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Merger Enforcement Guidelines: Part 4 (March 1991)

Evaluative Criteria

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4.1 Overview

Several of the section 93 factors play a major role at the market definition stage. It is important to assess each one of them once the relevant market is defined. For example, as indicated in part 3.2.2.7, identifiable sources of potential production substitution are generally not included in the relevant market where:

(i) significant difficulty would be encountered in distributing or marketing the relevant product; or,

(ii) new production or distribution facilities would be required to produce and sell on a significant scale.

These sources of competition are considered subsequent to market definition, in terms of the section 93(d) assessment of likely future entry into the relevant market.

Likewise, an assessment must be made of the likely role of sources of identifiable domestic or foreign potential competition that may have been excluded from the relevant market because it would not likely constrain a significant and nontransitory price increase by the hypothetical monopolist. The same is true with potential sources of domestic or foreign competition that cannot be identified, and that therefore cannot be included within the relevant market. The extent to which competition is likely to be provided by sources of competition that have not been included within the relevant market is pertinent not only to whether there will likely be a substantial prevention or lessening of competition, but also to how substantial the prevention or lessening of competition is likely to be. An analysis of the various factors discussed in parts 4.2 to 4.11 below may reveal that a merger is likely to raise price across the market by more than the significant level postulated for the purposes of market definition, for longer than two years.

Moreover, the extent to which sellers of particular substitutes that have been included within the relevant market would likely be able to make their product "available" in increased quantities in response to an attempted material price increase by the merged entity must be examined pursuant to section 93(c). Similarly, an evaluation must be made, pursuant to section 93(d), of the barriers to expansion that would likely be faced by firms within the market in responding to a material price increase.

Although it is important in every case to address the relevance of each of the factors highlighted in section 93 in assessing the effects that a merger is likely to have on competition, some factors may have more importance than others. Indeed, the assessment of information relating to future entry (s.93(d)), business failure and exit (s.93(b)), or effective remaining competition (s.93(e)) may, in certain circumstances, provide a sufficient basis, in and of itself, for concluding that a merger is not likely to prevent or lessen competition substantially. That is to say, this conclusion may be arrived at notwithstanding the existence of information that is, on balance, unfavourable to the merger in terms of each of the other factors that may be relevant under section 93.

In general, the Director will conclude that a merger is not likely to prevent or lessen competition substantially where it can be established that, in response to the merger or to the exercise of increased market power resulting from the merger, sufficient entry into the relevant market would occur to ensure that a material price increase would not likely be sustainable in a substantial part of the relevant market for more than two years. Conversely, information indicating that barriers to entry are high cannot provide a sufficient basis, in and of itself, for concluding that a merger is likely to prevent or lessen competition substantially.

The Director will also generally conclude that a merger is not likely to prevent or lessen competition substantially where one of the parties to the merger is likely to fail or exit the market if the merger in question does not proceed, and there are no alternatives to which the firm would likely turn, in the event of a challenge to the merger,(25) which would likely result in a materially higher level of competition in the relevant market.

Similarly, where it is clear that the level of effective competition that would remain is not likely to be reduced, this will generally justify a conclusion that enforcement action is not warranted. Conversely, although it may be concluded that information relating to this factor (s.93(e)) warrants a negative weighting, there are circumstances where such a conclusion may not lead to a finding that the merger is likely to prevent or lessen competition substantially. For example, the effects on competition that are likely to result solely from the elimination of a vigorous and effective competitor (s.93(f)) may not be of sufficient magnitude to enable the Bureau to conclude that competition is likely to be substantially prevented or lessened, i.e., that there is likely to be a material price increase in a substantial part of the relevant market for at least two years.

The importance attributed to the other assessment criteria generally varies considerably according to the facts of individual cases. In some cases, information relating to these factors may be given substantial weight. This is particularly so with foreign competition and the availability of acceptable substitutes.

4.2 Market Shares and Concentration

4.2.1 General Approach

Although information which demonstrates that market share or concentration will be high cannot provide a sufficient basis, in and of itself, to justify a conclusion that a merger is likely to prevent or lessen competition substantially, it is a necessary condition that must exist before such a finding can be made. Absent high post-merger concentration or market share, the effectiveness of remaining competition in the relevant market is generally such as to be likely to constrain the merged entity from acquiring, increasing or maintaining market power by reason of the merger.

Accordingly, the Director generally will not challenge a merger on the basis that the merging parties will be able to unilaterally exercise greater market power than in the absence of the merger, where the post-merger market share of the merged entity would be less than 35 percent. Similarly, the Director generally will not challenge a merger on the basis that the interdependent exercise of market power by two or more firms in the relevant market will be greater than in the absence of the merger, where:

(i) the post-merger share of the market accounted for by the four largest firms in the market would be less than 65 percent, or

(ii) the post-merger market share of the merged entity would be less than 10 percent.(26)

These thresholds simply serve to identify mergers that are unlikely to have anticompetitive consequences from mergers that require a more qualitative analysis, before any conclusions regarding likely competitive impact can be reached. All else being equal, as market share and concentration increase above these thresholds, the potential increases for a merger to give rise to concerns about its likely effect on competition. However, in all cases, an assessment of market shares and concentration is only the starting point of the Bureau's analysis.

In addition to the level of market shares or concentration in the relevant market, an assessment is made of the nature of market share distribution and the extent to which market shares have changed or remained the same over a significant period of time. Other things being equal, the likelihood that a single firm may be able to raise price increases as its individual market share increases, and as the disparity between its market share and the market shares of its competitors increases. Similarly, other things being equal, the likelihood that a number of firms may be able to bring about a price increase through interdependent behaviour increases as the level of concentration in a market rises and as the number of firms declines.(27) In addition, interdependent behaviour often becomes increasingly likely as the market share disparity between significant competitors decreases. By contrast, interdependent behaviour becomes increasingly difficult as the number or size of fringe firms that have the ability to increase output expands.

4.2.2 Calculating Market Shares

The entire actual output of firms that are located within the relevant market, or, in the circumstances described below, the total (used and unused) capacity of such firms, is generally included in the calculation of the total size of the market and the market shares of individual competitors. However, where such firms typically ship significant quantities of output beyond the bounds of the relevant market, and where this output would not likely be diverted to the relevant market in response to the postulated significant and nontransitory price increase, this capacity or output will not generally be included in the relevant market.

