Response to the consultation on the Draft Bulletin on Efficiencies in Merger Review

August 7, 2008

Junlin Yang
Ph.D Candidate
Department of Economics
University of Ottawa

1. Basic Framework for Mergers

The Competition Act adopts the total surplus standard as the criteria to assess mergers for the consideration of efficiency gains. This is correct at least theoretically because privately profitable mergers involve more than 80% firms to participate if there is no any efficiency gain (from marginal cost reductions, or fixed cost efficiencies) in a specific merger under certain conditions. In such cases, a subset of the firms will not form a merging entity since it is notprofitable or form a legal entity that covers most of the firms in the industry. In the former, the antitrust agency does not need to worry about since such a merger will not happen; in the latter, an almost-including-all-firms merger is close to a monopoly, it is easy to judge the irrationale for such a merger by the antitrust agency. Because most of the mergers in practice do not involve that large amount firms in it (more than 80% firms), there must be certain form efficiency gains in the merger, hence a TS standard will allow the mergers that bring about sufficient efficiencies to offset the anti-competitive effects arising from the mergers although the antitrust agency is not a good vehicle for the corresponding income redistribution issues.

With the TS standard, some mergers may be welfare-improving, and some not, hence the antitrust agency should takes different roles when facing different mergers. For the welfare-reducing mergers, they should be denied by the antitrust agency; whereas for the welfare-improving mergers, the efficiency gains may be sufficient large to offset any anticompetitive effects caused, and hence should be approved. If not, they should be denied by the antitrust agency.

To facilitate merger arrangements, the antitrust agency should explicitly define: 1. perse illegal mergers. Some mergers may be obviously welfare-reducing, and could be pre-identified as perse illegality, such as industry-wide mergers (monopolization); 2. perse legal mergers. It can be shown that there are many mergers which generate sufficient large efficiency gains, and some of these mergers can be explicitly identified. For example, mergers with exogenous RJV, R&D inducing mergers, production alliances, certain mergers in open economy considerations, these mergers are welfare-increasing in general, and it is not hard to identify the good mergers (perse legal) among these mergers with the TS standard.

For these two types of mergers, the antitrust agency should well define their scopes and contexts such that the agency could provide a clear guideline for firms to form the mergers as quickly as possible.

The clear definition of these two types of mergers is very important. For the merging parties, they will know what type of mergers is prohibited by competition laws, and what type of mergers is encouraged by the antitrust system. For the antitrust agency, it does not have to review all the merger cases. In such, it will work more efficiently because the antitrust know what types of mergers are bad or good.

On the other hand, the efficiency effects of many mergers are not as definitive as that of the above two, they should be judged on the case by case basis. That is, theoretically only these types of mergers should be assessed through the conventional merger reviews. Hence mergers can be grouped into 4 categories: 1. perse illegal mergers; 2. perse legal mergers; 3. review-approval mergers. Mergers for which the efficiency gains are large enough to compensate any anti-competitive effects, and thus should be approved; 4. review-deny mergers. Mergers for which the efficiency gains are not large enough to compensate the anti-competitive effects, and thus should be denied.

In summary, the Bureau should well define good or bad mergers according to efficiency rationale, and firms should provide efficiency rationale for their intended merger in their submissions. In such a way, the firms could form their mergers as quickly as possible, because they know what are good mergers that are allowed by the antitrust agency. The Bureau could completes its merger reviews as quickly as possible too because it knows what are good mergers and have the relevant information submitted by the merging entities for the merger reviews.

2. on the Forgone Efficiencies

This is the most trickle part when assessing a merger. In fact, if one of the Parties has actually invested in certain technological improvements, its effects have already included in the TS comparisons between premerger and postmerger when the antitrust agency reviews the merger submission. Hence there is no need to deduct the efficiency lost additionally from the welfare produced by the merger. If it is just a potential investment, and has not invested yet, it is very hard to justify the claim of the fringe firms because such claims may be used purely as vehicles for the fringe firms to deter an efficient merger, and in fact the fringe firms would never invest on such technological improvements if the subset of firms does not form such a merger.

Hence although the idea of the “forgone efficiencies” is correct theoretically, it may be highly misleading in the sense that some fringe firms may use it as a strategic tool to block a potentially efficient merger.

3. on the Mergers in Open Economy

In the “Draft Bulletin on Efficiencies in Merger Review”, it is explicitly claimed that “for productive efficiencies, the issue is whether the efficiency gains will accrue to the Canadian economy rather than the ownership of the company that will determine what should be counted as a ‘gain in efficiency’ for the purpose of section 96”. This is the typical GDP standard, and may be good in today’s globalization. The problem for this standard is: at one hand, it is shown that some domestic mergers that would previously reduce social welfare in closed economy may improve total surplus in an open economy and thus should be encouraged by the antitrust agency, which is typical in China when it became a member of WTO. At the other hand, under the GDP standard firms located in Canada but mostly owned by foreign shareholders may become more competitive or gain higher competitive advantages than the domestic firms. In such, it is possible that Canadian economy is controlled by foreign shareholders, and hurting Canadian economy greatly in the long run.

Hence I believe a GNP standard is much better than the GDP standard when assessing efficiency gains for a merger.