REVISING THE MEGs

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REVISING THE MEGs

• CBA Mergers Committee

Presentation to the Competition Bureau
June 14, 2004
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Part 1 Definition of Merger (1)

• 1.4 de facto control consider whether
  introducing the concept of de facto control in
  the MEGs creates uncertainty
• There are two thresholds for merger review
  acquisition of (legal) control and acquisition of
  a significant interest (section 91)
• Is there a need to adopt a de facto control
  threshold? And what does it mean?
• What is the legislative basis?

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Part 1 Definition of Merger (2)

• 1.10 convertible securities, etc. - should
  state that a merger can occur either at the time
  of purchase or exercise of convertible securities
• Normal rule is that a significant interest is
  acquired at the time of conversion/exercise, not
  purchase
• 1.12 Interlocking directorates
• What is the point?

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Part 1 Definition of Merger (3)

• 1.14 and 1.15 Other considerations
• Without a more detailed discussion, the list of
  circumstances in 1.14 may be overbroad -
  suggests that many business arrangements that
  should not be reviewable as mergers may be
  reviewable
• Further guidance is needed on the circumstances
  in which agreements that do not involve
  acquisitions will constitute mergers
• Guidance is also required on when an agreement
  will be potentially reviewable as a merger rather
  than under s.45

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Part 2 Anti-Competitive Threshold

• 2.2 (and 2.4)
• 2.2 refers only to price. However, 2.4
  refers also to non-price issues.
• Non-price issues are important not only in
  markets where there is a significant level of
  non-price competition (see 2.4), but in most
  markets.
• More guidance is needed on assessing non-price
  effects.

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Part 2 Anti-Competitive Threshold (2)

• 2.5, 2.6, 2.7
• In a number of places in the New MEGs (i.e.,
  2.5, 2.6, 2.7), there is a reference
  to coordinated behaviour" and "accommodating
  responses". However, footnote 13 states that this
  does not mean anything different than the Old
  MEGs where the word interdependence was used. 
• The language of coordination and
  accommodation suggests a new level of concern.
  If the concepts are not intended to mean anything
  other than interdependence under the Old MEGs,
  we suggest leaving the current language.

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Part 2 Anti-Competitive Threshold (3)

• 2.8 - refers to the fact that vertical mergers
  can result in a lessening of competition if they
  increase barriers to entry or facilitate
  upstream coordinated behaviour. It would be
  useful to understand by way of example what the
  Bureau has in mind.

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Part 2 Anti-Competitive Threshold (4)

• 2.13 - Eliminates the five percent price
  increase threshold and refers instead to the
  Bureau undertaking an assessment of market
  specific factors.  It is not clear what that
  means.  While too general, the 5 test provided a
  conceptual reference, which the current wording
  does not
• Has there has been a conceptual change? If so,
  it requires more discussion.

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Part 3 Market Definition

• Supply Side Considerations
• The Bureau should preserve the ability to take
  supply-side substitution into account at the
  market definition stage of merger analysis in
  appropriate cases.
• Particularly in Canada, where certain market
  shares have been treated as presumptively
  problematic (e.g., over 45), this change may
  reflect too narrow a view and may be
  unjustifiably prejudicial to merging parties.

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Part 3 Market Definition (2)

• The Hypothetical Monopolist test
• The model assumes that the current price is equal
  to the competitive price.
• The benchmark should be price levels that would
  likely exist in a competitive environment.

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Part 3 Market Definition (3)

• Product Market Definition
• The meaning of substitute should be clarified.
• What is a close substitute vs. an acceptable
  substitute? (see footnote 26 and 3.18).
• Are some substitutes that are in the product
  market not acceptable within the meaning of
  section 93(c)?
• Once a product is defined as a substitute, is it
  not a substitute for all purposes in merger
  analysis?

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Part 3 Market Definition (4)

• Elasticities
• 3.13 should indicate that, even if evidence of
  elasticities is available, the Bureau will
  consider indirect evidence of substitutability.
• 3.16 presents a misleading picture of the
  importance of functional interchangeability.
  While it may not be sufficient to include two
  products in the same relevant market, it is still
  a necessary condition (and is presumed in 3.17).

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Part 3 Market Definition (5)

• Geographic Market Definition
• Geographic markets cannot be substitutes for one
  another, they can only be part of the same
  geographic market. (see 3.19)
• Does switching capture situations where buyers
  use the same product but purchase it from a
  different source, as opposed to switching to a
  substitute product? (see 3.24)

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Part 3 Market Definition (6)

• Distant suppliers
• 3.25 should state the assumption that the
  product is not currently being shipped between
  the two distant areas.
• The Old MEGs assume that distant suppliers will
  commence sales in the relevant market unless
  contrary evidence is presented. Does this
  assumption apply to the New MEGs as well? If so,
  it should be included.

