single price or as agreed or restrict the sale
  volume of goods or services
• 2). fixing buying prices of goods or services as
  single price or as agreed or restrict the
  purchase volume of goods or services
• 3). entering into an agreement to have market
  domination or control
• 4). fixing an agreement or condition in a
  collusive manner in order to enable one party to
  win a bid or tender
• 5). fixing geographical areas for distribution
  or fix customers to exclusion of other
  businesses in competition

47
Thai TCC S.27 Horizontal Vertical Restraints

• 6). fixing geographical areas or fixing persons
  businesses may purchase from
• 7). fixing the quantities which each business
  operator may manufacture, purchase, distribute,
  to restricting the quantity below market demand
• 8). reducing quality below that of previous
  levels
• 9). appointing a sole distributor and
• 10). fixing conditions of sale to ensure the
  uniform or agreed practice.
• Permission can be obtained from TCC for (5)
  through (10) if commercially necessary.
• These are broad categories but there is no basket
  clause.
• Article 29 is a catchall.

48
Vertical Restraints Cdn Law Sect 77

• Can include
• Resale price maintenance
• Quantity forcing
• Bundling
• Requirement tying
• Full-line forcing
• Exclusive territories
• Exclusive dealing
• Exclusive supply restriction
• Must result in competition being lessened
  substantially or likely to be lessened

49
Exclusive Dealing Tying

• As a condition of supply that product, requires
  the customer to either
• Deal only or primarily in products selected by
  the supplier
• Take another product that would otherwise not
  take
• May be illegal where (i) it is a practice (ii)
  by a major supplier of product or is widespread
  in the market and (iii), such practice likely to
  impede entry or expansion (iv), will likely to
  lessen competition substantially.

50
Exclusive Dealing Nutrasweet (Cda)

• Product market artificial sweetener aspartame
• Geographical market Canada
• Market Share 95 percent
• Anticompetitive acts
• Contract clauses imposed by NutraSweet requiring
  or inducing exclusivity
• Clauses obligating customers to purchase all
  their aspartame from NutraSweet
• Discounts and price allowances granted to
  customers for use of the NutraSweet logo and
  name

51
Exclusive Dealing Nutrasweet (Cda)

• Substantially lessening competition
• High market share enjoyed by NutraSweet
• Contracts covered 90 percent of the market
• Contract exclusivity prevented the entry of
  competitors
• Barriers to entry, including high customer
  switching costs, sunk costs, a two-year entry
  period and the economies of scale
• Order
• Prohibit NutraSweet from enforcing the
  contractual terms requiring or inducing
  exclusivity.
• Other issues
• Allegations of selling below cost are rejected.

52
Exclusive Dealing Neilsen (Canada)

• Facts
• Product Market scanner-based market tracking
  services
• Geographic market Canada
• Market Share 100 percent
• Anticompetitive Acts
• The use of exclusive contracts to deny
  competitiors access to scanner data
• Long term contracts (3 years or longer)
• MFN clause such that no company pays less for
  data
• Strict conditions for termination

53
Exclusive Dealing Neilsen (Canada)

• Renewals structured to occur at different times
  so as to limit the available sources of data,
  thus creating a barrier to entry
• Payment for exclusive access to data, or
  financial penalties if a retailer supplied data
  to a competitor
• Substantially lessening Competition
• 100 percent control by Nielsen, combined with the
  use of practices designed to bar entry, allowed
  it to maintain and increase its market power
• Nielsens practices raised barriers where they
  did nto formerly exist
• Nature of the industry did not permit entry over
  time, since the data needed for comparison was
  required from the outset.
• Intent of the contracts and results of their
  operation were anti-competitive.

54
Exclusive Dealing Neilsen (Canada)

• Order
• Amendments imposed to the Neilsen Contracts
• Provisions preventing or limiting the supply of
  data to any party declared to be null and void
• Clauses promoting exclusivity of scanner data
  rendered unenforceable
• Inducements to limit the supply of data banned
• Use of the MFN clause prohibited for 24 months
  after the issuance of the order
• Same term imposed on all future contracts signed
  within 18 months of the date of the order
• Long-term contracts for Nielsens services
  reduced
• Neilsen ordered to provide 15 months of data,
  calculated from the date requested by a new
  entrant competitor, Information Resources Inc.

55
Vertical Restraints Tying

• Manufacturer requires distributor and retailers
  to accept a second product to purchases the
  first
• First a monopoly product and tying extends
  monopoly into second market
• Viewed on a tying basis
• However Consumer demand used to determine market
  separability
• Seen as a way of allowing rule of reason
  through the back door
• Examples
• 1). Jefferson Parish, held hospital surgery and
  anesthesiological
• services represent one product
• 2). Example Kodak, repair services and
  products represented
• two distinct products

56
MERGERS
57
Thai Trade Competition Act, Section 26, Mergers

• A business operator shall not merge businesses,
  which may result in monopoly or unfair
  competition as prescribed by the Commission
  unless the Commission's permission is obtained.
• Commission shall specify merger thresholds
  relating to minimum shares, volume, capital,
  shares or assets
• Thailands Merger threshold None has been
  implemented.

