The Competition Bureau [hereinafter "the Bureau"] is issuing these guidelines to provide general guidance on its analytical approach to merger review. They describe, to the extent possible, how the Bureau will conduct its analysis of merger transactions. Given that merger law is applicable to a wide variety of factual circumstances, these guidelines cannot be applied rigidly. As such, this document sets forth the general approach taken to merger review, and is not a binding statement of how the analysis will be carried out in a particular situation. The specific facts of a case, as well as the nature of the information and data available, will determine how the Bureau assesses a proposed transaction and may sometimes require different methodologies.

Merging parties are encouraged to contact the Bureau early to discuss proposed transactions. Merging parties should obtain appropriate legal advice when contemplating a possible transaction. The final interpretation of the Competition Act rests with the Competition Tribunal [hereinafter "the Tribunal"] and the courts.

To the extent of any inconsistency, these guidelines supersede previous merger enforcement guidelines and statements made by the Commissioner of Competition or other officials of the Bureau. They are subject to future amendments to the law.

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PART 1 - DEFINITION OF MERGER

Section 91 of the Competition Act defines a "merger" as "...the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, buyer or other person."¹

The definition of "merger" includes any manner in which control over, or a significant interest in, the whole or a part of a business of another person is acquired or established. While these guidelines focus primarily on horizontal mergers, section 91 also encompasses vertical and conglomerate transactions.

Control

With respect to corporations, "control" is defined in section 2(4) of the Act to mean de jure control, that is, a direct or indirect holding of more than 50 per cent of the votes that may be cast to elect directors of the corporation, and which are sufficient to elect a majority of such directors. Acquisition of de jure control constitutes a merger. The Bureau applies a similar analysis in assessing whether a transaction results in the establishment or acquisition of control over an unincorporated business. Specifically, the Bureau considers the nature of the legal and beneficial ownership of the business, voting rights of persons affiliated in the business and the rights and obligations associated with the division of profits and expenses associated with the business.

Significant Interest

The Act provides no guidance on the meaning of the words "significant interest", leaving them to be construed in the context of the Act.

In determining whether an interest is significant, the Bureau considers both the quantitative nature and qualitative impact of the acquisition or establishment of the interest. Given that the Act is concerned with the competitive market behaviour of firms, a "significant interest" in the whole or a part of a business is held qualitatively when the person acquiring or establishing the interest obtains the ability to materially influence the economic behaviour of the business (including decisions relating to pricing, purchasing, distribution, marketing, investment, financing or the licensing of intellectual property rights).

Notifiable Transactions

In the absence of any evidence to the contrary, the proposed transactions described in section 110 of the Act constitute the acquisition or establishment of a significant interest in the whole or a part of a business. However, transactions, which fall outside of those described in section 110, may nevertheless constitute the acquisition or establishment of a significant interest as stated above, if the person(s) acquiring the interest are able to materially influence the economic behaviour of the business.²

Acquisition of Voting Equity Interests

The Bureau finds that a significant interest in a corporation exists when one or more persons, directly or indirectly, hold enough voting shares:

to obtain a sufficient level of representation on the board of directors of the corporation to materially influence that board; or
to block special or ordinary resolutions of the corporation.

In the absence of other relationships, a direct or indirect ownership of less than 10 per cent of the voting interests in a business does not generally constitute ownership of a "significant interest".³ While inferences about situations that result in a direct or indirect holding of between 10 per cent and 50 per cent are more difficult to make, a greater level of voting interest is ordinarily required to materially influence a private company than a widely-held public company. The merger notification requirements in Part IX of the Act are triggered at 35 per cent for private corporations and 20 per cent for public corporations.⁴

Non-voting & Convertible Securities

A merger can occur both at the time of the purchase of convertible debentures, non-voting shares or options and at the time of their conversion or exercise.⁵ To determine whether the purchase of convertible securities constitutes a significant interest, the Bureau examines the nature of and circumstances in which the rights attached to these securities may be exercised.

Asset Acquisitions

Asset transactions that generally fall within the scope of section 91 include the purchase or lease of an unincorporated division, a plant, distribution facilities, a retail outlet, a brand name or intellectual property rights. The Bureau treats the acquisition of any or part of these essential assets to be the acquisition or establishment of a significant interest in that business. Further, acquiring part of the assets of a business that is capable of being used to carry on a separate business is also considered as the acquisition or establishment of a significant interest in the business.

Increasing an "Interest" in a Business

Persons already holding a significant interest in the whole or a part of a business may trigger the merger provisions of the Act by acquiring or establishing a materially greater ability to influence the economic behaviour of the business. Therefore, movement from a minority, yet significant, interest to control would likely be found to constitute a merger. Notably, the merger notification requirements under Part IX that pertain to the acquisition of voting shares of corporations are also triggered when holdings are increased above 50 per cent.

Other Considerations

Depending on the specific terms of the arrangements, a significant interest can be acquired or established pursuant to shareholder agreements, management contracts and other contractual arrangements involving corporations, partnerships, joint ventures, combinations and other entities.⁶ In addition, loan, supply and distribution arrangements that are not ordinary-course transactions and that confer the ability to materially influence management decisions of another business (that is, financing arrangements and terms of default relating to such arrangements; long-term contractual arrangements or pre-existing long-term business relationships and the economic significance of these relationships) may constitute a "merger" within the meaning of section 91.⁷

In determining whether the acquisition or establishment of a significant interest constitutes a merger, the Bureau examines the relationship between the parties prior to the transaction; the likely relationship between the parties subsequent to the transaction; the access that an acquiring party obtains to confidential business information of the target business; and any evidence of intentions to affect the behaviour of the target business or to change the behaviour of the acquiring party.

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PART 2 - THE ANTI-COMPETITIVE THRESHOLD

Overview

As set out in section 92(1) of the Act, the Tribunal may make an order when it finds that a merger "prevents or lessens, or is likely to prevent or lessen, competition substantially." A substantial prevention or lessening of competition results only from mergers that are likely to create, maintain or enhance the ability of the merged entity, unilaterally or in coordination with other firms, to exercise market power.

In general, when evaluating the competitive effects of a merger, the primary concerns are price and output. The Bureau also assesses the effects of the merger on other dimensions of competition such as quality, product choice, service, innovation, and advertising especially in markets where there is a significant level of non-price competition.⁸ To simplify the discussion, unless otherwise indicated, the term price in these guidelines refers to all aspects of firms' actions that affect the interest of buyers. References to an increase in price include an increase in the nominal price and a reduction in quality, product choice, service, innovation or other dimensions of competition that buyers value.⁹

These guidelines describe the analytical framework for assessing market power from the perspective of a seller of a product or service [hereinafter "product" as defined in section 2(1) of the Act]. Market power of sellers means the ability of a single firm or group of firms to profitably maintain prices above the competitive level for a significant period of time.

The analytical framework is equally applicable when assessing market power by buyers of a product.¹⁰ Market power of buyers means the ability of a single firm or group of firms to profitably depress prices paid to sellers (for example, by reducing the purchase of inputs) to a level that is below the competitive price for a significant period of time.

The analysis of competitive effects falls under two broad theories of competitive harm. Competitive harm may result when market power is exercised unilaterally or through coordinated behaviour.

A unilateral exercise of market power can arise when a merger enables the merged entity to profitably sustain higher prices than would otherwise exist in the absence of the merger without relying on an accommodating response from its competitors.

A coordinated exercise of market power can arise when a merger reduces the competitive vigour in a market by, for example, removing a particularly aggressive competitor or enabling the merged entity to coordinate its behaviour with that of its competitors. In this case, higher prices post-merger are profitable and sustainable only because other competitors in the market have accommodating responses.¹¹

Where a merger is not likely to have market power effects, it generally cannot be demonstrated that competition is likely to be prevented or lessened substantially as a result of the merger, even though the merger might have additional implications for other industrial policy objectives that are beyond the scope of the Act.