Market shares can be measured in terms of dollar sales, unit sales, production capacity or, in certain natural resource industries, reserves. Where the relevant market is composed of a single product that is undifferentiated (e.g., having no unique physical characteristics or perceived attributes), and where firms are all operating at full capacity, dollar sales, unit sales and capacity allocation should yield virtually identical market shares. In such situations, the basis of measurement will largely depend on the availability of data. However, where firms in such markets have excess capacity, the proportion of the total market capacity that is accounted for by a firm's own total capacity is considered to better reflect the firm's relative market position and competitive influence in the market. Accordingly, in these circumstances, market shares will generally be measured on the basis of total capacity. Where it is clear that some of a firm's unused capacity does not exercise a constraining influence in the relevant market (e.g., because the capacity is high-cost capacity, or because the firm is not effective in marketing its product), this capacity will not be taken into account in calculating market shares.

In general, given the difficulty associated with estimating the amount of output that is likely to be diverted to the relevant market by distant sellers located outside of the relevant market, the market shares accounted for by these sellers will be calculated on the basis of their actual dollar sales in the relevant market immediately prior to the merger, whether or not there is a significant degree of differentiation within the market.(28) It is recognized that the market shares so calculated may understate the relative market position and competitive influence of these sellers.

As the level of differentiation between the products in a relevant market increases, the calculation of market shares on the basis of dollar sales, unit sales and capacity produces increasingly dissimilar results. 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 would be greater if shares were calculated on the basis of total capacity than they would be if calculated on the basis of actual unit or dollar sales. If, in response to a material price increase elsewhere in the relevant market, the discount sellers would not likely be able to increase sales to the extent that all of their excess capacity was employed, market shares based on total capacity would be a misleading indicator of the relative market position of these sellers. In such circumstances dollar sales will generally be considered to provide the best indication of the size of the total market and of the relative positions of individual firms. However, unit sales are also considered to provide important information. Accordingly, both dollar sales and unit sales data are generally requested from the merging firms and third parties.

4.3 Foreign Competition

Section 93(a) highlights the importance of assessing the constraining influence of foreign competition in merger analysis, by drawing attention to: "the extent to which foreign products or foreign competitors provide or are likely to provide effective competition to the businesses of the parties to the merger or proposed merger". This complements the section 1.1 statement of underlying purpose for the Act, which provides that the objective of the Act is to maintain and encourage competition in Canada in order to "... expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada".

The assessment of foreign competition is particularly important in the context of the globalization of markets, the continuing growth in foreign direct investment and strategic alliances in Canada, the Canada-U.S. Trade Agreement (CUSTA), the rationalization of European industry that is being facilitated by the integration of the European Community member states, and increasingly vigorous competition from firms based in newly industrialized countries.

The constraining influence of foreign firms on competition in Canada can range from non-existent to sufficient to ensure that the merger of the last two domestic firms in a market would not likely prevent or lessen competition substantially. The majority of cases fall between these two extremes. As indicated in part 3.3.2.9, the same principles are applied in assessing the likely constraining influence of both domestic and foreign sources of competition on a merged entity.

However, in evaluating the extent to which foreign products or foreign competitors are likely to provide effective competition to the businesses of the parties to a merger, there are a variety of considerations unique to the assessment of foreign competition.(29) One of the more important factors in this regard is tariffs. In some markets, foreign competition is completely absent due to a tariff, and would remain absent for this reason even if a merger resulted in a material price increase. In these situations, where competition among domestic firms has kept prices significantly below the level at which imports would be competitive and would likely continue to do so after the merger, foreign competition cannot be relied upon to ensure that competition will not be prevented or lessened substantially. By contrast, where domestic firms are pricing just below the tariff ceiling prior to a merger, it is usually the case that further price increases would likely be prevented by foreign competition.(30) Between these two extremes, the constraining influence of foreign competition ordinarily varies directly with the level of the tariff.

For example, in some markets for differentiated products, the tariff is low enough to permit foreign products to occupy a particular niche. In these situations, the extent to which a merger between two competitors in other segments of the relevant market would be likely to lead to a material price increase would depend upon:

(i) the extent to which buyers would likely switch to the foreign product(s) in response to such a price increase; and,

(ii) the extent to which the foreign suppliers of these products would likely expand their production of the niche product to meet the increased demand.

In evaluating the feasibility and likelihood of success of potential responses of foreign firms, such as commencing the production and sale of products outside of this niche, the various matters discussed in part 4.6 are relevant.

In assessing the effects of tariffs, it is important to evaluate the extent to which reductions pursuant to the CUSTA and the General Agreement on Tariffs and Trade (GATT) are likely to result in increasing the actual constraining influence of foreign competition. The impact of the CUSTA and the GATT varies from one market to another. In some industries, annual tariff reductions will result in a gradual increase in the role of foreign competition. In others, foreign competition will not become significant until the final stages of a ten year reduction in the tariff. Alternatively, the effectiveness of foreign competition may be likely to increase substantially, subsequent to a particular annual or one time reduction. The scheduling of reductions in tariffs (and other non-tariff trade barriers) can therefore be very important to merger review.

Where import quotas and "voluntary" restraint agreements exist, they place a ceiling on the extent to which foreign products that are subject to these quotas can provide effective competition in domestic markets.(31) In situations where the limit permitted by such restraints is already met prior to the merger, these sources of competition cannot be relied upon to ensure that a merger will not result in a substantial prevention or lessening of competition.

In addition to the foregoing, it is important to assess the extent to which the effectiveness of foreign competition is likely to be hindered or impeded by the following:

  • regulations that impose product quality or labelling standards and specifications, or that impose licence/permit requirements;

  • the difficulties or time delays in obtaining service and spare parts;

  • uncertainties regarding shipping delays;

  • the threat of an antidumping complaint being initiated by domestic firms;

  • government procurement policies;

  • intellectual property laws;

  • domestic ownership restrictions;

  • initiatives to "buy local";

  • exchange rate fluctuations;

  • technological trends;

  • formal and informal global market allocation arrangements within multi-national enterprises that have Canadian affiliates or between independent multinational firms;

  • international product standardization within such enterprises;

  • the terms of license, franchise and non-competition contracts between foreign firms and their Canadian subsidiaries (which may extend to third parties that have purchased the shares or assets of such subsidiaries);

  • the extent to which developments relating to any of the above matters (32) are likely to reduce the likelihood that long term contracts with foreign firms will be renewed;

  • conditions in the home markets of foreign competitors; and,

  • whether the industry has a particular susceptibility to supply interruptions from abroad.

