Mergers and Acquisitions

Week 4

Find these slides online: https://webslides.baxterlab.ca/slides/competition2025-26/04/
Category: Competition 2025-26

Agenda

Worries about market consolidation
Market definition
Assessing competitive effects

Competition Act, RSC , 1985, c. C-34, s 92

92 (1) Where, on application by the Commissioner, the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially […]

Competition Act, section 92(2) [repealed]

92(2) For the purpose of this section, the Tribunal shall not find that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially solely on the basis of evidence of concentration or market share.

Competition Act, section 92(2) [as amended]

92(2) For the purpose of this section, if the Tribunal finds, on a balance of probabilities, that a merger or proposed merger results or is likely to result in a significant increase in concentration or market share, the Tribunal shall also find that the merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, unless the contrary is proved on a balance of probabilities by the parties to the merger or proposed merger.

E.g., banking sector consolidation:

What are the threats to competition from market consolidation? Are there benefits?

Worries:

coordinated: collusion concerns
unilateral: monopoly power by merged entity alone
political influence

Bednar and Moffatt:

scale advantages in terms of efficiency, productivity, innovation (R&D spending), shareholder value, employees
(banking sector: stability)
Canada is way behind in big companies in the high tech and intangibles sectors
key argument is that Canada’s firm’s aren’t too big, they big ones are too old (mean age of largest 15 is 122 years); therefore need more competition to help newer companies achieve scale
why this argument is interesting: “more competition” as an avenue to more new big firms (not as an avenue to a bunch of smaller firms competing – see s.1.1)
authors draw link between strong domestic competition and global competitiveness of Canadian firms

Two Steps in Merger Analysis

Defining relevant markets
Assessing competitive effects

Market definition and market power

The purpose of defining a market in merger analysis is to assess the potential market power exercised by the post-merger firm.

Market Definition

EXERCISE: b.socrative.com/login/student/

Room name: BAXTERDAL

Narrow vs Broad Definitions

If two Nissan dealers are thinking of merging in Mississauga, why isn’t it correct to analyze the competitive effects on the “retail market for Nissan cars in Mississauga”?

If market is defined too narrowly, it will not include close substitutes. So we will get a distorted view (i.e. overestimate) of the merged firm’s market share and thus their ability to set monopoly prices in that narrow market.

E.g. if there are several close substitutes for Nissan cars beyond the retail market for Nissan cars in Mississauga (Volvos in Mississauga; Nissan cars in Vaughan), but we exclude these from the relevant market, the merged firm will appear to be a virtual monopolist in that market for the purposes of merger review–when in fact they might have very little market share/power.
Result: if we define the market too narrowly, we’ll tend to disallow mergers even though the competitive effects are nil.
BUT flip side: if we define a market too broadly, merged firms with significant market power might pass review too easily.

ASK: are parties to a proposed merger likely to argue for a narrower or broader market definition?

e.g., Superior Propane (propane vs all fuels)
CB challenging the merger argues for narrower definition (easy to make the case that merged firm has market power)
Respondent merging parties argue for broader definition

What about Southam?

in Southam, Southam Inc owns both daily papers around Vancouver; acquires 13 community newspapers in Lower Mainland. Question is whether these papers are all in the same “market”. Tribunal saw them as different markets (only “weak substitutes”)
Here, Southam wants to characterize daily and community papers as different markets. Even though this means that they are virtual monopolists in the daily market, they have a relatively small share of the community paper market.
Bureau is arguing for a more expansive market definition (dailies and community papers) to show that Southam is buying up its competitors and consolidating its overall market share.

Merger Enforcement Guidelines (MEGs)

4.3 Conceptually, a relevant market is defined as the smallest group of products, including at least one product of the merging parties, and the smallest geographic area, in which a sole profit-maximizing seller (a “hypothetical monopolist”) would impose and sustain a small but significant and non-transitory increase in price (“SSNIP”) above levels that would likely exist in the absence of the merger.

Hypothetical Monopolist Test (HMT)

A method for defining the relevant market for merger analysis, in which there are no product substitutes available to thwart the exercise of market power by a monopolist in that market.

Implicitly undertook the HMT analysis in the Socrative exercise.