Lessening of Competition

A merger can lessen 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. This typically occurs with horizontal mergers where there is direct or existing overlap between the operations of the merging parties. This can also occur with vertical mergers such as those that increase barriers to entry or facilitate coordinated behaviour.

Prevention of Competition

Competition can be prevented when a merger enables the merged entity, unilaterally or in coordination with other firms, to sustain higher prices than would exist in the absence of the merger by hindering the development of future competition. This typically occurs where there is little or no direct overlap between the merging parties' existing business(es) and direct competition between the merging parties' business(es) was expected to increase in the absence of the merger.

In these circumstances, the Bureau examines the type, scope and timing of the potential entry or expansion by either one of the merging parties. An assessment is made of whether entry or expansion by the merging firms is likely, even though effective entry or expansion by rival firms is not likely to occur. Evidence of pre-existing market power held by at least one of the merging parties is also relevant if prices would decrease towards the competitive level in the absence of the merger. The Bureau may examine a merger as a "prevent" case when either the acquirer, the acquiree or a potential competitor has entry or expansion plans that are forestalled because of the merger.

The following are examples of mergers that may result in the prevention of competition:

the acquisition of an increasingly vigorous competitor or a potential entrant;
an acquisition, by the market leader, preempting the acquisition by another competitor;
the acquisition of an existing business by a firm that would likely have entered the market in the absence of the merger;¹²
an acquisition that prevents expansion into new geographic markets;¹³
an acquisition that prevents pro-competitive effects of new capacity;¹⁴ and
an acquisition that prevents or limits the introduction of new products.¹⁵

Substantiality

When the Bureau assesses whether competition is likely to be substantially prevented or lessened, it evaluates whether the merger is likely to provide the merged entity (unilaterally or in coordination with others) with an ability to materially influence price.¹⁶ In doing so, it considers the likely magnitude, scope and duration of any price increase that is anticipated to arise as a result of the merger. Generally speaking, the prevention or lessening of competition is considered to be "substantial" where:

the price of the relevant product(s) would likely be materially greater in a substantial part of the relevant market¹⁷ than it would be in the absence of the merger [hereinafter "material price increase"],¹⁸ ; and
the material price increase is not likely to be eliminated by existing or new competitors within two years.¹⁹

The Bureau does not apply a numerical threshold for the material price increase.²⁰ Instead, its conclusions about whether a lessening or prevention of competition is substantial are based on an assessment of market-specific factors listed in section 93 that could have a constraining influence on price following the merger.²¹ These factors are assessed over a two-year period commencing from when market power could likely be exercised, not necessarily when the merger review is taking place.²²

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PART 3 - MARKET DEFINITION

Overview

Typically, the first stage in the Bureau's review of a merger involves defining the relevant market(s) in which the merging parties operate.²³ The overall objective of market definition in merger analysis is to identify a set of buyers that could potentially face increased market power due to the merger. Relevant markets are assessed from two perspectives: the product dimension and the geographic dimension.

As a general principle, it cannot be assumed that merging parties operate in the same relevant market(s), even where there appears to be some overlap between their products and the geographic areas in which they conduct business. In addition, the relevant market(s) being analysed for competitive effects may not necessarily correspond to the product categories or service areas established by the managers of the merging firms or their rivals for operational purposes.²⁴

Market definition is based on substitutability and focuses on demand responses to changes in relative prices. The ability of a firm or group of firms to raise price without losing sufficient sales to make the price increase unprofitable ultimately depends on buyers' willingness to pay the higher price.²⁵ Supply responses are also important when assessing the potential for the exercise of market power, but is are examined later in the analysis, either when identifying the participants in the relevant market or when examining entry or expansion into the relevant market.

Conceptually, a relevant market is defined as the smallest group of products,²⁶ including at least one product of the merging parties, and the smallest geographic area in which a sole profit-maximizing seller (a "hypothetical monopolist") would impose and sustain a significant and non-transitory price increase above levels that would likely exist in the absence of the merger. In most cases, the Bureau considers a five per cent price increase to be significant and a one-year period to be non-transitory.²⁷

The market definition analysis begins by postulating a candidate market for each product of the merging parties. For each candidate market, the analysis proceeds by determining whether a hypothetical monopolist controlling the group of products in that candidate market would be able to impose a five per cent price increase assuming the terms of sale of all other products remained constant. If the price increase would likely cause buyers to switch their purchases to other products in sufficient quantity to render the price increase unprofitable, the postulated candidate market is not the relevant market, and the next-best substitute is added to the candidate market.²⁸ The analysis then repeats by determining whether a hypothetical monopolist controlling the set of products in the expanded candidate market would be able to profitably impose a five per cent price increase. This process continues until the point at which the hypothetical monopolist would impose and sustain the price increase for at least one product of the merging parties in the candidate market. The smallest set of products in which the price increase can be sustained is defined as the relevant product market.

The same general approach applies to assessing the geographic scope of the market. In this case, an initial candidate market is proposed for each location where the merging parties produce or sell the relevant products. As above, if buyers are likely to switch their purchases to sellers in more distant locations in sufficient quantities to render a five per cent price increase by a hypothetical monopolist unprofitable, the location that is the next-best substitute is added to the candidate market. This process continues until the smallest set of areas over which a hypothetical monopolist would impose and sustain the price increase is identified.

The base price used to postulate a price increase is generally the prevailing price in the relevant market. The Bureau may not use the prevailing price if it is likely that market conditions (absent the merger) would result in a lower or higher price in the future.²⁹

In general, the base price used to postulate a price increase is whatever is ordinarily considered to be the price of the product in the sector of the industry (for example, manufacturing, wholesale, retail) being examined.

In some circumstances, sellers may identify and charge different prices to a targeted sets of buyers within a market. Sellers may price discriminate when certain buyers cannot effectively switch to other products or geographic locations and cannot engage in arbitrage with other buyers by taking advantage of price differences. When price discrimination is feasible, it may be appropriate to define narrower relevant markets with reference to the characteristics of the classes of buyers or to the particular locations of the targeted buyers.³⁰

Factors considered in the analysis of product and geographic dimensions of market definition are addressed below.

Product Market Definition

For the purpose of product market definition, what matters is not the identity of sellers, but the characteristics of the products and buyers' ability or willingness to switch from one product to another in sufficient quantity in response to changes in relative prices.³¹ A relevant product market consists of a given product of the merging parties and close substitutes for it.

When detailed data on the prices and quantities of the relevant products and their close substitutes are available, statistical measures may be used to define relevant product markets.³² Demand elasticities indicate how buyers change their consumption of a product in response to changes in the product's price (own-price elasticity) or in response to changes in the price of another identified product (cross-price elasticity). While cross-price elasticities do not in themselves directly measure the ability of a firm to raise price, they are particularly useful when determining whether differentiated products are close substitutes for one another and whether such products are part of the same relevant market.³³

Whether or not reliable statistical evidence on demand elasticities is available, consideration is given to factors that provide indirect evidence of substitutability, including evidence from market participants and the functional indicators highlighted below.

The views, strategies and behaviour of buyers often provide a reliable indication of whether buyers would likely switch to other products in response to a five per cent price increase. For example, the Bureau examines what buyers have done in the past and what they are likely to do in the future as options become available, for instance, through advances in technology. Additional information from industry surveys and industry participants, such as competitors and manufacturers of the relevant product, is also taken into account. This information advances the analysis by providing details on historical developments and likely future developments in the industry (including the past behaviour of the merging parties and their rivals) relative to other products that are alleged to provide a significant constraining influence. Documents prepared by the merging parties in the ordinary course of business are also very useful in this regard.

Various functional indicators help to determine what products are considered close substitutes, including end use, physical and technical characteristics, price relationships and relative price levels, as well as the switching costs incurred by buyers as discussed below.