An assessment is also made of the role that the following considerations are likely to play in creating disincentives to international transactions: unfamiliarity with Canadian market;(33) difficulties presented by exchange rate fluctuations (34) and customs and other requirements associated with processing imports; and a general reluctance of domestic intermediate buyers to purchase from a foreign country.

It is equally important to assess factors that may be likely to facilitate the entry of foreign products into Canada, such as: the existence of cross-border distribution systems that can accommodate additional volume; a high level of information possessed by domestic buyers about foreign products and how to source them; the fact that foreign suppliers or their products have already been placed on approved sourcing lists; the existence of a significant level of excess capacity held by foreign firms; a high degree of similarity between the needs of domestic buyers and the needs of customers of foreign firms; exchange rate trends; and the existence of technology licensing agreements, strategic alliances and other affiliations between domestic buyers and foreign firms.

4.4 Business Failure and Exit

4.4.1 Underlying rationale

Section 93(b) draws attention to the importance of assessing "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).

It is important to assess the financial health of the parties to a merger from a competition perspective, for three principal reasons. First, the loss of the actual or future competitive influence of a failing firm cannot be attributed to the acquisition (35) of such a firm where the firm would have exited the relevant market in any event . Second, the extent to which the acquisition of a failing firm can increase the market power of the acquiror is often reduced as the failure of the former becomes increasingly likely, and as its relative market position weakens. Third, the likelihood that any market power effects that will materialize subsequent to the merger can be avoided through one of the alternatives discussed below is typically reduced as the failure of the firm in question becomes increasingly likely.

However, probable failure of a party to a merger is not sufficient to warrant a conclusion that the merger is not likely to prevent or lessen competition substantially. An assessment must be made of whether acquisition of the failing firm by a third party, retrenchment by the failing firm, or liquidation would likely result in a materially higher level of competition in the relevant market than if the merger proceeded. Conversely, the absence of such an alternative to the merger is sufficient to warrant a conclusion that a merger is not likely to prevent or lessen competition substantially. For this reason, careful consideration of these alternatives is required in every case where submissions are made in terms of section 93(b). The approach to the assessment of these matters is discussed below.

The underlying rationale of section 93(b) is equally applicable to situations where a firm wishes to exit a market for reasons other than failure, such as unsatisfactory profits, or a desire by a diversified firm to focus its efforts elsewhere. In short, the anticompetitive effects that may arise in a market subsequent to the acquisition of a failing firm cannot be attributed to the merger, where there are no likely alternatives that would result in maintaining a materially higher level of competition in the relevant market than if the merger proceeded. Accordingly, likely failure is not a necessary condition that must exist in order for the approach described in parts 4.4.3 to 4.4.5 to provide a justification for concluding that a merger is not likely to prevent or lessen competition substantially. However, as failure becomes less likely, it generally becomes more difficult to establish that if the merger did not proceed:

(i) a sale to a third party would not occur;

(ii) the firm proposing to exit would not likely remain in the market in its actual state or in a retrenched form; and,

(iii) that liquidation would likely occur.

4.4.2 Assessing Failure

A firm is considered to be failing where:

(i) it is insolvent or is likely to become insolvent;

(ii) it has initiated or is likely to initiate voluntary bankruptcy proceedings; or,

(iii) it has been, or is likely to be, petitioned into bankruptcy or receivership.

Technical insolvency is considered to occur when liabilities exceed the realizable value of assets, or where a firm is unable to pay its liabilities as they come due.

In assessing the extent to which a firm is likely to fail, the Bureau typically seeks the following information:

  • the most recent, audited, financial statements, including notes thereto, and qualifications in the auditor's report;

  • projected cash flows;

  • whether any of the firm's loans have been called, or further loans/line of credit advances at viable rates have been denied and are unobtainable elsewhere;

  • whether suppliers have curtailed or completely eliminated trade credit;

  • whether there have been persistent operating losses (36) or a serious decline in net worth or in the firm's assets;

  • whether such losses have been accompanied by an erosion of the firm's relative position in the market;

  • the extent to which the firm engages in "off balance-sheet" financing - e.g., leasing;

  • whether the value of publicly traded debt of the firm has significantly dropped;

  • whether the firm is unlikely to be able to successfully reorganize pursuant to Canadian or foreign bankruptcy legislation, the Company Creditors Arrangement Act, or through a voluntary arrangement with its creditors.

These considerations are equally applicable to failure-related claims concerning a division or a wholly owned subsidiary of a larger enterprise. However, in assessing submissions relating to the failure of a subsidiary or a division, particular attention will be paid to: transfer pricing within the larger enterprise, intra-corporate cost allocations, management fees, royalty fees, and other matters that may be particularly relevant in this context. These allocations will generally be assessed in relation to the values of equivalent arm's length transactions.

Objective verification of matters addressed in financial statements will ordinarily be considered to be provided by financial statements that have been audited or prepared by a person who is independent of the firm that is alleging failure. The Bureau's assessment of financial information will include a review of historic, current and projected income statements and balance sheets. The reasonableness of the assumptions underlying financial projections will also be reviewed in light of historic results, current business conditions and the performance of other businesses in the industry.

The Bureau generally requires up to six week so assess the extent to which a firm is likely to fail if the merger in question does not proceed.(37) The time required to make this assessment will vary from case to case. Parties intending to invoke the failing firm rationale are therefore encouraged to make their submissions in this regard as early as possible.

4.4.3 No competitively preferable purchaser

The assessment of section 93(b) cases focuses primarily upon whether there exists a third party whose purchase of the exiting firm would likely result in a materially higher level of competition in a substantial part of the market,(38) and who would be willing to pay a price which, net of the costs associated with making the sale (39), would be greater than the proceeds that would flow from liquidation, less the costs associated with such liquidation. For the remainder of these Guidelines, this will be referred to as the "net price above liquidation value". Where it is determined that such a third party (a "competitively preferable purchaser") exists, it can generally be expected that if the merger under review could not be completed, the acquiree would either seek to merge with that competitively preferable purchaser, or remain in the market.

Where a competitively preferable purchaser exists, the likely effects that can be attributed to the first proposed merger include:

(i) the loss of the competitively preferable purchaser's less anticompetitive, or even procompetitive, merger; and,

(ii) the acquisition or preservation of a greater degree of market power by the acquiror than would otherwise be the case.

