Merger Enforcement Guidelines

Draft for Consultation
March 2004

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Part 2 - The Anti-Competitive Threshold

Overview

2.1 As set out in section 92(1) of the Act, the Competition Tribunal (hereinafter "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 from mergers that are likely to create or enhance the ability of the merged entity, alone or in concert with other firms, to exercise market power.

2.2 These Guidelines describe the analytical framework for assessing market power from the perspective of a seller.Market power by a seller is defined as the ability of a single firm or group of firms to profitably maintain prices above the competitive level for a significant period of time.

2.3 The analytical framework is equally applicable when assessing market power by buyers.⁹ Market power by a buyer is defined as the ability of a single firm or group of firms to profitably depress prices paid to sellers (by reducing the purchase of inputs) to a level that is below the competitive price for a significant period of time.¹⁰

2.4 In general, when evaluating the competitive effects of a merger, the primary concerns are price and output. In markets where there is a significant level of non-price competition, the Bureau assesses the effects of the merger on other dimensions of competition.¹¹ In these Guidelines, the term price refers to all aspects of firms' actions that affect the interest of buyers. Thus, references to an increase in price include an increase in the nominal price and a reduction in quality, variety, service, innovation, advertising or other dimensions of competition that benefit buyers. ¹²

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

2.6 A unilateral exercise of market power can arise when a merger enables the merged entity to profitably raise price without relying on any accommodating response from its competitors.

2.7 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, the higher price post-merger is profitable only because competitors in the market have accommodating responses.¹³

Lessening of Competition

2.8 A merger can lessen competition from the pre-merger level when the merged entity, alone or in concert with other firms, is able to maintain higher prices than would exist in the absence of the merger. 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 that increase barriers to entry or facilitate upstream coordinated behaviour.

Prevention of Competition

2.9 Competition can be prevented when a merger enables the merged entity, alone or in concert with other firms, to maintain higher prices than would exist in the absence of the merger by hindering the development of increased competition. This typically occurs where: (i) there is little or no direct overlap between the merging parties' existing businesses and direct competition between the merging parties or parts of their businesses is expected to increase; and (ii) potential entry or increased competition would have occurred had it not been for the merger.

2.10 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 also made of whether such entry or expansion by the merging firms is likely, but effective entry or expansion by rival firms is not likely to occur.Evidence of pre-existing market power in the hands of at least one of the merging parties may also be relevant to the analysis.The Bureau may examine a merger as a prevent case when either the acquirer or the acquiree has entry or expansion plans that are forestalled because of the merger.

2.11 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 that forestalls entry or expansion plans;¹⁴
• an acquisition that prevents expansion into new geographic markets;¹⁵
• an acquisition that prevents pro-competitive effects of new capacity;¹⁶ and
• an acquisition that prevents or limits the introduction of new products.¹⁷

Substantiality

2.12 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 (alone or in concert with others) with an ability to materially influence price.¹⁸ Generally speaking, the prevention or lessening of competition is considered to be "substantial" where:

• the price of the relevant product(s) or service(s) [hereafter "product(s)"], is likely to be materially greater in a substantial part of the relevant market ¹⁹ than it would be in the absence of the merger [hereafter "material price increase"],²⁰; and
• the material price increase is not likely to be eliminated by existing or new competitors within two years.²¹

2.13 The Bureau does not impose a numerical threshold for the material price increase that is likely to arise when a merger creates or enhances market power.²² 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. ²³ These factors are assessed over a two-year period from when market power is likely to be exercised, not necessarily when the merger review is taking place.²⁴

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⁹ See for example Canada (Director of Investigation and Research) v. Hillsdown Holdings (Canada) Ltd. (1992), (Comp. Trib.) 41 C.P.R. (3d) 289 (Comp. Trib.) (hereinafter "Hillsdown") at 299 where the Tribunal stated that it could analyse the competitive effects of the merger from the perspective of a monopsonist (a buyer of the rendering material) or a monopolist (a seller of rendering services). It concluded that no significant difference resulted from the two characterizations.