Products purchased for similar end uses may not be close substitutes from the perspective of buyers. Therefore, functional interchangeability is not sufficient to warrant inclusion of two products in the same relevant market.³⁴ In general, if buyers place a high value on the actual or the perceived unique physical or technical characteristics of a product (including product warranties, post-sales service, and order turn-around time), it may be necessary to define distinct relevant markets based on such characteristics.

Buyer switching costs may discourage a sufficient number of buyers from switching to products that are functionally interchangeable, thereby allowing a hypothetical monopolist to raise price by five per cent. Products are not included in the same relevant market when costs that must be incurred by buyers are sufficient to render switching unlikely in response to a five per cent price increase. Examples include costs for buyers to retool, re-package, adapt marketing, breach a supply contract, learn new procedures, or convert essential equipment.³⁵ Other costs include the expenses (and risk) that must be incurred if a product fails to satisfy expectations, which may lead to damaging a buyer's reputation as a reseller, or requiring the shutdown of an entire production line.

A relevant market may consist of a grouping of diverse products that are not themselves close substitutes for each other. This occurs where a sole seller would be able to sustain a profitable increase in the price of the grouping of products because a sufficient number of buyers will not respond to the price increase by purchasing the various components separately from different sellers. This reaction may occur when there are significant transaction costs associated with using a number of sellers, including physical transportation costs and the time taken to negotiate with various sellers. In these circumstances, the Bureau examines buyers' propensity to purchase a number of products from a single seller and the extent to which buyers have broken up their purchases of a grouping of products in response to relative price changes.

Geographic Market Definition

For the purpose of geographic market definition, what matters is not the identity of the sellers, but buyers' ability or willingness to switch their purchases in sufficient quantity from one location to another in response to changes in relative prices. A relevant geographic market consists of all supply points that are regarded as close substitutes by buyers.³⁶

When defining the boundaries of geographic markets, the Bureau generally relies on indirect evidence of substitutability including evidence from market participants and the functional indicators described below.

The views, strategies and behaviour of buyers in a given geographic area often provide a reliable indication of whether buyers would likely switch their purchases to sellers located in other geographic areas in the event of a five per cent price increase. For example, the Bureau examines what buyers have done in the past and what they are likely to do in the future as options become available, for instance, through advances in technology. Industry surveys and the views, strategies and behaviour of industry participants also inform the analysis by providing information on how buyers of a relevant product in one geographic area respond or have responded to changes in the price, packaging or servicing of the relevant product in another geographic area. The extent to which distant sellers are taken into account in business plans, marketing strategies and other documentation of the merging parties and other sellers are also useful indicators for geographic market definition.

Various functional indicators can assist in determining whether geographic areas are considered to be close substitutes, including particular characteristics of the product, switching costs, transportation costs, price relationships and relative price levels, shipment patterns, and conditions regarding foreign competition.

Several price and non-price factors could affect a buyer's ability or willingness to consider distant options. Non-price factors include the fragility or perishability of the relevant product, convenience, frequency of delivery, and the reliability of service or delivery.

As with product market definition, high switching costs incurred by buyers may also discourage substitution between geographic areas. In addition, transportation costs play a central role in defining the geographic scope of relevant markets because they directly affect price. For example, if the price of a product in a distant area plus the cost of transporting that same product to a candidate geographic market is found to exceed the price in the candidate market including a five per cent price increase, the products of sellers located in the distant area will not generally be included in the relevant market.³⁷

Evidence that prices in a distant area have historically either exceeded or have been lower than prices in the candidate geographic market by more than transportation costs may indicate that the two areas are in separate relevant markets, for reasons that go beyond transportation costs.³⁸ However, before reaching this conclusion, the Bureau determines whether a five per cent per cent price increase in the candidate geographic market may change the pricing differential to the point where distant sellers may be able to constrain such an increase.

Significant shipments of the relevant product from a more distant area into an area in relation to which a price increase is being postulated may suggest that the distant area is in the geographic market. However, pre-merger shipment patterns do not, by themselves, establish the constraining effect of distant sellers and may be insufficient to justify broadening the geographic market. Further analysis is necessary to determine whether shipments from the distant area would result in making the five per cent price increase unprofitable.

Foreign Competition

Buyers' willingness or ability to turn to foreign sellers may be affected by buyer tastes, preferences, and border-related considerations. Buyers may be less willing or able to switch to foreign substitutes when faced with exchange rate risk, industry imposed standards,³⁹ or initiatives to "buy local" due to difficulties or uncertainties when crossing the border. Conversely, buyers may be more willing to turn to foreign substitutes when they have a high level of information about foreign products and how to source them, when foreign sellers or their products have already been placed on approved sourcing lists, or when technology licensing agreements, strategic alliances or other affiliations exist between domestic buyers and foreign firms.

Where it is clear that the sales area of the merging parties and that of foreign sellers belong in the relevant market (because sufficient buyers would be willing to respond to a five per cent price increase by turning to these sellers), the boundaries of the market are expanded beyond Canada to include the locations of foreign sellers.⁴⁰

Delineating Geographic Boundaries

The geographic locations of buyers and sellers are relevant in delineating boundaries, particularly when markets are local or regional in nature. The underlying assumption is that profit-maximizing firms make decisions about where to locate based on the density of their buyer base and an attempt to avoid the potential cannibalization of their own sales when one of their locations is closely situated to another. In this way, demand responses are still a key determinant of market boundaries. Spatial competition analysis can usefully assist in delineating the boundaries of localized geographic markets.⁴¹ The methodology for applying spatial competition analysis depends on the characteristics of the industry and the market under consideration.⁴²

It is important to emphasize that market boundaries are not, in many instances, precise.⁴³ In addition, constraints on a merged firm's pricing behaviour can come from both inside and outside the relevant market as defined. These issues are discussed further below.

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PART 4 - MARKET SHARE AND CONCENTRATION

Once relevant markets have been defined, the next step in the analysis is to identify participants in the relevant markets in order to determine market shares and concentration levels. Such participants include current sellers of relevant products and those that would begin selling relevant products if price rose by five per cent. In the latter case, a firm is deemed a participant in a relevant market if it does not require significant sunk investments to enter or exit the market and would be able to do so within a one year period [hereinafter a "supply response"].⁴⁴ Situations where firms would need to incur significant sunk investments or would take longer than one year before initiating sales of the relevant products are considered in the analysis of entry as described in Part 6.

Participating in the Market Through a Supply Response

The Bureau determines whether sellers who are not currently supplying the relevant market are able to profitably divert sales from their existing buyers to those in the relevant market in the event of a five per cent price increase. Similarly, the Bureau determines whether these sellers are able to profitably utilize excess capacity to begin supplying products in the relevant market. The Bureau examines:

switching costs, such as the cost of adapting facilities (including distribution) in order to substitute production and/or sales in the relevant market for current production;⁴⁵
whether the firm is able to reposition its products or extend its product line;
whether and to what extent the firm is committed to producing other products;
to what extent the firm has excess capacity;
applicable intellectual property rights; and
applicable regulations that impose product quality or labelling standards and specifications, or that impose licence/permit requirements.

When assessing whether foreign sellers participate in the relevant market through a supply response, additional considerations include:

the existence of tariffs, import quotas or export constraints;
domestic ownership restrictions;
difficulties presented by exchange rate fluctuations;
the threat of trade actions, such as an antidumping complaint being initiated by domestic firms or the imposition of countervailing duties;
formal and informal market allocation arrangements within multinationals that have Canadian affiliates or between independent multinational firms;
the terms of licence, franchise and non-competition contracts between foreign firms and their Canadian subsidiaries or third parties that have purchased shares or assets of such subsidiaries;
conditions in home markets of such foreign sellers;
whether the industry is susceptible to supply interruptions from abroad;
the degree of familiarity with the Canadian market; and
difficulties presented by customs and other requirements associated with processing imports.