It is recognized that when a merger is likely to result in a substantial prevention or lessening of competition, the acquiring party may be able to offer a premium over what competitively preferable purchasers have offered or are likely to offer. The Bureau's analysis focuses solely upon whether a competitively preferable purchaser has offered a net price above liquidation value, or is likely to do so if the proposed merger does not proceed.

Searches for alternative buyers will ordinarily be required to be conducted by an independent third party, e.g., an investment dealer, trustee or broker who has no material interest in either of the merging parties or the proposal in question. In general, this third party should be:

(i) provided with all such information as is generally required by a purchaser of a business;

(ii) given permission to release this information to prospective buyers;

(iii) given access to the premises of the exiting firm if desired;

(iv) given authority to determine whether access to these premises by prospective purchasers is necessary;

(v) given permission to advertise the search and to circulate a written request for offers, unless a more discrete search is warranted in the circumstances;

(vi) given permission to state that all offers will be considered and to otherwise make it clear that bids do not have to be greater than or equal to the price offered by the person proposing to make the acquisition being reviewed by the Bureau; and,

(vii) provided with as much time as is reasonably necessary, up to maximum of 60 days(40) to conduct the search.

The involvement of an independent third party may not be required where the Director is satisfied that a thorough search has already been undertaken, or where the involvement of such a third party would likely cause significant harm to the exiting firm. In such circumstances, the exiting firm may satisfy the Director in other ways that a thorough search for a competitively preferable purchaser can be made.

Firms that anticipate that they may be required to undertake a search for a competitively preferable purchaser are encouraged to perform the search prior to contacting the Bureau, or at any time during the Bureau's review. It is not necessary to wait until the Bureau has completed its analysis of the likely effects of the merger on competition.(41)

Where the Director has concluded that competition is likely to be prevented or lessened substantially by the merger under review, and where one or more conditions attached to an offer made by a competitively preferable purchaser have not been fulfilled within the maximum 60 day period described above, a request may be made to extend this period. In the absence of such an extension, it may be concluded that the existence of a conditional offer is a sufficient basis to warrant a finding that the merger is likely to prevent or lessen competition substantially. Before making a decision to challenge a merger on the basis that a competitively preferable purchaser exists, the Director will assess the prospective alternative buyer's ability to raise the required financing, its managerial expertise, and the extent to which it will likely be an effective competitor.

4.4.4 Retrenchment

As indicated in part 4.4.1, anticompetitive effects, that are likely to arise in the relevant market if the merger proceeds, cannot be attributed to the merger if there are no alternatives to the merger. It is, therefore, relevant to assess whether the firm proposing to exit the relevant market would likely remain in that market, in its actual state or in a retrenched form, (42) if the proposed merger does not proceed. Where it appears that the firm would likely remain in the market rather than sell to a competitively preferable purchaser or liquidate, it is necessary to determine whether this alternative to the proposed merger would likely result in a materially greater level of competition than if the proposed merger proceeded. Unless such a difference in the level of competition in the market is likely, the assessment of this aspect of the review of alternatives to the merger will weigh in favor of a conclusion by the Director to not challenge the merger.

4.4.5 Liquidation

Where the Bureau is able to confirm that there are no competitively preferable purchasers for the exiting firm and that there are no feasible and likely retrenchment scenarios, it assesses whether liquidation of the firm would likely result in a materially higher level of competition in a substantial part of the market than if the merger in question proceeded. In some cases, liquidation can facilitate entry (43) into, or expansion in, a market by enabling actual or potential competitors to compete for the exiting firm's customers or assets to a greater degree than if the exiting firm merged with the proposed acquiror.

4.5 The Availability of Acceptable Substitutes

The provisions of section 93(c) recognize that, in addition to identifying which products compete with the products of the merging parties, it is necessary to assess the extent to which the supply of these products would likely increase in response to an attempted exercise of market power. Specifically, section 93(c) draws attention to the relevance of considering: " the extent to which acceptable substitutes for products supplied by the parties to the merger or proposed merger are or are likely to be available". A product is generally not considered to be an acceptable substitute for another product unless it is in the same relevant market as the second product. Similarly, a particular geographic source of supply of the relevant product is generally not considered to be an acceptable substitute for a local source of supply of the relevant product unless it is in the same relevant market as the local source of supply. Conversely, all product and geographic substitutes that are included in a single relevant market are typically considered to be "acceptable" within the meaning of section 93(c).The approach to the determination of whether product and geographic substitutes warrant inclusion in the relevant market is described in part 3 of these Guidelines.

Once the relevant market has been delineated, it is important to consider the extent to which sellers of the "acceptable" substitutes that have been included in the market would likely make these substitutes individually and collectively available in increased quantities in response to a material price increase imposed by the merged entity, alone or interdependently with others.

Where the overall availability of acceptable substitutes is such that the merging parties would likely be able to impose a material price increase in a substantial part of the relevant market, this generally suggests that the merger will likely lessen competition substantially, unless such anticompetitive effects would likely be eliminated within two years by new entry or expansion by foreign or domestic sources of competition. In assessing the extent to which sellers of acceptable substitutes are likely to increase the supply of their products in the relevant market in response to a material price increase, the assessment will not be limited to an evaluation of whether such sellers collectively have, or could easily add, sufficient additional capacity to ensure that the price increase cannot be maintained in a substantial part of the relevant market . An assessment will also be made of whether it is likely that the total supply of acceptable substitutes in the market will in fact increase sufficiently to ensure that a material price increase cannot be sustained for two years.

Furthermore, an assessment will be made of whether buyers are likely to switch a sufficient quantity of their purchases to acceptable substitutes to ensure that a material price increase cannot be profitably maintained in the relevant market post-merger. In this regard, an evaluation will be made of the extent to which the products of the merging parties are significantly better substitutes for one another than are other substitutes in the relevant market.

4.6 Barriers to Entry

4.6.1 General Approach

The assessment of potential competition is a central and fundamental aspect of merger review under the Act. This is implicitly recognized in several of the section 93 factors, and most prominently in section 93(d), which draws attention to the relevance of considering:

"any barriers to entry into a market, including:

(i) tariff and non-tariff barriers to international trade,

(ii) interprovincial barriers to trade, and

(iii) regulatory control over entry and any effect of the merger or proposed merger on such barriers".