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Part 4 Market Share and Concentration

• Participating through a Supply Response
• In 4.1, reference should be made to firms that
  could participate through a supply response.
• More guidance is needed on how to distinguish
  between potential entrants and those who may
  participate through a supply response?
• Is the relevant time frame one year?

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Part 4 Market Share and Concentration (2)

• Participating through a Supply Response
• 4.2 Is there circularity? If suppliers can
  participate through a supply response from
  locations outside the relevant market in response
  to a 5 price increase, then are they not within
  the relevant geographic market based on the
  methodology
• After (ii) insert are able to.
• The use of divert sales in 4.2 does not
  capture situations where firms may have excess
  capacity and simply increase production as
  opposed to moving sales from other customers.

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Part 4 Market Share and Concentration (3)

• What is a voluntary import quota? Perhaps
  reference should be to import quotas or export
  constraints (and not refer to voluntary).
• (See bullets 4 and 5 of 4.3) These
  considerations assume market definition by
  country and this may not always be true.

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Part 4 Market Share and Concentration (4)

• Calculating Market Shares
• 4.6 - Guidance is needed on the meaning of
  future competitive significance. Does this term
  include potential entry or participation through
  a supply response?
• 4.8 - Wouldnt discount sellers have the least
  unused capacity due the their low prices creating
  high demand?

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Part 5 Anti-Competitive Effects

• General Comments
• The new material on unilateral effects and the
  expanded discussion of coordinated effects
  recognize that an SLC finding must be based on a
  coherent theory of competitive harm.
• Raising rivals costs is another theory relied
  upon by the Bureau in the past in 5.27, more
  discussion of this theory would be useful (in
  addition to the brief reference to inhibiting a
  maverick)
• While structuring the MEGs based on the flow of a
  typical analysis (rather than a linear discussion
  of each section 93 factor) is helpful, it would
  be desirable to add sub-headings to identify the
  relevant statutory factor

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Part 5 Anti-Competitive Effects (2)

• Differentiated Products
• 5.4 and 6.11 contain inappropriately negative
  general references to product differentiation
  limiting the level of direct competition among
  firms and impeding entry. This ignores the
  important role of product differentiation as a
  dimension of non-price competition, innovation
  and entry in many industries.
• Product heterogeneity is also important in
  reducing the likelihood that market power can be
  exercised on a coordinated market basis.

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Part 5 Anti-Competitive Effects (3)

• Removal of a Vigorous Competitor
• 5.5 and 5.6 it may be inappropriate to assume
  that the competitive style of the merged firm
  will be determined by the acquirors (as opposed
  to the acquirees) pre-merger style
• The MEGs should acknowledge that this factor can
  be positive as well as negative (e.g., where the
  acquired firm is weak or declining but does not
  yet meet the failing firm standard)

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Part 5 Anti-Competitive Effects (4)

• Unilateral Effects
• New material is useful and is generally
  consistent with modern economic theory
• Will this analysis be used for geographic
  locations too?
• 5.16 - it is not clear what is meant by firms
  distinguished primarily by their capacities
  (there is also an implication that capacity
  constraints are inapplicable when firms are
  distinguished by their products, which is
  puzzling)

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Part 5 Anti-Competitive Effects (5)

• Coordinated Effects Analytical Framework
• The explicit recognition of essential conditions
  for coordinated behaviour from Stiglers
  framework is a positive development although
  the fundamental first step (formation of an
  understanding amongst rivals) has been glossed
  over.
• 5.22 - it should be made clear that the listed
  factors are not the focal point of analysis, but
  merely items which may be relevant to one or more
  of the essential conditions in the Stigler model
  this could be achieved by linking each factor
  to the applicable condition(s) in the framework.

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Part 5 Anti-Competitive Effects (6)

• Coordinated Effects Evidence
• The New MEGs should acknowledge the need for
  probative evidence on each of the essential
  conditions, not just a sub-set of the factors (as
  was required by the European CFI in Airtours)
• The ambiguous nature of some of the factors has
  not been recognized (see Technical Comments)

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Part 6 Entry - Timeliness

• Reading 6.3 and footnote 74 together, a poised
  entrant need never enter to be able to discipline
  market power. Entrant may also enter outside two
  year period and have disciplining effect within
  two year period (See US MEGs).
• Consider clarifying 6.3 to read that the
  "beneficial effects of entry or poised or
  anticipated entry upon prices in this market must
  occur within a two year period".