A seller is not included in the relevant market at this stage of the analysis when:

the seller is likely to encounter significant difficulty distributing or marketing the relevant product; or,
significant sunk investment in production or distribution facilities (such as warehouse requirements, a direct-store-delivery network, marketing costs, the need to hire local salespersons, and the costs associated with obtaining local regulatory approval) are required to supply the relevant market.

Under these circumstances, as mentioned above, the impact of such sellers is analysed later when examining the likelihood of entry or expansion.

Calculating Market Shares

Market shares are calculated for all sellers who have been identified as participants in the relevant market.

Market shares can be measured in terms of dollar sales, unit sales, capacity⁴⁶ or, in certain natural resource industries, reserves. When calculating market shares, the Bureau uses the best indicators of sellers' future competitive significance. In cases where products are undifferentiated or homogeneous (e.g.,for example, having no unique physical characteristics or perceived attributes), and where firms are all operating at full capacity, market shares based on dollar sales, unit sales and capacity should yield similar results. In such situations, the basis of measurement depends largely on the availability of data.

Where firms in such marketsproducing homogeneous products have excess capacity, market shares based on capacity may best reflect a firm's relative market position and competitive influence in the market. Excess capacity may be less relevant in calculating market shares when it is clear that some of a firm's unused capacity does not constitute have a constraining influence in the relevant market (for example, because the capacity is high-cost capacity or the firm is not effective in marketing its product).

As the level of product differentiation in a relevant market increases, the calculation of market shares calculated on the basis of dollar sales, unit sales and capacity produces increasingly dissimilar resultsincreasingly differ. For example, if most of the excess capacity in the relevant market is held by discount sellers in a highly differentiated market, the market shares of these sellers calculated on the basis of total capacity would be greater than if they were calculated on the basis of actual unit or dollar sales. In this case, market shares based on total capacity would be a misleading indicator of the relative market position of the discount sellers.⁴⁷ In such circumstances, dollar sales may be considered to be the better indication of the size of the total market and of the relative positions of individual firms. Because unit sales may also provide important information about relative market positions, both dollar sales and unit sales data are often requested from the merging parties and other sellers.⁴⁸

The total output or total capacity of firms current sellers located within the relevant market is generally included in the calculation of the total size of the market and the shares of individual competitors. However, where significant quantities of output or capacity are committed to business outside the relevant market and where they are not likely to be available to the relevant market in response to a five per cent price increase within one year, this output or capacity is generally not included in the calculations.

For When participating firms that participate in the market through a supply response, are located within a relevant market, only the output or capacity that would likely become available to the relevant market without incurring significant sunk investments will be included in the market share calculations.

Market Share and Concentration Thresholds

Information that demonstrates that market share or concentration is likely to be high does not, in and of itself, provide a sufficient basis to justify a conclusion that a merger is likely to prevent or lessen competition substantially.⁴⁹ However, market shares and concentration can inform the analysis of competitive effects when they reflect the market position of the merged entity relative to its rivals. In the absence of high post-merger concentration and market share, effective competition in the relevant market is generally likely to constrain the creation, maintenance, or enhancement of market power by reason of the merger.⁵⁰

The Bureau has established thresholds to identify mergers that are unlikely to have anti-competitive consequences from those that require a more detailed analysis. In particular:

the Commissioner generally will not challenge a merger on the basis of a concern related to unilateral exercise of market power when the post-merger market share of the merged entity would be less than 35 per cent.
the Commissioner generally will not challenge a merger on the basis of a concern related to a coordinated exercise of market power when:

the post-merger market share accounted for by the four largest firms in the market (known as the four-firm concentration ratio or CR4) would be less than 65 per cent; or
the post-merger market share of the merged entity would be less than 10 per cent.

Mergers that give rise to market shares or concentration that exceed these thresholds are not necessarily anti-competitive. Under these circumstances, the Bureau examines various factors to determine whether such mergers will likely create, maintain or enhance market power and thereby result in a substantial lessening or prevention of competition.

When other information suggests that current market shares do not reflect the competitive role of one of the merging parties relative to its rivals, the Bureau considers this information in determining whether competition is likely to be substantially lessened or prevented by a merger. Furthermore, the Bureau considers other information that may suggest that competition is likely to be lessened or prevented substantially even when these thresholds are not surpassed, particularly when current market shares do not reflect the market position of the merging parties relative to their rivals. In all cases, examining market shares and concentration is only the starting point of the Bureau's analysis of competitive effects.

In addition to the level of market shares or concentration in the relevant market, the Bureau examines the distribution of market shares across competitors and the extent to which market shares have changed or remained the same over a significant period of time.

All else equal, the likelihood that a number of firms may be able to bring about a price increase through coordinated behaviour increases as the level of concentration in a market rises and as the number of firms declines.⁵¹ By contrast, coordinated behaviour becomes increasingly difficult as the number or size of firms that have the ability to increase output expands.

When evaluating market share information, the Bureau considers the nature of the market and the impact of forthcoming change and innovation on the stability of existing shares.⁵² While a small incremental increase in concentration post-merger may suggest that the merger does not have a significant impact on the market, the Bureau assesses the growth expectations for one or both of the merging parties to determine whether the merger may eliminate an important competitive force.⁵³

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PART 5 - ANTI-COMPETITIVE EFFECTS

When the above-mentioned market share and concentration thresholds are exceeded or when other information suggests that a merger may result in a substantial lessening or prevention of competition, the Bureau undertakes a competitive effects analysis of the merger based on the factors listed in section 93 of the Act.⁵⁴ Such an analysis falls under the broad categories of unilateral effects and coordinated effects as described below.

When it is clear that the level of effective competition that is to remain in the relevant market is not likely to be reduced as a result of the merger, this alone generally justifies a conclusion not to challenge the merger.

To determine the ability and effectiveness of remaining competitors to constrain an exercise of market power by the merged entity, the Bureau examines existing forms of rivalry, such as discounting and other pricing strategies, distribution and marketing methods, product and package positioning, and service offerings.⁵⁵ The stability of their market shares over time is also relevant, as is the extent to which product differentiation affects the level of direct competition among firms.⁵⁶ Furthermore, an assessment is made of whether competitors are likely to remain as vigorous and effective as prior to the merger.

The extent of excess capacity held by merging and non-merging firms provides useful information about whether the merger could result in the exercise of market power.⁵⁷ Excess capacity held by rivals to the merged entity improves their ability to expand output should the merged entity attempt to exercise market power. On the other hand, if the merged entity holds a significant share of excess capacity in the relevant market, this may discourage expansion by rivals.⁵⁸

The competitive attributes of the acquired firm are assessed to determine whether the merger will likely result in the removal of a vigorous and effective competitor.⁵⁹ In addition to the forms of rivalry discussed above, the Bureau considers whether one of the merging parties:

has a history of not following price increases or market stabilizing initiatives by competitors;
provides unique service/warranty benefits to the market⁶⁰;
has recently expanded capacity, or has plans to do so;
has recently made gains in market share, or is positioned to do so; or
has recently acquired intellectual property rights that enhance its ability to compete in the market, or will soon do so.

While the removal of a vigorous and effective competitor through a merger is likely to prevent or lessen competition to some degree, it is generally not sufficient to warrant enforcement action under the Act. The Bureau also examines the extent to which remaining competition may be limited or ineffective as described above, whether there are factors that are likely to deter or impede entry or expansion by other firms, and other relevant factors under section 93 of the Act.

The Bureau evaluates the general nature and extent of change and innovation in a market.⁶¹ In addition to assessing the competitive impact of technological developments in products and processes, the Bureau examines change and innovation in relation to: distribution, service, sales, marketing, packaging, buyer tastes, purchase patterns, firm structure, the regulatory environment and the economy as a whole.