The section 93(d) stage of the Bureau's assessment is directed toward determining whether entry by potential competitors would likely occur on a sufficient scale in response to a material price increase or other change in the relevant market brought about by the merger, to ensure that such a price increase could not be sustained for more than two years.

In this assessment, consideration is given to any matter or combination of matters that would make entry on this scale within two years less likely or more difficult. This generally involves an examination of whether entry is likely to be delayed or hindered by the presence of absolute cost differences or the need to make investments that are not likely to be recovered if entry is unsuccessful. These investments are referred to in the remainder of these Guidelines as sunk costs.

Some entry impediments are generally found to exist in relation to most markets. Therefore, the analysis of entry conditions does not focus upon whether barriers to entry exist, but upon the following key issues:

(i) what must be done and what commitments must be made by potential competitors in order to enter on a scale that would be sufficient to eliminate a material price increase in the relevant market;

(ii) what factors are likely to delay entry, and are they collectively likely to prevent the scale of entry described above from occurring within two years; and,

(iii) are potential competitors likely to enter, given the commitments that must be made, the time required to become an effective competitor, the risks involved and the likely rewards.

Unless such entry is likely to occur, it will not generally be considered to provide a sufficient replacement for the loss of actual competition that would result from the merger.

In general, four principal categories of entry are assessed:

(i) entry from identified potential sources of production substitution that were not included within the relevant market, for the reasons articulated in section 3.2.2.7;

(ii) entry from other identified sources of competition that were excluded from the relevant market on the basis of the "significant" or the "nontransitory" aspects of the test articulated in section 3.1;

(iii) entry from sources that cannot be identified (and therefore cannot be assessed at the relevant market stage) - e.g., entry from unknown potential competitors; and,

(iv) expansion by firms within the market.

In assessing the extent to which future entry would likely occur, the Bureau's analysis generally commences with an assessment of firms that appear to have an entry advantage, i.e., fringe firms already in the market, (44) firms that sell the relevant product in adjacent geographic markets, firms that produce products with machinery or technology that is similar to that employed to produce the relevant product, firms that sell in related upstream or downstream markets, and firms that sell through similar distribution channels or that employ similar marketing and promotion methods. These are typically the most important sources of potential competition. Other potential sources of entry are then assessed.

Helpful information regarding commitments that must be made and the time required to become an effective competitor is often provided by firms that have recently entered or exited the market. However, the fact that entry has or has not occurred in the past does not in and of itself indicate that additional new entry would likely take place in response to a material price increase or other change in the market brought about by a merger. Additional useful information is provided by the stage of growth of the relevant market. Generally speaking, new entry is more likely to occur when a market is in its growth stage, where increasing demand accommodates entry, than when a market is stagnating or declining.

As indicated in part 4.1, the Director will generally conclude that a merger is not likely to prevent or lessen competition substantially where it can be established that in response to the merger or to the exercise of increased market power resulting from the merger, sufficient entry into the relevant market would occur to ensure that a material price increase would not likely be sustainable in a substantial part of the relevant market for more than two years.

4.6.2 Time

An important aspect of the assessment of entry conditions involves determining the time that it would take for a potential competitor to respond to a material price increase or other change in the market brought about by a merger, and to become an effective competitor in the relevant market. In general, the longer the period of time that would be required for potential competitors to become effective competitors: the less likely it is that incumbent firms will be deterred by the threat of future entry from exercising market power in the first place; and, the longer any market power that is exercised can be maintained.

In the assessment of whether entry will likely occur within two years (45) on a scale sufficient to ensure that a material price increase cannot be sustained beyond this period, account will be taken of whether the delay and losses that potential entrants can expect to encounter before this scale of sales is attained will likely increase the sunk costs, risk or uncertainty perceived to be associated with such entry, and thereby reduce the likelihood that this entry will occur.>

4.6.3 Cost Advantages

Incumbent firms can gain important cost advantages relative to potential entrants through a variety of sources. Sections 93(d)(i), (ii) and (iii) highlight three sources of cost advantage that can present potential entrants with considerable, and in some cases insurmountable, barriers to entry. The extent to which tariff and non-tariff barriers to international trade can facilitate the exercise of market power in domestic markets is discussed in part 4.3.

Interprovincial barriers to trade and regulatory control over entry can take many forms, including:

  • local content rules; laws that impose local ownership requirements;

  • regulations that restrict the right to supply to certain persons or classes of persons; (46) local product standards;

  • environmental or other laws that impose costs on new entrants that do not have to be borne by incumbents due to "grandfather" provisions in the laws; and,

  • licensing and other restrictions on transportation, packaging, advertising and other forms of promotion.
Other potential sources of cost advantages include transportation costs and control over access to scarce or non-duplicable resources, e.g., technology, natural resources and distribution channels.

4.6.4 Sunk Costs

In addition to the various start-up sunk costs that new entrants are often required to incur, such as acquiring market information, making the entry decision, developing and testing product designs, installing equipment, engaging new personnel and setting up distribution systems, potential entrants may face significant sunk costs as a result of a need to:

(i) make investments in market specific assets and in learning how to optimize the use of these assets;

(ii) overcome product differentiation-related advantages enjoyed by incumbent firms; and/or

(iii) overcome disadvantages presented by the strategic behaviour of incumbent firms.

Each of these potential sources of sunk costs can create significant impediments to entry by presenting potential entrants with a situation where they must factor greater costs into their decision making than incumbent firms that have already made their sunk cost commitment, and can, therefore, ignore such costs in their pricing decisions. This asymmetry typically presents potential entrants with a recognition that they face greater risks and a lower expected return (47) than what is faced by incumbent firms. In general, risk and uncertainty increase, and the likelihood of significant future entry decreases, as the proportion of total entry costs accounted for by sunk costs increases. The focus of the Bureau's assessment of sunk costs is upon whether the likely rewards of entry, the likely time required to become an effective competitor and the risk that entry will not ultimately be successful, taken together, justify making the sunk investments that would be required to undertake the entry initiative. The manner in which the three enumerated potential sources of sunk costs can impede the ability of potential entrants to become significant competitors is discussed in greater detail below in Appendix 1.

