Merger Enforcement Guidelines (Banks) - The Potential Anti-Competitive Effects of Mergers

Merger Enforcement Guidelines (Banks) - The Potential Anti-Competitive Effects of Mergers

59. The Bureau will not conclude that a merger is likely to substantially lessen or prevent competition solely on the basis that the market shares or concentration levels in the relevant markets are above the threshold levels. ⁽²⁵⁾ Rather, the Bureau will undertake a full competitive effects analysis for those markets where the thresholds are exceeded. When undertaking such analysis, the Bureau focuses on certain factors which make it more likely that a merger will result in a substantial lessening of competition through the unilateral exercise of market power by the merged entity post-merger as described in paragraphs 60 to 64. The section following this discusses the factors that increase the likelihood that firms in the relevant market will engage in interdependent behaviour post-merger.

Lessening of Competition Through Unilateral Effects

60. A merger can enhance the ability of the merging firms to profitably raise price by placing pricing and supply decisions under common control, thereby creating an incentive to increase prices and restrict supply or limit any other dimension of competition. In a competitive market, where consumers can choose among many suppliers offering comparable products, a firm's incentive to increase price is limited by consumers diverting their purchases to substitute products in response to the price increase. When two firms in a market merge and one of the firms increases its price, some demand may be diverted to the firm's merger partner, thereby increasing the overall profitability of the price increase and thus increasing the incentive to increase price. A price increase is likely to be profitable when the merging firms account for a significant share of the market. In assessing a merger, the Bureau will consider whether the characteristics of the relevant market are conducive to such a post-merger price increase.

61. In some markets, firms are distinguished primarily by differences in their products, while in other markets, firms are distinguished by their capacities or costs. In differentiated product markets, a merger is more likely to enhance the ability of merging firms to exercise unilateral market power when a significant number of consumers view the product offerings of the merging parties to be their first and second choices. In these circumstances, a post-merger price increase is more likely to be profitable because a price increase by one of the merging firms is likely to divert demand toward its partner. If, on the other hand, the merged firms' products are not first and second choices for a significant number of consumers, then a price increase by one of the merging parties may not be profitable, because demand will be diverted to other firms in the market.

62. In order to assess whether a merger among suppliers of differentiated products is likely to enhance the ability of the merged entity to unilaterally exercise market power, the Bureau will use any information which indicates whether the products of the merging firms are first and second choices for a significant number of consumers. Evidence of past consumer switching behaviour in response to changes in relative prices is particularly useful. The Bureau will also consider whether other firms in the market are likely to re-position their products to replace any competition lost as a result of the merger.

63. In markets in which firms are distinguished primarily by their capacities, a post-merger price increase may be profitable if the merger removes a competitor to which consumers would otherwise turn in response to the price increase. Such a price increase is unlikely to be profitable if other firms in the market are able to absorb the demand that is diverted from the merged entity. This is possible only if the remaining firms have sufficient capacity to absorb this demand, or if capacity can be expanded quickly and at low cost.

64. Capacity in the context of a bank merger is likely to be limited to some extent by access to funds for the purpose of lending, but it may also be limited by the availability of trained personnel with knowledge of the market and the availability of other inputs required to supply banking services.

Lessening of Competition Through Interdependent Behaviour

65. The term "interdependent behaviour", also known as coordinated behaviour, refers to conduct by a group of firms that is profitable for each of them only because of the accommodating co-operative conduct of the others. Such behaviour is more likely in markets in which firms can recognize and reach a co-operative understanding, monitor one another's behaviour, and respond to any deviations from the co-operating behaviour by others. ⁽²⁶⁾ This type of behaviour may include tacit or explicit agreements on price, service levels, or any other dimension of competition.

66. A high level of concentration in the relevant market is a necessary, but not sufficient, condition for a determination that competition is likely to be lessened or prevented through interdependent behaviour. An understanding among firms in a market to limit competition is easier and less costly to reach and enforce if the number of firms accounting for a large proportion of total market output is small. However, high concentration levels in themselves do not imply that a merger will increase the likelihood of the exercise of market power through interdependent behaviour. In addition to high levels of concentration, interdependent behaviour requires the ability to reach an understanding and to detect and deter deviations from the cooperative understanding.

67. Reaching terms of understanding is likely to be easier when products and/or firms are homogeneous, and when important information about rival firms and market conditions is readily available. On the other hand, complex products and differences in product offerings, and rapid and frequent product innovations, make it more difficult to reach an understanding. The existence of industry organizations that facilitate communication and dissemination of information among market participants can also facilitate anti-competitive cooperation.

68. The following are important factors affecting the ability of firms to detect and successfully deter deviations from a co-operative understanding:

i) Transparency of the terms of market transactions. When prices are transparent to market participants, deviations are more easily detected;

ii) Stability of underlying costs. When costs fluctuate, it may be difficult to determine whether a price change represents a deviation from an understanding or is rather a response to a change in cost conditions;

iii) Size and frequency of product sales. When sales occur in large discreet blocks and are relatively infrequent, then deviations from understandings are relatively more profitable and effective deterrence of deviation is more difficult; and,

iv) Multi-market exposure. When firms participate in multiple geographic or product markets, there are greater opportunities to discourage firms from deviating from the co-operative understanding.

69. The Bureau will examine whether there is a history of market participants having engaged in interdependent behaviour in the past. The effect of "maverick" firms, who may impede successful coordination, will also be considered.

70. In previous assessments of bank mergers, the Bureau has found that geographic markets for some products are often local, but the participants in these markets are national or regional. When geographic markets are local, the concentration level threshold will be applied at the local level, but an assessment of ease with which a co-operative understanding can be reached and maintained will be undertaken at both the local level and the national level. If competition occurs locally, then a high level of concentration at the local level is necessary in order to facilitate interdependent behaviour. However, coordination can occur either among decision-makers in local markets or among decision-makers at the national or regional level: that is, senior executives may have the ability to reach and sustain an agreement about prices in a particular local geographic market, even if concentration at the national level is low.

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⁽²⁵⁾ Section 93(2) of the Act directs that the Competition Tribunal cannot find that a merger lessens or prevents competition substantially based solely on evidence of market shares or concentration.

⁽²⁶⁾ These responses, typically known as punishments, may take the form of low prices in the relevant market or in other markets.