The pressures exerted by change and innovation on competitors in a market (including the merging parties) may be such that a material price increase is unlikely to be sustainable, especially where a merger reduces barriers to entry or stimulates or accelerates the change or innovation in question.⁶² Such pressures may have important implications for efficient markets in the medium-to-long term. However, for the purpose of the Bureau's analysis of competitive effects, the resulting competitive pressures are generally relevant when they are expected to have a constraining influence within two years of a likely exercise of market power.⁶³

A merger may also facilitate the exercise of market power by impeding the process of change and innovation. For example, when a merger eliminates an innovative firm that presents a serious threat to incumbent firms, the merger itself may hinder or delay the introduction of new products, processes, marketing approaches, aggressive research and development initiatives or business methods.⁶⁴

The Bureau also examines the competitive effects of a merger resulting from, or enhanced by, the existence of particular relationships such as interlocking directorships between and among the merging parties or their affiliates and their competitors, customers and suppliers. For example, the Bureau may determine that a pre-existing relationship or arrangement between one of the merging parties and a third party raises concerns due to the merger because the third party is a direct competitor to the other merging party.⁶⁵ Similarly, where directors of one of the merging parties are employees, executives, partners, owners, or members of the board of directors of another firm, or who have other interests in the business, such that confidential business information could be communicated, the Bureau assesses the competitive effects of those relationships. The Bureau is not generally concerned if board representation in these circumstances occurs solely through "independent" directors where the businesses do not directly compete.

Unilateral Effects

By placing pricing and supply decisions under common control, a merger can create an incentive to increase price and restrict supply or limit any other dimension of competition. A unilateral exercise of market power occurs when the merged entity can profitably sustain a material price increase without effective discipline from competitive responses by rivals.

Where buyers can choose among many sellers offering comparable products, a firm's ability to profitably increase price is limited by buyers diverting their purchases to substitute products in response to the price increase. When two firms in a market merge and the price of one firm's product(s) rises, some demand may be diverted to product(s) of the firm's merger partner, thereby increasing the overall profitability of the price increase and providing the impetus to raise the price. A price increase is more likely to be profitable when the merging parties account for a significant (even if not dominant) share of the market.

Unilateral effects can occur in different market environments that are defined by the primary characteristics that distinguish firms within those markets and determine the nature of their competition. Two types of market environments are described below.

Firms Distinguished Primarily by their Products

In markets with differentiated products, a merger may create, enhance or maintain the ability of the merged entity to exercise market power unilaterally when a significant number of buyers view the product offerings of the merging parties to be their first and second choices. In these circumstances, a post-merger price increase may be profitable because a price increase by one of the merging parties diverts demand toward the other merging party. This is particularly true when a merger removes a vigorous competitor from the market. If, on the other hand, the merging parties' products are not first and second choices for a significant number of buyers, then a material price increase in the product of one of the merging parties is less likely to be profitable when demand would be diverted almost entirely to the products of other competitors with available capacity.

In order to assess whether a merger among sellers of differentiated products is likely to create, enhance or maintain the ability of the merged entity to unilaterally exercise market power, the Bureau examines product purchase and pricing information to determine whether the products of the merging parties are first and second choices for a significant number of buyers. Evidence of past buyer-switching behaviour in response to changes in relative prices is particularly useful, including information based on buyer preference surveys, own-price and cross-price elasticities, purchasing patterns and diversion ratios.⁶⁶

The Bureau also evaluates whether rivals in the market are likely to re-position their products to discipline unilateral market power that would otherwise occur as a result of the merger.⁶⁷ Consideration is also given to existing sellers that may only occupy a particular niche within the relevant market and whether they provide competition for a sufficient number of buyers.

Firms Distinguished Primarily by their Capacities

A post-merger price increase may be profitable if the merger removes a seller to whom buyers would otherwise turn in response to a price increase. In markets where firms are distinguished primarily by their capacities (and their products are relatively undifferentiated), such a price increase is likely to be profitable if other sellers offering close substitutes are not able to absorb the demand that would otherwise be diverted from the merged entity. This is possible only ifoccurs when the remaining sellers have insufficient capacity to absorb this demand, and capacity can cannot be expanded quickly and at low cost. Therefore, the Bureau examines whether capacity constraints limit the effectiveness of remaining sellers by impeding their ability to make their products available in sufficient quantities to counter an exercise of market power by the merged entity.⁶⁸

Coordinated Effects

A merger may result in coordinated effects when a group of firms (that includes the merged entity), is able to profitably coordinate its behaviour because of each firm's accommodating reactions to the conduct of others. The Bureau assesses whether a merger makes such coordinated behaviour among firms more likely or effective.⁶⁹

Coordinated behaviour can involve tacit or express understandings on price, service levels, allocation of customers or territories, or any other dimension of competition.⁷⁰ Tacit understandings arise from mutual, yet independent, recognition that, post-merger and under certain market conditions, firms can benefit from competing less aggressively with one another.

Coordinated behaviour is only likely to be sustainable when:

firms are able to:

individually recognize mutually beneficial terms of coordination;
monitor one another's conduct and detect deviations; and
respond to any deviations from the terms of coordination through credible deterrent mechanisms⁷¹; and

coordination will not be threatened by external factors, such as the reactions of existing and potential competitors not part of the coordinating group of firms or the reactions of buyers.

In its analysis of competitive effects, the Bureau examines whether market conditions will likely allow coordinated behaviour to be sustainable post-merger.⁷² While the presence of certain market conditions (often referred to as facilitating factors) may suggest the ability of firms to overcome impediments to coordinated behaviour, neither the absence nor the presence of any single factor or group of factors determines whether there is likely to be a substantial lessening or prevention of competition.

When examining whether firms are able to independently recognize mutually beneficial terms of coordination, the Bureau considers the degree of product homogeneity, and cost symmetries among firms. Recognizing terms of coordination that all firms find profitable is easier when products are homogeneous and when firms have similar cost structures. On the other hand, complex products and differences in product offerings and cost structure make it more difficult for firms to reach profitable terms of coordination. Similarly, markets with rapid and frequent product innovations are less conducive to coordinated behaviour.

Profit-maximizing firms have an incentive to deviate from coordinated behaviour when the expected profits from deviating are greater than the expected profits from engaging in coordination. Therefore, when evaluating whether coordination is likely, the Bureau considers factors that could affect incentives to deviate, such as the size and frequency of transactions and the elasticity of demand. When individual transactions are large and infrequent relative to total market demand, deviations from the coordinated behaviour are more profitable, making effective coordinated behaviour less likely. The profits available from coordinated behaviour are higher for products with inelastic demand, making effective coordinated behaviour more likely.

The Bureau also considers whether firms can monitor and detect deviations from coordinated behaviour. In so doing, the Bureau evaluates the degree of market transparency that exists.⁷³ When information about prices, rival firms and market conditions is readily available to market participants, it is easier to monitor coordinated behaviour, which in turn makes effective coordination more likely. The existence of industry organizations that facilitate communication and dissemination of information among market participants may also facilitate coordinated behaviour. Also relevant to the analysis is the stability of underlying costs of firms. When costs fluctuate, it may be difficult to detect whether a price change represents a deviation from coordinated behaviour or whether it is a response to a change in cost conditions, which in turn makes effective coordination less likely.

An evaluation of whether firms can impose credible punishments includes an assessment of the degree of multi-market exposure among firms and the degree of excess capacity that exists. When firms participate in multiple geographic or product markets, there are greater opportunities to discourage firms from deviating from the coordinated behaviour because there is broader scope for punishing deviations. Similarly, excess capacity held by firms within the coordinating group can allow such firms to oversupply the market when they detect deviations from the agreed price, thereby discouraging deviations and making coordination more likely. However, excess capacity may also provide firms with an incentive and an ability to deviate from coordinated behaviour by selling products at lower prices, and could therefore make coordinated behaviour less likely. It is therefore important to consider which firms, if any, hold excess capacity as well as their individual economic incentives.