4.6.5 Effects of Mergers on Barriers

Section 93(d) draws attention to the importance of assessing the extent to which mergers are likely to affect barriers to entry into a market. In evaluating whether entry is likely to be more difficult as a result of a merger, the Bureau focuses primarily upon determining whether the sunk costs that a future entrant would have to commit increase, due to the fact that:

(i) the merger effectively results in requiring any prospective entrant into the relevant market to enter at a second stage as well, as a result of the elimination of one of the few remaining important sources of supply or important distribution outlets (cf. part 4.11.1);

(ii) the merger removes an important entry opportunity for a potential entrant, who would otherwise have been more likely to enter by acquiring the acquired firm or some of the acquired firm's assets;

(iii) the merger results in potential entrants having to enter the relevant market on a greater scale; and/or,

(iv) the merger increases the risks associated with entry, in either absolute or relative terms.

In addition, the Bureau assesses whether entry is likely to require more time as a result of the foregoing or any other effects of a merger.

4.7 Effective Remaining Competition

Section 93(e) draws attention to "the extent to which effective competition remains or would remain in a market that is or would be affected by the merger or proposed merger". Effective remaining competition is a broad concept that refers to the collective influence of all sources of competition in a market. Some of these sources have already been addressed in parts 4.3, 4.5 and 4.6 above, which highlight the Director's approach to the assessment of the extent to which competition is likely to be provided by foreign competition, acceptable substitutes and new entry. The nature of innovation and change in a market, which is discussed below in part 4.9, can also significantly impact upon the effectiveness of remaining competition.

In addition to these matters, it is important to consider the extent to which the general effectiveness of remaining competition is enhanced by the competitive initiative of individual competitors in the market, and by the collective constraining influence of these sources of competition on the ability of particular firms to exercise market power unilaterally or interdependently. In this regard, an assessment is made of the likely nature and extent of forms of rivalry such as discounting and other aggressive pricing strategies, innovative distribution and marketing methods, product and packaging innovation, and aggressive service offerings. These and other forms of competition give rise to a competitive environment that contrasts sharply with markets where competitors accept stability or are content to follow attempts at price leadership or other initiatives of existing or aspiring market leaders. In addition, an assessment is made of the extent to which competitors are likely to remain as vigorous and effective as prior to the merger.

As indicated in part 4.1, where it is clear that the level of effective competition that would likely remain in the relevant market is not likely to be reduced as a result of the merger, this alone will generally justify a conclusion not to challenge the merger. This is so whether the absolute level of effective competition in the market in question appears to be high or low.

4.8 Removal of a Vigorous and Effective Competitor

By orienting the analysis toward an assessment of the competitive attributes of the acquired firm, section 93(f) draws more direct attention to what is likely to be lost as a result of the merger than any other provision of section 93. This clause contemplates an examination of the extent to which there is "any likelihood that the merger or proposed merger will or would result in the removal of a vigorous and effective competitor".

A firm that is a vigorous and effective competitor often plays an important role in pushing, or pressuring other firms to extend the limits of competition in a market toward new frontiers. Alternatively, a firm may be characterized as vigorous and effective because it makes an important contribution toward maintaining a higher level of competition than that which would exist in its absence. When such a firm is eliminated through a merger, competition is prevented or lessened to some degree.

There can be a wide variety of indications that a competitor may be vigorous and effective. These include information which indicates that the firm in question:

  • is innovative in terms of product offerings, distribution, marketing, packaging, etc.;

  • engages in discounting or other aggressive pricing strategies;

  • has a history of not following price leadership and other market stabilizing initiatives by competitors;

  • is a disruptive force in a market that appears to be otherwise susceptible to interdependent behaviour;

  • provides unique service/warranty benefits to the market, or helps to ensure that similar benefits offered by other competitors are not reduced; has recently expanded capacity, or has plans to do so;

  • has recently made impressive gains in market share, or is positioned to do so; or,

  • has recently acquired patents, or will soon do so.

A firm does not have to be among the larger competitors in a market in order to be a vigorous and effective competitor. Small firms can exercise an influence on competition that is disproportionate to their size.

In the Director's view, the removal of a vigorous and effective competitor through a merger is not generally sufficient, in and of itself, to warrant enforcement action under the Act. It must also be established that as a result of the removal of a vigorous and effective competitor, prices will be materially higher than in absence of the merger; i.e., there must also be findings unfavorable to the merger in terms of other factors, in particular, effective remaining competition and future entry.

4.9 Change and Innovation

Section 93(g) highlights the importance of taking into account "the nature and extent of change and innovation in a relevant market" in assessing the likely effects of a merger on competition. An assessment of the extent of likely change and innovation plays a fundamental role in the analysis of several of the matters that have already been discussed, e.g., market definition, foreign competition, the availability of substitutes, future entry and effective remaining competition. In the context of section 93(g), a further evaluation is made of the general nature and extent of change and innovation to determine whether there are broader considerations that should be taken into account in deciding whether enforcement action is warranted.

In addition to technological change and innovation in products and processes, an assessment is made of the general impact on competition of the nature and extent of other forms of change and innovation, e.g., 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 imposed on remaining competitors in a market by the nature and extent of dynamic developments in any of these areas may be such as to ensure that a material price increase is unlikely to occur or will not be sustainable. This may be especially the case where a merger stimulates or accelerates the change or innovation in question.

A further source of information that is relevant in the section 93(g) analysis is the stage of market growth. In the start-up and growth stages of a market, the dynamics of competition generally change more rapidly than in the mature stage, which is typically characterized by a higher degree of stability. In addition, entry into start-up and growth markets is less difficult and time consuming than it is in relation to mature markets. For these and other reasons, it may be more difficult to establish that a merger is likely to facilitate the exercise of market power in the expansive start-up and growth stages of a market than in the mature stage of a market.

It is equally important to assess the extent to which a merger is likely to facilitate the exercise of market power by impeding the process of change and innovation. This can occur, for example, where the introduction of new products, processes, marketing approaches, aggressive R&D initiatives or business methods, etc., is hindered or delayed by a merger which eliminates a new and innovative firm that presents a serious threat to incumbent firms.

When a merger is likely to enhance or facilitate the maintenance of existing market power, representations regarding how the merger may be likely to give rise to innovation-related synergies and other efficiencies will be considered pursuant to section 96.

4.10 Additional Evaluative Criteria

Section 93(h) recognizes that evaluative criteria in addition to those discussed in parts 4.2 to 4.9 may be relevant to an assessment of whether a merger is likely to prevent or lessen competition substantially. This provision draws attention to "any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger". In parts 4.10.1 and 4.10.2, these Guidelines highlight two criteria that are generally assessed, together with the factors discussed in parts 4.2 to 4.9, when the Bureau is concerned that the merger may be likely to facilitate the exercise of interdependent behaviour.