HMT = method for reaching the definition of a market in which there are no product substitutes close enough to thwart exercise of market power by a monopolist in that market

start by postulating a candidate market controlled by HM; if HM cannot impose a SSNIP (because there are viable substitutes outside that market), then add the next-best substitute to the market controlled by the HM
keep going until you’ve reached a group of products controlled by the HM in which HM can impose a SSNIP (i.e., there are no sufficiently close substitutes left outside the controlled market)
same basic idea for defining geographic market
this leaves you with a definition of the product and geographic markets without close substitutes outside those markets where we can isolate and analyze the competitive effects of the merger itself

Identifying substitutes

How can we identify relevant substitutes for the purpose of the HMT analysis?

Identifying Substitutes:

cross-elasticity of demand
functional interchangeability
other contextual factors

cross-elasticity is gold standard, but direct evidence can be hard to get = change in demand for focal product given change in price of another product (if demand changes a lot, then the other product is a substitute)
Functional interchangeability: are end-uses of the products the same? how similar are their physical and technical characteristics?
Other contextual indicators, such as presence of “switching costs”, which would cause buyers NOT to purchase products that are nevertheless functionally interchangeable. (e.g. specialized equipment needed in processing)

Substitutes in Southam

Was the Tribunal in Southam correct that community newspapers and daily newspapers in and around Vancouver were not substitutes?

FACTS:

Southam owns two daily newspapers that are not doing well – company views this as consequence of strong community newspapers in lower mainland.
Southam (1) starts flyer distribution and (2) competitor community newspapers (“North Short Extra”). Then starts to acquire various community newspapers and eventually shuts down its flyer and NSE publications.

ISSUE: were Southam’s newly acquired community papers substitutes for its existing dailies? (if so, Southam’s market share = market power in the relevant post-merger market would be much higher)

Tribunal concluded that Southam’s purchase of community newspapers had not substantially lowered competition in the “retail print advertising market in the lower mainland”, which excluded the Vancouver dailies
FCA disagreed with this market definition and thought dailies should be included

ASK: How did the Tribunal determine that dailies and community papers weren’t substitutes?

No direct evidence of cross-elasticity of demand (not uncommon)
Functional interchangeability (end use or purpose): papers served different purposes (large advertisers vs smaller local advertisers) – BUT SCC says all depends on how you define “purpose” (broadly or narrowly – cars and tanks example)
Southam’s own and competitors’ beliefs that these papers were in competition (e.g. Southam’s US expert): firms assessing this question could answer it in different ways for different purposes – SCC says that this conclusion might seem unusual (especially in the face of Southam’s own expert analysis), but it was not “unreasonable” in administrative law terms

Substitutes in Superior Propane

Why does the Tribunal regard an analysis of substitutes based on cross-price elasticity as unnecessary?

n Superior Propane, issue is whether propane (and associated products) is its own market, or whether other fuels (like natural gas) should be included in relevant market.

CB: propane
SUP: all fuels

KEY MESSAGE: don’t get caught up in market definition as end in itself – need to get clear on the purpose of employing different economic tools.

Cross-price elasticity = change in demand for focal product given change in price of another product

Own-price elasticity = change in demand for focal product given change in price for that product

CPE = used for IDENTIFYING close substitutes to include in relevant market; set of pair-wise comparisons does NOT measure market power directly

OPE = measures market power directly – e.g., if demand for product is inelastic/insensitive to changes in its price, then firm exercises market power to set monopoly prices

Because we are trying to define the SMALLEST possible market in which the merged entity could exercise market power, OPE is sufficient if on the evidence it is sufficiently INELASTIC (i.e. direct evidence of monopoly)

Only when such OPE evidence isn’t available or doesn’t exit, then pairwise comparisons in CPE become relevant.

On the evidence in Superior Propane, demand for propane is inelastic to changes in its OWN price, thereby indicating significant market power on the part of pre-merger firms.

Tribunal’s conclusion: evidence shows that propane demand is inelastic with respect to its price over the relevant time period and therefore propane is the relevant market (Bureau’s argument)

CAVEAT: this analysis fails when the PRE-MERGER price was already above marginal cost, i.e. already the result of monopoly power = cellophane fallacy

Multi-sided markets

“In the presence of multi-sided platforms, the Commission may define a relevant product market for the products offered by a platform as a whole, in a way that encompasses all (or multiple) user groups (129), or it may define separate (although interrelated) relevant product markets for the products offered on each side of the platform (130). Depending on the facts of the case, it may be more appropriate to define separate markets where there are significant differences in the substitution possibilities on the different sides of the platform.” European Commission Notice C/2024/1645, s 4.4

When firms supply services or products that engage two different customer groups at the same time–groups which interact in different ways

e.g. newspapers: readers and advertisers (quality of content affects readership levels, which increases value to advertisers)
e.g. credit cards: cardholders and merchants
e.g. google: search and advertising (quality of search increasers search user base AND allows google to capture user data, which increases value to advertisers)