A history of collusion or coordination in the market is also relevant to the analysis because previous and sustained collusive or coordinated behaviour indicates that firms have successfully overcome the hurdles to effective coordinated behaviour in the past.

Unlike the facilitating factors described above, market concentration coupled with barriers to entry are two necessary (but not sufficient) conditions for a merger to substantially lessen or prevent competition through coordinated effects.⁷⁴ Firms find it easier and less costly to engage in coordinated behaviour if there are a small number of firms accounting for a large proportion of total market output. Coordinated behaviour among competitors in a concentrated market is also unlikely to be sustainable if raising prices would lead to significant entry.

The analysis of coordinated effects includes an examination of how the merger changes the competitive dynamic in the market. To do so, the Bureau identifies the constraints on coordinated behaviour that existed pre-merger to determine if the merger reduces or eliminates those constraints.

In highly concentrated markets, effective coordination may nonetheless be constrained by the number of firms that exist pre-merger. A merger could remove this constraint by reducing the number of rivals to a level at which the profitability of coordination makes it a more attractive strategy relative to competition.

When firms differ greatly relative to one another, effective coordination may be constrained by the inability of firms to behave in a way that each finds profitable. If the effect of the merger is to reduce or eliminate asymmetries between the merged firm and its rivals, firms may find it easier to coordinate their behaviour in a way that is profitable to all participants post-merger. Conversely, a merger may increase asymmetries between the merged firm and its rivals, thereby making coordinated behaviour less profitable and therefore less likely.

Pre-merger, effective coordination may be constrained by the activities of a particularly vigorous and effective competitor (a "maverick").⁷⁵ An acquisition of a maverick may remove this constraint on coordination by reducing incentives to behave in an aggressive manner. Such an acquisition increases the likelihood that coordinated behaviour will be effective.

Alternatively, a merger may not remove the maverick but may instead inhibit a maverick's expansion or entry, or marginalize its competitive significance, thereby increasing the likelihood of effective coordination. For example, a merger may have the effect of raising rivals' costs by limiting access to the supply of necessary inputs.

The Bureau also examines the extent to which firms outside the coordinating group have the ability to make the relevant product available in the relevant geographic market in sufficient quantities to thwart a coordinated exercise of market power.

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PART 6 - ENTRY

A key component of the Bureau's analysis of competitive effects is whether timely entry by potential competitors would likely occur on a sufficient scale and magnitude scope to constrain a material price increase in the relevant market or a substantial part of the relevant market. In the absence of impediments to entry, a merged entity's attempt to exercise market power, either unilaterally or through coordinated behaviour with its rivals, is likely to be thwarted by entry of firms that:

are already in the relevant market and can expand production or sales;⁷⁶
are not in the relevant market but operate in other product or geographic markets and can switch production or sales into the relevant market; or
can begin production or sales into the relevant market de novo.

Conditions of Entry

Entry is only effective in constraining the exercise of market power if it is viable.⁷⁷ When entry is likely, timely and sufficient in scale and scope, an attempt to increase price is not likely to be sustainable as buyers of the product in question turn to other sources of supply.

Timeliness

Assessing the conditions of entry involves determining the time that it would take for a potential entrant to become an effective competitor in response to a material price increase that is anticipated to arise as a result of the merger. In general, the longer it takes for potential entrants to become effective competitors, the lesser the likelihood that incumbent firms will be deterred from exercising market power. When a material price increase occurs in a relevant market, entrants must react and have an impact on price in a reasonable period of time. In the Bureau's analysis, the beneficial effects of entry on prices in this market normally must occur within a two-year period.⁷⁸

Likelihood

In assessing whether future entry is likely to occur, the Bureau's analysis generally starts with an assessment of firms that appear to have an entry advantage. While other potential sources of competition may also be relevant, typically the most important sources of potential competition include:

fringe firms already in the market;
firms that sell the relevant product in adjacent geographic areas;
firms that produce products with machinery or technology that is similar to that used to produce the relevant product;
firms that sell in related upstream or downstream markets;
firms that sell through similar distribution channels; or
firms that employ similar marketing and promotion methods.

A history of entry into and exit from a particular market provides insight into the likelihood of entry occurring in a timely manner and on a sufficient scale to counteract an exercise of market power by a merged entity. It is, however, not the sole determinant as to whether this will likely occur.⁷⁹

The analysis seeks to determine the extent that entry is likely, given the commitments that must be made by potential entrants, the time required to become effective competitors, the risks involved and the likely rewards. The Bureau considers any delay or loss that potential entrants expect to encounter before becoming effective competitors and the resulting sunk costs and risk associated with such entry that reduce the likelihood that entry will occur. When assessing the likelihood of entry, the Bureau evaluates profitability at pre-merger prices rather than likely post-merger prices.

Sufficiency

When considering whether entry is likely to be on a scale orand scope that would be sufficient to eliminate a material price increase, the Bureau examines what is required from potential competitors who choose to enter. For instance, if a competitor enters a market on a scale that is below the minimum viable scale, the Bureau would not consider this entry sufficient to eliminate a material price increase since the entrant will be unable to achieve the annual level of sales necessary to achieve profitability at pre-merger prices. Entry by firms who seek to differentiate themselves by establishing a niche to avoid direct competition with the merged entity may also not be sufficient to constrain an exercise of market power.

Types of Barriers to Entry

Barriers to entry affect the timeliness, likelihood and sufficiency of entry. They can take many forms, ranging from absolute restrictions that preclude entry to sunk costs and other factors that raise the cost and risks associated with entry and thereby deter it.⁸⁰ While, in some cases, each individual "barrier" may be insufficient to impede entry, the Bureau considers the collective influence of all barriers, which, when taken together, can effectively deter entry.

Regulatory Barriers

The types of barriers identified in section 93(d) of the Act, namely tariff and non-tariff barriers to international trade, inter-provincial barriers to trade, and regulatory control over entry, can provide incumbents with absolute cost advantages over potential entrants, presenting considerable and in some cases insurmountable impediments to entry.⁸¹

Sunk Costs

Substantial sunk costs directly affect the viability likelihood of entry and, where present, constitute a significant barrier to entry.⁸² Costs are sunk when they are not recoverable if the firm exits the market. In general, since entry decisions are typically made in an environment where success is uncertain, the likelihood of significant future entry decreases as the absolute amount of sunk entry costs relative to the estimated rewards of entry increases. The Bureau's assessment of sunk costs also focuses on the time required to become an effective competitor and the probability of success, and whether these factors justify making the investments required.

New entrants must often incur various start-up sunk costs, such as acquiring market information, developing and testing product designs, installing equipment, engaging personnel and setting up distribution systems. Potential entrants may also face significant sunk costs due to the need to:

make investments in market specific assets and in learning how to optimise the use of these assets;
overcome product differentiation-related advantages enjoyed by incumbents; or
overcome disadvantages presented by the strategic behaviour of incumbents.

As more fully described in Appendix I, these potential sources of sunk costs can create significant impediments to entry when they require that potential entrants factor greater costs into their decision-making relative to incumbents who can ignore such costs in their pricing decisions because they have already made their sunk cost commitment.