4.10.1 Market transparency

Where a merger raises concerns that it may be likely to facilitate interdependent behaviour, the extent of transparency in the relevant market will ordinarily be assessed. Transparency in this context connotes information that is readily available in the market about competitors': prices, levels of service, innovation initiatives, product quality, product variety, levels of advertising, etc. In general, as the level of transparency in a market decreases, coordinated behaviour becomes increasingly difficult, because firms find it harder to detect and retaliate against secret discounts and other deviations from interdependent situations.

Market transparency is typically increased by the following: delivered or basing point pricing schemes; posted pricing; circulation of price books; product, service or packaging standardization; exchanges of information (whether through a trade association, trade publication, or otherwise) regarding matters such as pricing, output, innovation, bids won and lost, and advertising levels; public disclosure of this information by buyers or through government sources; and "meet the competition" or "most favored nation" clauses in contracts.

4.10.2 Transaction value and frequency

Where a merger raises the concern that it may be likely to facilitate interdependent behaviour, an assessment will ordinarily be made of the extent to which the value and frequency of the typical transaction in the relevant market render this type of conduct more difficult to sustain. Interdependent behaviour often becomes increasingly difficult as the frequency and regularity of sales of the relevant product decrease, and as the value of each sale increases. This is due to the fact that departures from interdependent situations become harder to detect and retaliate against as the frequency and regularity of sales decrease. In addition, the incentives to engage in secret discounting and other concealable competitive initiatives increase with the value of individual sales.

4.11 Vertical Mergers

Vertical mergers generally only raise concerns in the circumstances described below in parts 4.11.1 and 4.11.2. However, these circumstances cannot, in and of themselves, provide a sufficient basis for concluding that a merger is likely to prevent or lessen competition substantially. When they are found to exist, an assessment of the evaluative criteria discussed in parts 4.2 to 4.10 above must be undertaken before conclusions can be made about the likely effects of the merger on competition.

4.11.1 Increased Barriers to Entry

A vertical merger may raise concerns where the elimination of an independent upstream source of supply (or downstream distribution outlet) leaves only a small amount of unintegrated capacity (48) at either of the stages at which the acquiror or the acquiree operate. In particular, concerns may be raised when the amount of unintegrated capacity at one stage (the secondary market) is sufficiently small that an entrant into the other stage (the primary market) would consider it necessary to simultaneously enter the secondary market. In general, where such simultaneous entry into both the primary and secondary markets would involve incurring greater sunk costs than what would be required to enter into the primary market alone, barriers to entry into the primary market are effectively raised. (49)

However, an increase in the height of barriers to entry into a primary market only presents grounds for concern under the merger provisions of the Act where the degree of actual competition that would remain subsequent to the merger would be so low that it would be possible for a successful new entrant to exercise an important constraining influence on prices in the market. An assessment of this matter necessarily involves an evaluation of the criteria discussed in parts 4.2 to 4.10 above.

The Director is not likely to conclude that a vertical merger is likely to prevent or lessen competition substantially unless:

(i) the merger results in rendering unlikely entry into the primary market on a scale sufficient to eliminate a material price increase within two years, due to the need to simultaneously enter the secondary market; (50) and,

(ii) the exercise of market power in the primary market is likely to be facilitated by the merger in the absence of such entry.

In considering whether a requirement for simultaneous entry at two stages is likely to make successful, effective entry within two years more difficult or less profitable, an assessment will be made of whether entrants in such circumstances are likely to be faced with higher costs of capital than incumbent firms, as a result of the fact that greater risk is involved in attempting successful two-stage entry. An assessment will also be made of whether a difference in the levels of minimum-efficient-scale in the primary and secondary markets would likely impose significant additional costs on a two stage entrant.

4.11.2 Upstream interdependence facilitated by forward integration into retail

A merger that results in, or increases, an existing high degree of vertical integration getween an upstream market and a downstream retail market can facilitate interdependent behaviour by firms in the upstream market by making it easier to monitor the prices charged by rivals at the upstream level. In general, such mergers will not likely be found to be likely to prevent or lessen competition substantially unless:

(i) the prices at which transactions are actually made at the retail level are more visible than the prices at which upstream transactions are actually made;

(ii) conditions in the upstream market are otherwise conducive to the interdependent exercise of market power; and,

(iii) the percentage of upstream output that is sold through unintegrated firms is so low that post-merger sales to such firms on concealable terms would not likely result in preventing a material price increase from being imposed and maintained for two years.

4.12 Conglomerate Mergers

In general, conglomerate mergers (51) can only give rise to concerns under the Act where it can be demonstrated that, in absence of the merger, one of the merging parties would likely have entered the market de novo. In such circumstances, enforcement action will only be warranted where it can be established that prices would likely be materially higher in a substantial part of the market for more than two years than they would be if the merger did not proceed. For example, concerns could be raised under the Act when a dominant firm that is exercising market power in the relevant market acquires a firm in an adjacent market that has signaled an intention to enter the relevant market by attempting to negotiate contracts with customers of the dominant firm that are very favorable, from the perspective of those customers. Conversely, a similar anticompetitive effect can result where a large firm that would otherwise have entered the relevant market de novo, thereby increasing capacity and introducing a new and independent source of competition in the market, simply replaces a significant incumbent firm through merger.

Before concluding that de novo entry would likely have occurred in absence of the merger, the Director generally requires objectively verifiable information that clearly supports this proposition, e.g., internal documents that pre-date the merger, recent initiatives by the firm to contest the market, an application for regulatory approval, or the registration of a patent.

25. The various alternatives that must be assessed and dismissed as being unlikely before the Bureau will conclude that the market power effects that are likely to arise subsequent to the merger cannot be attributed to the merger are discussed in part 4.4 below.

26. Given that calculation of market shares is reasonably, but not entirely, accurate, and given that the Bureau's definition of the market may differ from that of the parties, full information should be provided to the Bureau regarding the merger and its likely effect on competition, where either the anticipated four-firm concentration level (CR4), or the market share accounted for by the merged entity, is close to the above- described thresholds.

27. Generally speaking, as the number of significant firms in a market decreases, the difficulties and costs associated with coordinating behaviour decrease and the probability of detecting departures from implicit or explicit arrangements increases.

