2009 ICN MERGER WORKSHOP
Plenary Session
“Entry and Other Competitive Effects”
Topics
Will the merged firm be constrained from reducing output and
raising its prices (and/or reducing quality) by:
• expansion of existing competitors
• actual or potential entry of new competitors
• the countervailing power of the firm’s customers, and
• will efficiencies arising from the merger reduce the firm’s
incentive to raise prices
Expansion/Entry
• Expansion and entry are considered together under “entry”
for brevity
• The question is whether entry or potential entry would act
to constrain price rises by the merged firm in the factual
• To answer the question apply the LET test – is entry Likely,
sufficient in Extent, and will it be Timely?
Is Entry Likely? – Factors to Consider
• Would entry be profitable, if the merged firm raised its
prices?
• Has there been a history of entry (or exit) in the relevant
markets?
• Are there any barriers to entry into the relevant markets –
costs or disadvantages that an entrant faces that an
established incumbent does not face and which might allow
incumbents to raise prices above competitive levels without
inducing entry
Is Entry Likely (continued)
Barriers to entry may include some or all of:
•
regulatory
•
structural
•
Strategic
•
The question, is not whether something is defined as a barrier to
entry. The real question is would an potential entrant be able to
scale those barriers and enter in a timely manner
Would Entry be Sufficient in Extent and Timely
• merged firm will be constrained only if entry (or the threat
of entry) is of a scale that causes the firm to return prices
to competitive levels
• small scale or local (c/f national) entry may be insufficient
• in general entry should occur usually within two years of
the exercise of market power, although this would depend
on the circumstances of the market concerned
Customers’ Countervailing Power
The merged firm may be constrained if buyers can influence
the price, quality or terms of supply of its goods/service
because:
• the buyers are large in comparison to the merged firm
• the buyers can easily and quickly switch to alternative
suppliers or buyers can self supply
• the classic example of the use of buyer power is
supermarket chains v their suppliers but this example has
its limits - think Coca Cola – would any rational
supermarket in the world refuse to stock that product
Efficiencies
For example, better utilisation of existing assets may reduce
merged firms incentive to raise prices. Lower marginal
costs can lower a firm’s profit maximising price.
• often hard to quantify
• must be merger specific
• reductions in variable, rather than fixed, costs more likely
to be quickly passed onto consumers
• has not been decisive in merger decisions (at least in New
Zealand)