Question is: if two newspapers are merging, do you address these as a single market or different ones?

interactions (indirect network effects) are important: e.g. newspaper might hesitate to raise subscription prices because it will loose advertising revenue if it loses subscribers
different approaches among courts: in credit card cases, CT treated each side of the market separately, taking into account interdependence; USSC treated both sides as a single market (one market supplying “transactions”)

Why does this matter?

e.g. in USSC approach, it was possible for the court to conclude that AmEx’s ability to raise credit card fees for merchants DIDN’t mean it had market power, because incentive could come from benefits it was able to offer to consumers (e.g. better rewards program) – i.e. treats these two sides as “substitutes”

Competitive Effects

Competition Act, RSC , 1985, c. C-34, s 92

92 (1) Where, on application by the Commissioner, the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially

Two Theories of Harm

(1) Coordinated effects

(2) Unilateral effects

Basic idea = effect of merger on market power is easy to assess in extreme case of duopoly to monopoly (prices rise)

But in less concentrated markets with low barriers to entry, effect of merger is more difficult to assess.

Two theories:

coordinated effects: assesses whether merger will result in greater collusion (esp tacit collusion) by eliminating a competitor or making it easier for remaining firms to cooperate
unilateral effects: assess whether the post-merger firm will lead to higher prices due to lower own-price elasticity of demand
coordinated effects used to be the main focus of merger analysis, but past few decades have seen much greater focus on unilateral effects

Unilateral Effects

Basic idea: these are “static” models that ignore most of the dynamic aspects of oligopoly that we studied previously (i.e. insight that firms in oligopoly account for and respond to one anothers’ changes in output)

Static model asks about the effect of the merger in terms of how changes in price by one firm will impact demand conditions (consumer behaviour) in the market.

When goods are perfectly homogenous, duopoly is sufficient for perfect competition (think Coke and Pepsi).

When goods are not homogenous, demand consequences of price increase by one firm are more complicated.

Basic idea: pre-merger, if one of the merging firms raises its prices, some of its demand will be lost (diverted) to the other merging partner. The merger itself internalizes these consequences, thereby increasing the merged entity’s market power.
So, for example, data on how many customers would switch between merging firms pre-merger (diversion ratio) can help us to assess consequences of merger in quantitative terms.

Without these data, we’d ask: (1) how close are the two firms’ substitutes? (2) how big was the firms’ market share pre-merger? (which affects ability to capture diverted customers) (3) how concentrated was the rest of the pre-merger market? (4) host of other factors

Coordinated Effects

Focus here is not the affect of the merger on consumer behaviour, but on consequences of the merger for the behaviour of other firms – namely, in terms of explicit or tacit collusion.

KEY LINK BACK TO LAST WEEK:

We saw that law on horizontal restraints struggles to detect tacit collusion, and to deal with it effectively
Merger policy makes available a “structural remedy” to deal with tacit collusion – i.e. a way to change the structural conditions in the market to make collusion more difficult

So focus here is on the market conditions that favour or disfavour collusion (three cartel problems from last week) = (1) reaching an agreement; (2) monitoring defections; (3) punishing defectors

Efficiencies analysis

A Lamborghini dealer and a Maserati dealer seek authorization to merge. Two No-Frills supermarkets seek authorization to merge. In both cases, there are cost savings, shareholders will benefit, but consumer prices will rise.

Should these two mergers be treated the same?

Comparing “total surplus” vs" consumer surplus" approaches:

TS approach just compares the cost savings from the merger (efficiencies) to the deadweight loss
CS approach compares the cost savings from the merger to deadweight loss PLUS the transfer from producers to consumers
TS doesn’t account for the fact that more No-Frills consumers are going to be low-income compared to those who hold shares in the firm. Because redistributive effects are ignored, everyone is effectively treated as equally well-off
CS doesn’t account for the fact that luxury car buyers are at least or more well off than firm shareholders. Because redistributive effects are fully accounted for, unfairly advantages luxury car buyers

BW opens the possibility for applying different weights in different circumstances – middle way between two extremes.

Competition Act, RSC , 1985, c. C-34, s 96 [repealed]

96(1) The Tribunal shall not make an order under section 92 if it finds that the merger or proposed merger in respect of which the application is made has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made.

Competition Act, RSC , 1985, c. C-34, s 93

93 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 Tribunal may have regard to the following factors:

[…]

(h) any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger.

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