¹⁰ See for example Commissioner of Competition v. Trilogy Retail Enterprises L.P., CT-2001/003 (2001) CT-2001-003 (Comp. Trib.)

¹¹ As noted in by the Tribunal is its first decision in Canada (Commissioner of Competition) v.Superior Propane Inc., (2000)(Comp. Trib.) CT-1998-002 CT-1998/002, 2000 (Comp.Trib.) August 30, 2000) (hereinafter "Superior Propane"), at ¶ 504, a decline in service levels may reduce real output of the industry.

¹² The Bureau's analysis is not confined to pricing measures and will consider any impact on quality, service, or variety, to the degree that competition is substantially lessened or prevented.

¹³ Previously, the Bureau referred to a coordinated exercise of market power as "interdependence". This change in terminology is not a change is the Bureau's approach to analysing market power. Further explanation of the anti-competitive effects that may arise from a coordinated exercise of market power is found at Part 5 of these Guidelines.

¹⁴ See for example, Seaspan at ¶ 130, where the Commissioner concluded that "any influence Norsk had or would in the future have on Seaspan's ability to exercise market power in the B.C. barging market has been foreclosed by the Norsk Merger."

¹⁵ See for example Superior Propane, at ¶ 246 where the Tribunal found that the merger would likely result in a substantial prevention of competition "in light of the ICG's plans to vigorously expand its activities in Atlantic Canada."

¹⁶ See for example Canada (Commissioner of Competition) v. Canadian Waste Services Holdings Inc. (2001), 11 C.P.R. (4th) 425 (Comp. Trib.) (hereinafter "Canadian Waste") at ¶ 47 where the Tribunal concluded that "by increasing CWS's expected significant share of excess capacity…, the acquisition of the Ridge (landfill) enhances CWS's market power over such capacity and prevents competition substantially."

¹⁷ See for example News Release – "Competition Bureau Resolves Concerns in Pfizer's Acquisition of Pharmacia", April 11, 2003 (hereinafter "Pfizer/Pharmacia") where the Bureau concluded that competition would be substantially prevented by the merger of two companies whose products under development (i.e. that is, in the "pipeline") would compete in the same relevant product markets once they were introduced. See also Commissioner of Competition v. Bayer AG et al., (2002) CT-2002/-003 (Comp. Trib.) -Statement of Agreed Facts (hereinafter "Bayer/Aventis Statement of Agreed Facts") at ¶ 116 where the Commissioner concluded that "in the absence of the Acquisition, the market would likely enjoy significantly greater potential competition from Bayer's newly-introduced product".

¹⁸ As noted above, "price" is shorthand for other dimensions of competition.Also, as noted in Superior Propane at ¶ 258, there is no requirement under the Act to find that the merged entity will likely raise the price (or reduce quality, service or variety) but rather whether the merged entity has the ability to do so.

¹⁹ The material price increase need not occur throughout the entire relevant market. Competition may be substantially lessened or prevented even if, for instance, only some customers will face higher prices.

²⁰ In prevent cases, a determination that prices will likely be materially higher with the merger means that price levels are expected to fall (or quality, etc. is expected to increase) in the absence of the merger.

²¹ A two year period is generally used to allow some time for potential competitors to become aware of a material price increase, to develop products and marketing plans, to build facilities or make adjustments to existing facilities, and to achieve a level of sales sufficient to prevent or eliminate a material price increase.

²² A material price increase is distinct from (and can be lower or higher than) the "significant and non-transitory price increase" that is used to define relevant markets as described below. In this context, materiality refers to the sustainability rather than the magnitude of the price increase.

²³ See for example Superior Propane at ¶ 311-312. See also Canadian Waste at ¶ 204 and ¶ 224.

²⁴ The Bureau may challenge a merger even when the anti-competitive effects that are foreseeable at the time of the merger may not occur until after two years of when the merger is substantially completed. See Superior Propaneat ¶ 85, 101 and Canadian Waste at ¶ 72.