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Part 6 Entry - Sufficiency

• In 6.7, it is not clear what is meant by
  minimum efficient scale or sub-optimal level
  of production?
• Could have entrant initially below minimum
  efficient scale or sub-optimal level of
  production yet still act as sufficient
  discipline.
• Consider changing sentence in 6.7 to read "the
  entry may not be considered sufficient".
• Or, if this statement reflects the Bureau's
  practice, provide more guidance.

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Part 6 Entry Types of Barriers

• In footnote 79, is the Bureau suggesting that it
  will evaluate the longer-term viability of
  entrants when considering entry?
• If so, consider expanding this statement. Should
  also address the possibility of "hit and run"
  entry having disciplinary effect.

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Part 6 Entry Sunk Costs

• At 6.10, the presence of any sunk costs should
  not presumptively be viewed as significant
  barrier to entry.
• Consider re-working this sentence e.g., sunk
  costs directly affect the likelihood of entry
  and, where present may constitute a barrier to
  entry.
• At 6.14, consider modifying sentence to read
  such long-term contracts may constitute a
  barrier to entry.

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Part 7 Countervailing Power

• Discuss situations in which buyer leverage is
  most likely to be considered a mitigating factor,
  e.G.
• Where exercise of market power leads to a
  potentially greater loss for the seller than the
  buyer if the buyer and seller are in a
  take-it-or-leave-it situation.
• Where the seller needs the buyer to drive future
  sales.
• Examples speak to when buyer leverage is likely
  to exist but do not provide guidance as to when
  it should be considered a mitigating factor.

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Part 8 The Efficiency Exception

• General Comments
• New MEGs language may reflect preferred Bureau
  approach instead of jurisprudence, i.e., Superior
  Propane.
• e.g., reference to total welfare approach in
  footnote 113 may be contrary to FCA decision.
• Vague wording regarding enforcement approaches
  and lack of examples reduces utility as
  guidelines.

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Part 8 The Efficiency Exception (2)

• The New MEGs should include timing advantage as
  a merger-specific efficiency (see 8.12 and
  8.17) as in U.S. which credits a merger for when
  an efficiency is achieved.
• In describing types of efficiencies generally
  included, the New MEGs should also address
  synergies, transactional efficiencies (dropped
  from Old MEGs?), demand-side network effects.
• 8.9 requires substantiation of efficiencies by
  ordinary course business documentation - should
  allow studies and reports commissioned for the
  purpose.

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Part 8 The Efficiency Exception (3)

• Discussion of anti-competitive effects refers to
  consideration of qualitative effects.
• Inappropriate unless emphasize jurisprudence from
  Tribunal majority in Superior Propane that
  effects are to be quantified where possible, even
  using rough limits.
• Clarify the evidentiary support needed to show
  harm rather than mere theoretical effect.

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Part 8 The Efficiency Exception (4)

• 8.25 to 8.27 contain broad language regarding
  different ways to account for wealth transfer,
  stating that the approach will depend on the
  case.
• The brief discussion of the socially adverse
  effects approach should elaborate on the
  methodology the Bureau would use, including
  quantification of how much of the transfer would
  be included.
• In addition to the two approaches mentioned, the
  Bureau should discuss the other approaches and
  clarify when each is most likely to apply.

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Part 9 Failing Firm

• New MEGS do not include a discussion of the
  rationale underlying section 93(b) and its
  applicability to exit for reasons other than
  failure (see final three paragraphs of 4.4.1 of
  Old MEGs).
• New MEGs do not recognize that future competitive
  vigour can be reduced short of exit
  (retrenchment). We suggest the addition of a
  reference in Part 5 to Part 9, and vice versa.

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Part 10 Vertical Mergers

• 10.2 Should provide that, where simultaneous
  entry into both the primary and secondary markets
  involves incurring greater sunk costs than those
  required to enter into the primary market alone,
  barriers to entry into the primary market may be
  raised (not are effectively raised, as the
  currently provided).

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Monopsony

• Footnote 10 in the New MEGs refers to
  Commissioner v. Trilogy Retail Enterprises L.P.,
  CT-2001/003 (Comp. Trib.). The footnote appears
  in reference to paragraph 2.3, which defines
  anti-competitive market power by a buyer. A
  review of the case, however, reveals no such
  definition. To what aspect of the case does the
  footnote refer?