The investment required in establishing a reputation as a reliable or quality seller are is also a sunk cost and it can constitutes a barrier to entry when it is a crucial element in attracting buyers, particularly in industries where services are an important element of the product. Under these circumstances, the time to establish a good reputation may make profitable entry more difficult and therefore, delays the competitive impact that an entrant may have in the marketplace.⁸³

Long-term exclusive contracts with automatic renewals, rights of first refusal and termination fees may constitute a barrier to entry. Contracts with attributes that limit buyer switching may make it difficult for firms to gain a sufficient buyer base to be profitable in one or more markets (even when barriers to entry in the industry are otherwise relatively low) and can thus make entry unattractive.⁸⁴ The deterring effects of such contracts are more pronounced when, for example, economies of density or scale are important and make it difficult for new or smaller firms to achieve minimum efficient scale of operations.⁸⁵

Other Entry-Deterring Factors

In markets where economies of scale are significant, entry on a small scale may be difficult unless the entrant can successfully exploit a niche. Conversely, entry in such markets on a large scale may expand available capacity to supply beyond market demand, thereby depressing market prices and making entry less attractive.⁸⁶

Market maturity can also impede entry. Entry may be less difficult and time-consuming in the start-up and growth stages of a market, where the dynamics of competition generally change more rapidly. Mature markets exhibit flat or declining demand, making it more difficult for potential entrants to profitably enter the business because the entrants' sales have to come from existing rivals.⁸⁷

Other cost advantages for incumbents that may deter entry include: transportation costs, control over access to scarce or non-duplicable resources such as technology, land, natural resources and distribution channels, and capital costs.⁸⁸

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PART 7 - COUNTERVAILING POWER

In determining whether a merger is likely to result in a material price increase, the Bureau assesses whether one or more buyers have a countervailing ability to constrain an exercise of market power.⁸⁹ When credible options are available to buyers, buyer concentration can prevent a price increase and make it difficult for sellers to exercise market power.⁹⁰

Buyers may credibly constrain the ability of a seller to exercise market power if:

they have the ability to switch to other sellers in a reasonable amount of time;
they can vertically integrate their operation into the upstream market; or,
the promise of substantial orders can induce expansion of an existing smaller player and/or can sponsor entry by a potential seller not currently in the market, thereby inducing de novo new entry.

Where price discrimination is a feature of the relevant market, it may be possible for some but not all buyers to counter the effects of an exercise of market power. For example, a merged entity may be able to increase price to small buyers who may not have the option to vertically integrate their operations, even though large buyers with this option may be able to resist such a price increase. In such cases, countervailing power may be insufficient to prevent the merged entity from exercising market power in a substantial part of the market.⁹¹

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PART 8 - THE EFFICIENCY EXCEPTION

Overview

Section 96 of the Act provides an efficiency exception to the provisions of section 92. When a merger creates, maintains or enhances market power, subsection 96(1) creates a trade-off framework in which efficiency gains that are likely to be brought about by a merger are balanced against the anti-competitive effects that are likely to result.⁹²

As the starting point, when determining the relevant anti-competitive effects for the purpose of performing the trade-off, the Bureau recognizes the significance of all of the objectives set out in the statutory purpose clause contained in section 1.1 of the Act.⁹³

In general, categories of efficiency that are relevant to the trade-off analysis in merger review include:

allocative efficiency: the degree to which resources available to society are allocated to their most valuable use;
technical (productive) efficiency: the creation of a given volume of output at the lowest possible resource cost; and
dynamic efficiency: the optimal introduction of new products and production processes over time.

These categories are examined in reference to both gains in efficiency and anti-competitive effects (which include losses in efficiency).

For the purpose of the trade-off analysis in litigated proceedings before the Tribunal, the Bureau must show the anti-competitive effects of a merger. The merging parties must show all other aspects of the trade-off, including the nature, magnitude and likelihood of efficiency gains, and whether such gains are greater than and offset the anti-competitive effects.⁹⁴ Whether or not a case proceeds to litigation, in order to effectively carry out the analysis, the Bureau seeks information from the merging parties and other sources to enable it to evaluate both gains in efficiencies and anti-competitive effects.

Merging parties are encouraged to make their efficiency submissions to the Bureau at an early stage of the transaction. This facilitates an expeditious assessment of the nature, magnitude and likelihood of the efficiency gains and of the trade-off between relevant efficiency gains and anti-competitive effects.

Gains in Efficiencies

In order to be considered under subsection 96(1), it must be demonstrated that the efficiency gains "would not likely be attained if the order (before the Tribunal) were made". This involves considering the nature of potential orders that may be made, including those that may apply to the merger in its entirety or are limited to parts of the merger. Each of the anticipated efficiency gains are then assessed to determine whether these gains would likely be attained by alternative means if the potential orders are made.⁹⁵ Where the order sought is limited to parts of a merger, efficiency gains that are not affected by the order are not included in the trade-off analysis.⁹⁶

To facilitate its review of efficiency claims, the Bureau requires information that describes the precise nature and magnitude of each type of anticipated efficiency gain. The information should also address the likelihood that such gains will be achieved and why those gains are not likely be achieved if the potential Tribunal orders are made.

To enable the objective verification of anticipated efficiency gains, efficiency claims should be substantiated by documentation prepared in the ordinary course of business, wherever possible. This includes plant and firm-level accounting statements, internal studies, strategic plans, integration plans, management consultant studies and other available data.

Section 96(2) requires the Tribunal to consider whether the merger is likely to bring about gains in efficiency described in subsection 96(1) that will result in (i) a significant increase in the real value of exports; or (ii) a significant substitution of domestic products for imported products. To assist this analysis, firms operating in markets that involve international trade should provide the Bureau with information which establishes that the merger will lead them to increase output due to greater exports or import substitution.⁹⁷

Types of Efficiencies Generally Included in the Trade-off

As part of its assessment of gains in efficiencies, the Bureau examines claims that productive efficiency and dynamic efficiency are likely to be attained through the merger.

Gains in Productive Efficiency

Productive efficiencies result from real cost savings in resources, which permit firms to produce more output or better quality output from the same amount of input. In many cases, such efficiencies can be quantifiably measured, objectively ascertained, and supported by engineering, accounting or other data. Timing differences in the realization of these savings are accounted for by discounting to the present value.

Productive efficiencies include:

product, plant level and multi-plant level savings in both variable and fixed costs;⁹⁸
savings associated with integrating new activities within the firm;⁹⁹ and
savings arising from transferring superior production techniques and know-how from one of the merging parties to the other.¹⁰⁰

When considering savings of either variable or fixed costs, the Bureau examines claims related to:

economies of scale: product and plant level reductions in the average unit cost of a product through increased production;
economies of scope: savings that arise when the cost of producing more than one product at a given level of output is reduced by producing the products together rather than separately;
economies of density: savings that arise from more intensive use of a given network infrastructure;
savings that flow from specialization, the elimination of duplication, reduced downtime, a smaller base of spare parts, smaller inventory requirements and the avoidance of capital expenditures that would otherwise have been required;
savings that arise from plant specialization, the rationalization of various administrative and management functions (for example, sales, marketing, accounting, purchasing, finance, production) and the rationalization of research and development activities; and
savings relating to distribution, advertising and raising capital.

Gains in Dynamic Efficiency

The Bureau also examines claims that the merger has or is likely to result in gains in dynamic efficiency, including those attained through the optimal introduction of new products, the development of more efficient productive processes, and the improvement of product quality and service. It is recognized that attaining dynamic efficiency is crucial to both the general evolution of competition and the international competitiveness of Canadian industries. Because dynamic efficiency is ordinarily extremely difficult to measure, the Bureau generally relies on documents prepared in the ordinary course of business to assess the validity of such claims. Such efficiencies are generally considered from a qualitative perspective.

Deductions to Gains

Once all efficiency claims have been valued, the costs of retooling and other costs that must be incurred to achieve efficiency gains are deducted from the total value of the efficiency gains that are considered pursuant to section 96(1).¹⁰¹ Integrating two complex, ongoing operations with different organizational cultures can be a costly undertaking and ultimately may be unsuccessful. Integration costs are deducted from the efficiency gains.¹⁰²

Types of Efficiencies Generally Excluded from the Trade-off

Not all efficiency claims qualify for the trade-off analysis. The Bureau excludes:

gains that would likely be attained in any event through alternative means if the potential orders were made¹⁰³ (examples include internal growth, a merger with a third party,¹⁰⁴ a joint venture, a specialization agreement, and a licensing, lease or other contractual arrangement);¹⁰⁵
gains that would not be affected by an order, where the order sought is limited to part of a merger;¹⁰⁶
gains that are redistributive in nature, as provided in section 96(3) of the Act (examples include gains anticipated to arise from increased bargaining leverage that enables the merging parties to extract wage concessions or discounts from suppliers that are not cost-justified,¹⁰⁷ and tax-related gains);¹⁰⁸ and
savings resulting from a reduction in output, service, quality, or product choice.

