Merger Enforcement Guidelines

Draft for Consultation
March 2004

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Part 4 - Market Share and Concentration

4.1 Once relevant markets have been defined, the next step in the analysis is to identify sellers of the relevant products in order to determine market shares and concentration levels.Such sellers include current suppliers and those that participate in the market through a supply response.Firms that participate in the market through a supply response do not typically require significant sunk investments to participate in the market.

Participating in the Market Through a Supply Response

4.2 The Bureau determines whether sellers that are not currently supplying the relevant market are able to profitably divert sales from their existing buyers to those in the relevant market. These sellers (i) can be located in the relevant geographic market but are not be selling the relevant product, or (ii) participate from locations physically outside of 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;⁴⁷
• 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; and
• whether and to what extent the firm has excess capacity.

4.3 When assessing whether foreign suppliers participate in the relevant market, additional considerations include:

• the existence of tariffs or voluntary import quotas;
• domestic ownership restrictions;
• difficulties presented by exchange rate fluctuations;
• regulations that impose product quality or labelling standards and specifications, or that impose licence/permit requirements;
• intellectual property laws;
• the threat of trade actions, such as an antidumping complaint being initiated by domestic firms or countervailing duties;
• formal and informal market allocation arrangements within multi-nationals that have Canadian affiliates or between independent multinational firms;
• international product standardization within such enterprises;
• 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 foreign competitors;
• whether the industry is susceptible to supply interruptions from abroad;
• unfamiliarity with Canadian market; and
• difficulties presented by customs and other requirements associated with processing imports.

4.4 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, the impact of such sellers is analysed later when examining the likelihood of entry or expansion.

Calculating Market Shares

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

4.6 Market shares can be measured in terms of dollar sales, unit sales, capacity⁴⁸ or, in certain natural resource industries, reserves.When calculating market shares, the Bureau uses the best indicator 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 allocation should yield similar results. In such situations, the basis of measurement depends largely on the availability of data.

4.7 Where firms in such marketsproducing homogeneous products have excess capacity, market shares based on capacity may better 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).

4.8 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. Market shares based on total capacity would be a misleading indicator of the relative market position of the discount sellers.⁴⁹ In such cases, market shares based on capacity and revenues provide different information regarding relative market positions.In such circumstances, dollar sales are generally considered to be the best 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.⁵⁰

4.9 The total output or total capacity of firms current suppliers 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 relevant market.

4.10 When distant sellers supply the relevant market from locations outside of the market boundaries, market shares attributable to their products are typically calculated on the basis of actual sales in the relevant market.

4.11 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 is likely to be available to the relevant market without incurring significant sunk investments will be included in the market share calculations.When it is difficult to estimate the amount that is likely to be available, market shares accounted for by these sellers are typically calculated on the basis of their actual dollar sales in the relevant market immediately prior to the merger. When sellers supply the relevant market from locations outside of its boundaries, market shares attributable to products of the distant seller in question are typically calculated on the basis of actual sales in the relevant market.

4.12 In either case, it is recognized that the resulting market shares may understate the relative market position and competitive influence of these sellers.

Market Share and Concentration Thresholds

4.13 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.⁵¹ However, market shares and concentration can inform the analysis of competitive effects when they reflect the market position of the merging parties relative to their rivals.In the absence of high post-merger concentration or market share, effective competition in the relevant market is likely to constrain the creation or enhancement of market power by reason of the merger.⁵²

4.14 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 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 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.

4.15 All else being equal, as market share and concentration increase above these thresholds, the potential for a merger to create or enhance market power rises.However, mergersMergers 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 or enhance market power and thereby result in a substantial lessening or prevention of competition.

4.16 All else being equal, as market shares and concentration increase above these thresholds, the potential for a merger to create or enhance market power rises.

4.17 When other information suggests that current market shares do not reflect the relative market position of merging firms and their 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.

4.18 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.Other things being equal, it is more likely that a single firm will raise its price as its individual market share increases and as the disparity between its market share and the market shares of its competitors increase.

4.19 Similarly, 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.⁵³ Furthermore, coordinated behaviour becomes increasingly likely as the market share disparity between significant competitors decreases. By contrast, coordinated behaviour becomes increasingly difficult as the number or size of fringe firms that have the ability to increase output expands.

4.20 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.⁵⁴ While small incremental increases in market share for the merged entity 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.⁵⁵

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⁴⁷ The product actually produced by these sellers is not included within the market.

⁴⁸ Throughout these Guidelines, the term capacity means the ability to produce or sell a product. Capacity to sell refers to marketing and distribution capabilities, such as a sales force, distribution networks and other infrastructure.

⁴⁹ Similar results occur as the level of differentiation between sellers increase. For instance, two firms may operate with the same capacity (such as number of trucks) but have significantly different revenue streams (because one firm may have many buyers along a truck route, i.e. have route density).In such cases, market shares based on capacity and revenues provide different information regarding relative market positions.

⁵⁰ While publicly available or readily observable information may be useful for estimating market shares, when necessary, the Bureau will rely on data from individual market participants as the most accurate measure of market shares.See for example Superior Propane at ¶ 113.

⁵¹ Section 92(2) of the Act directs that the Tribunal cannot find that a merger lessens or prevents competition substantially based solely on evidence of market shares or concentration.

⁵² Effective competition may come from individual competitors or the collective influence of a number of fringe competitors.

⁵⁴ In addition to the CR4, the Bureau may examine changes in the Herfindahl-Hirschman Index ("HHI") (calculated by summing the squares of the individual market shares of all market participants) to observe the relative change in concentration before and after a merger.While the change in HHIs may provide useful information about changes in the market structure, the Bureau does not use HHI levels as a safe harbour threshold.

⁵⁴ For example, historical or existing market shares may be less relevant in bidding markets where rapid fluctuations in market shares are common.In such cases, the analysis will be more focussed on the effectiveness of independent sources of competition.

⁵⁵ See for example Bayer/Aventis Statement of Agreed Facts at ¶ 112.