58
Section 26, Mergers

• A business operator shall not merge businesses,
  which may result in monopoly or unfair
  competition as prescribed by the Commission
  unless the Commission's permission is obtained.
• Commission shall specify merger thresholds
  relating to minimum shares, volume, capital,
  shares or assets
• Thailands Merger threshold None has been
  implemented.

59
Canadian Competition Act

• 92(1), Where the Tribunal finds that a merger
  or proposed merger prevents or lessens, or is
  likely to prevent or lessen, competition
  substantially
• (a). In a trade, industry or profession
• The Tribunal may, subject to sections 94-6,
• (e). Dissolve a completed merger
• (f). Block the merger
• 96 No order if the merger results in gains in
  efficiency that will be greater than, and will
  offset, the effects of any prevention or
  lessening of competition .

60
Canadian Guidelines

• A substantial prevention or lessening of
  competition results only from mergers that allow
  the merged entity unilaterally or through
  coordination to exercise market power
• Primary concerns price and output but also
  considers quality, choice, service, innovation,
  etc.
• A merger can lessen or prevent competition when
  the merged entity, unilaterally or in
  coordination with other firms, is able to sustain
  higher prices than would exist in the absence of
  the merger by diminishing existing competition.

61
Mergers which may prevent competition

• Acquisition of an increasingly vigorous
  competitor or a potential entrant
• by the market leader, preempting the acquisition
  by another competitor
• of an existing business that would have likely
  entered market but for merger
• preventing expansion into new markets
• Prevents pro-competitive effects of new capacity
  
• Prevents or limits introduction of new products.

62
Substantially

• Must substantially lessen competition to be
  caught
• Substantial if the price of the relevant
  products would likely be materially greater in a
  substantial part of the relevant market than it
  would be in the absence of the merger and
• The material price increase is not likely to be
  eliminated by existing or new competitors within
  two years.

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Defining market Concentration

• Must define relevant market
• Then define participants in the market
• Includes current sellers of products and those
  that would begin selling if price rose by 5
• A participant if no significant sunk investments
  and could enter within one year

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Thresholds

• Mergers likely to have anti-competitive effects
• Not challenge a merger on basis of a concern of
  unilateral exercise of market power where
  post-merger share less than 35 percent
• Not challenge merger on basis of concern related
  to coordinated exercise of market power where
• The post-merger CR4 market share (four largest
  firms) is less than 65 percent or
• Post-merger market share of merged entity is less
  than 10 percent
• If exceed thresholds, not necessarily
  anti-competitive but further analysis required.

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Anti-competitive effects

• On further analysis, determine whether remaining
  competitors can constrain market power, by
  examining forms of rivalry such as discounting,
  distribution, marketing methods, product
  offerings, service offerings
• Was the merged entity a vigorous competitor?
• History not following price increases?
• Unique service/ warranty benefits?
• Recently expanded capacity or plans to do so?
• Recently made gains in market share?
• Recently acquired IP rights so enhanced ability
  to compete in market place?

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Consider chance of coordination

• Coordination only likely to be sustainable when
  firms
• Individually recognize mutually beneficial terms
  of coordination
• Monitor one another's conduct and detect
  deviations
• Respond to any deviations through credible
  deterrent mechanisms

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Barriers to Entry

• Key component of analysis is whether entry likely
  to occur, among others
• Regulatory barriers
• Sunk costs
• Economies of scale
• If entry possible, will constrain market power

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Efficiency Exception

• Section 96 provides efficiency exception where
  efficiencies offsets lessening of competition
• Efficiencies must be greater than and offset
  anticompetitive effects
• Gains only considered if only result through the
  merger
• Types of efficiency
• Allocative put resources to most valuable use
• Technical maximize production at lowest
  resource price
• Dynamic innovative, introduction of new
  products.

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Failing Firm Exception

• A firm is likely to be failing if
• It is insolvent or is likely to become insolvent
  
• It has initiated or is likely to initiate
  voluntary bankruptcy proceedings
• Has been or is likely to be petitioned into
  bankruptcy or receivership
• Determination of likely to fail involves review
  of
• Audited financial statements showing persistent
  operating losses
• Cash flows
• Loans being called
• Trade credit eliminated or reduced
• Erosion of market position

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Merger Example 1

• Two oil companies agree to integrate all of their
  refining and refined product marketing
  operations. Under terms of the agreement the
  collaboration will expire after twelve years
  prior to the expiration date, it may be
  terminated by either participant on six months
  prior notice.
• The two oil companies maintain separate curde oil
  production operations.

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Mergers Example 1

• DISCUSSION Formation of the collaboration
  involves an efficiency-enhancing integration of
  operations in the refining and refined products
  markets, and the integration eliminates all
  competition between the participants in those
  markets. The evaluating Agency likely would
  conclude that expiration after 12 years does not
  constitute termination within a sufficiently
  limited period.
• The participants entitlement to terminate the
  collaboration at any time after giving prior
  notice is not termination by the collaborations
  own specific and express terms. Based on these
  facts, likely analyzed as a merger and not a
  competitor collaboration.