Anti-Competitive Effects

Subsection 96(1) requires efficiency gains to be balanced against "the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger". The effects to be considered are not limited to resource allocation effects and include all the anti-competitive effects that are likely to arise from a merger, having regard to all of the objectives of the Act.¹⁰⁹ Determination of the relevant anti-competitive effects depends upon the particular circumstances of the merger in question and the markets affected by the merger.

The Bureau examines all relevant price and non-price effects, including: negative effects on allocative, productive, and dynamic efficiencies; redistributive effects; and effects on service, quality and product choice.

In addition to direct effects in the relevant market, the Bureau also considers price and non-price effects in interrelated markets. For example, mergers that are likely to result in increased prices and lower output can impair both domestic and exporting industries that use the merged firm's products as inputs.

Some examples of potential anti-competitive effects that can result from a merger are described below. This list is not intended to be exhaustive. While, in some cases, the negative impacts of a merger may be difficult to measure, all of the relevant anti-competitive effects of a merger are considered for the purposes of the tradeoff. Where anti-competitive effects (such as redistributive effects and non-price effects) cannot be quantified, they are considered from a qualitative perspective.

Price Effects

Loss of allocative efficiency (Deadweight Loss)

A merger that results in a price increase brings about a negative resource allocation effect (referred to as "deadweight loss"), which is a reduction in total consumer and producer surplus within Canada. This reflects a loss of allocative efficiency that is contrary to promoting the efficiency and adaptability of the Canadian economy.

In view of the difficulties associated with estimating the magnitude of a material price increase that is likely to be brought about by a merger and other variables, various estimates of the deadweight loss are usually prepared over a range of price increases and market demand elasticities.

The estimate of deadweight loss generally includes:

losses to consumer surplus resulting from reductions in output due to the merger;
losses in producer surplus that arise when market power is being exercised in the relevant market prior to the merger; and
losses to consumer and producer surplus anticipated to result in interrelated markets.¹¹⁰

Redistributive Effects

Price increases resulting from an anti-competitive merger cause a redistributive effect ("wealth transfer") from buyers to sellers. Providing buyers with competitive prices and product choices is an important objective of the Act.¹¹¹ Therefore, the Bureau examines the extent to which the wealth transfer is part of the trade-off analysis.

There are different ways in which the wealth transfer could be taken into account when evaluating a merger. One approach to the wealth transfer is the "socially adverse effects approach", which attempts to quantify the portion of the transfer that is considered socially adverse.¹¹² The type of information that would assist in applying this approach includes detailed information regarding the type of products produced by the merging parties, the nature of their buyers, the uses to be made of those products by their buyers and the socio-economic profiles of their buyers.

Other approaches to the wealth transfer may be appropriate, depending on the circumstances of a particular case.

Non-price effects

Reduction in Service, Quality, Choice

A substantial prevention or lessening of competition resulting from a merger can have a negative impact on service, quality, product choice and other dimensions of competition that buyers value. Considering these effects is consistent with ensuring that buyers are provided with competitive prices and product choices.

Loss of Productive Efficiency

Mergers that prevent or lessen competition substantially can also reduce productive efficiency as resources are dissipated through x-inefficiency¹¹³ and other distortions.¹¹⁴ For instance, x-inefficiency may arise when firms, particularly in monopoly or near monopoly markets, are insulated from competitive market pressure to exert maximum efforts to be efficient.

Loss of Dynamic Efficiency

Mergers that result in a highly concentrated market may reduce the rate of innovation, technological change, and the dissemination of new technologies with a resulting opportunity loss of economic surplus.¹¹⁵

The Trade-Off

To satisfy the section 96 trade-off, the efficiency gains must both "be greater than and offset" the relevant anti-competitive effects.

The "greater than" aspect of the test requires that the efficiency gains be more extensive or of a larger magnitude than the anti-competitive effects. The "offset" aspect requires that efficiency gains compensate for the anti-competitive effects.¹¹⁶

Both the efficiency gains and the anti-competitive effects can have quantitative (measured) and qualitative aspects to them. To enable appropriate comparisons to be made, timing differences between measured future anticipated efficiency gains and measured anti-competitive effects are addressed by discounting to the present value.¹¹⁷

There is currently no statutory basis for assuming any fixed set of weighting between redistributive effects, deadweight losses and efficiency gains.¹¹⁸ Such weighting depends on the facts of a particular case. Because all gains must be weighed against all effects, the exercise of judgment is required when combining measured gains (effects) with qualitative gains (effects) for the purpose of performing the trade-off.¹¹⁹

Merging parties intending to invoke the efficiencies exception are encouraged to address how they propose that qualitative and quantitative gains and effects be combined and weighed for the purpose of performing the "greater than and offset" aspect of the trade-off; and to explain how and why the gains "compensate for" the anti-competitive effects.¹²⁰

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PART 9 - FAILING FIRM

Business Failure and Exiting Assets

Among the factors that are relevant to an analysis of a merger and its effects on competition, section 93(b) lists "whether the business, or a part of the business, of a party to the merger or proposed merger has failed or is likely to fail." The opening clause of section 93 makes it clear that this information is to be considered "in determining, for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially". The impact that a firm's exit can have in terms of matters other than competition are generally beyond the scope of the assessment contemplated by section 93(b).

Probable business failure does not provide a defence for a merger that is likely to prevent or lessen competition substantially. Rather, the loss of the actual or future competitive influence of a failing firm is not attributed to the merger if imminent failur

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Table of Contents

Foreword

PART 1 - DEFINITION OF MERGER

Control

Significant Interest

Notifiable Transactions

Acquisition of Voting Equity Interests

Non-voting & Convertible Securities

Asset Acquisitions

Increasing an "Interest" in a Business

Other Considerations

PART 2 - THE ANTI-COMPETITIVE THRESHOLD

Overview

Lessening of Competition

Prevention of Competition

Substantiality

PART 3 - MARKET DEFINITION

Overview

Product Market Definition

Geographic Market Definition

Foreign Competition

Delineating Geographic Boundaries

PART 4 - MARKET SHARE AND CONCENTRATION

Participating in the Market Through a Supply Response

Calculating Market Shares

Market Share and Concentration Thresholds

PART 5 - ANTI-COMPETITIVE EFFECTS

Unilateral Effects

Firms Distinguished Primarily by their Products

Firms Distinguished Primarily by their Capacities

Coordinated Effects

PART 6 - ENTRY

Conditions of Entry

Timeliness

Likelihood

Sufficiency

Types of Barriers to Entry

Regulatory Barriers

Sunk Costs

Other Entry-Deterring Factors

PART 7 - COUNTERVAILING POWER

PART 8 - THE EFFICIENCY EXCEPTION

Overview

Gains in Efficiencies

Types of Efficiencies Generally Included in the Trade-off

Gains in Productive Efficiency

Gains in Dynamic Efficiency

Deductions to Gains

Types of Efficiencies Generally Excluded from the Trade-off

Anti-Competitive Effects

Price Effects

Loss of allocative efficiency (Deadweight Loss)

Redistributive Effects

Non-price effects

Reduction in Service, Quality, Choice

Loss of Productive Efficiency

Loss of Dynamic Efficiency

The Trade-Off

PART 9 - FAILING FIRM

Business Failure and Exiting Assets