28. Cf., part 3.3.2.9 and note 22 above. This approach contrasts with that taken with regard to firms located within the relevant market, the shares of which may be calculated on the basis of total (used and unused) capacity, in the circumstances described below.

29. Given that domestic and foreign competition is assessed in the same manner, the matters discussed in part 3 are equally applicable when assessing the likely constraining influence of foreign sources of competition. Some of the considerations highlighted in this section may also hinder or facilitate the ability of firms in one area of Canada to constrain the market power of firms in another area of Canada.

30. In these circumstances, the merger would not likely lead to a substantial lessening of competition. However, if one of the parties to the merger is a foreign firm that would likely have stimulated a future price reduction in the market in the absence of the merger, an assessment would be made of whether competition would likely be substantially prevented. This could occur, for example, where the foreign firm has new excess capacity and its marginal cost of increased production is such that it would likely make profitable sales in the relevant market at a price that is less than the sum of the price in its home market, transportation costs and the fixed tariff.

31. Where products that are subject to such restraints are included within the relevant market, the market shares of these products will not exceed the percentage of the market that they would represent if the maximum amount permitted by the restraint was shipped into the market. In some cases, it may be appropriate to assign a single market share to a group of products sold by several firms from a specific country, e.g., where they function as an export consortia, or where the government of a country that is subject to a quota allocates production among these firms.

32. e.g., changes in technology, input availability or exchange rates.

33. Foreign firms often indicate that they are simply not interested in investing the time and resources that would be required to learn about and enter a Canadian market. Such statements are considered in the context of any interest that these firms may have in the outcome of the Bureau's review.

34. This point is distinct from the one made in the previous paragraph, which addressed the direct effects that exchange rates have on foreign competition when the Canadian dollar depreciates relative to the currency of the country in which company in question is located. In addition to these effects, indirect disincentives to international transactions can arise. For example, foreign suppliers or domestic purchasers may consider the difficulties and uncertainties associated with such movements to provide a separate disincentive to cross-border transactions. In evaluating the effect of exchange rate movements, account will be taken of the extent to which domestic purchasers are likely to facilitate foreign competition by buying forward in currency markets.

35. Although most failing firm situations involve the acquisition of a failing firm by a healthy firm, the underlying rationale of section 93(b) is equally applicable where the failing firm is the acquiror.

36. Persistent operating losses may not be indicative of failure, particularly in a "start-up" situation, where such losses may be normal, and indeed anticipated.

37. Where submissions relating to failure are made at the outset of the Bureau's review, they will be evaluated concurrently with the analysis of matters that do not relate to business failure. However, where parties do not raise the issue of failure until the end of the Bureau's merger review, an additional period of up to six weeks generally will be required.

38. An important factor in the assessment of whether competition is likely to be substantially prevented or lessened, relative to what is likely to occur if the exiting firm merges with an alternative party, is whether the latter is capable of exercising a meaningful influence in the market. Where an alternative buyer does not intend to keep the exiting firm's assets in the relevant market, an assessment will be made of the extent to which the market power of the original proposed acquiror is likely to be less than if the merger proceeds.

39. These costs include matters such as ongoing environmental liabilities, tax liabilities, commissions relating to the sale and severance and other labour related costs.

40. Although a period not exceeding 60 days will ordinarily be sufficient to determine whether any competitively preferable purchaser exists, a period that is longer than 60 days may be required where circumstances warrant. The search period generally does not begin until the independent third party has been provided with all of the information that it considers necessary to properly conduct the search. The time required to undertake a thorough search varies from industry to industry and can in some circumstances be completed within a period that is substantially less than 60 days.

41. As soon as the absence of such alternatives (including the matters discussed below in sections 4.44 and 4.45) is established, the assessment of the likely effects of the merger on competition becomes moot.

42. The distinction between the Bureau's examination of likely failure and its assessment of whether retrenchment is likely is the following: Where failure is the issue, the Bureau assesses the extent to which steps could be taken to enable the firm to continue to operate at its current level of operations (i.e., to continue to sell all of the products it actually sells in all of the markets where it is actually present, to approximately the same extent as is actually the case). Where retrenchment is the issue, an assessment is made of the extent to which steps could be taken to enable the firm to survive as a meaningful competitor within a relevant market by narrowing the scope of its operations (i.e., by withdrawing from the sale of certain products or from certain geographic areas, or by downsizing its activities in these areas).

43. Where a firm with excess capacity seeks to acquire an exiting firm, this may be indicative of an attempt to prevent the assets of the latter from being acquired by a third party.

44. Expansion by firms already within the market is an important form of "entry". The same factors that constrain new entrants also often constrain significant expansion by fringe producers. The entry advantage that may be enjoyed by these firms and the others mentioned above generally stems from reduced investment and risk, or from the fact that a shorter period of time is likely to be required to learn how to successfully produce and market the product.

45. A two year period is employed in assessing entry in recognition of the fact that potential competitors need more time than firms within the relevant market (who are typically identified on the basis of a one year response time) to learn about new opportunities therein, to assess these opportunities, to develop products and marketing plans, to build facilities, to qualify as acceptable sources of supply for buyers who only purchase from sellers who have been "qualified", and to achieve a level of sales sufficient to prevent or eliminate a material price increase. Given that section 97 of the Act imposes a three year limitation period in respect of challenges to completed mergers, it is not generally considered to be appropriate to employ a period of longer than two years in this context. Although immediate awareness of a "significant" price increase is assumed for the purpose of market definition, it is not assumed in the assessment of entry.

46. e.g., persons who are a member of a local trade or professional association, (such as the Law Society of Upper Canada); persons who hold a particular licence (such as a municipal taxi permit); persons who have passed certain certification procedures; and persons whose facilities and product designs have met local standards.

47. The expected return is simply the anticipated profits from successful entry multiplied by the probability of achieving those profits, plus the anticipated loss multiplied by the probability of the loss.

48. i.e., capacity that produces output at only one of the stages in question.

49. Cf., Appendix 1.

50. The Director is unlikely to consider that second stage entry is required where post-merger sales (or purchases) by unintegrated firms in the secondary market would be sufficient to service two minimum-efficient-scale operations in the primary market.

51. A conglomerate merger is a merger between parties that do not compete in the same relevant market or in relevant markets that are vertically related.

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Date Modified: 2008-12-22

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