Breakout Session 4: Developing an Investigation Plan

Fifth Annual African Consumer Protection Dialogue Conference

Livingstone, Zambia

Overview

Competition laws

Merger analysis: a very brief review A taxonomy of transactions Unilateral effects of horizontal mergers

Planning the Investigation Theories of harm Sources of information Timing and tasks Investigative tips

Case Study Exercise

Focusing and Managing the Investigation

Competition Laws

Most competition laws address three generally recognized types of private anticompetitive conduct that hurt competition Anticompetitive mergers Collusion between competitors Exclusionary conduct by dominant firms

Called “monopolization” in the United States Called “abuse of dominance” in most other places

Merger Analysis (I): A Taxonomy

Horizontal mergers Mergers between producers of substitutes, i.e. products / services within the same

relevant market Examples: two brands of toothpaste, two mobile network operators, two grocery

stores or clinics (in the same geographic market)

Vertical mergers Mergers between producers of complements, i.e. products / services are “inputs” to

one another Examples: manufacturer and distributor, petrol producer and fuel retailer, gin and tonic

producers

Conglomerate mergers Mergers between producers of competitively unrelated products? Example: cars and washing machines?

→ Beware presumptions based on “characteristics”!

Merger Analysis (II): Horizontal Mergers

Pro-competitive effects of horizontal mergers displacement of ineffective management realisation of savings through the elimination of fixed costs realisation of savings through the reduction of variable costs

Anti-competitive effects of horizontal mergers Unilateral effects (non-coordinated effects): the creation of market circumstances

that permit the merged firm to raise the price of some or all of its products / services (or otherwise compete less effectively, e.g. in terms of range, quality or service), without any change in the nature of competition

Coordinated effects: the creation of market circumstances that change the nature of competition such that the merged firm and its rivals are able to tacitly coordinate their actions in order to compete less intensively

Merger Analysis (III): The Basics

If a merger does not create, protect, or enhance market power, it should be cleared

Market power: “the ability profitably to sustain prices above competitive levels” where “competitive constraints” are not effective

Competitive constraints Existing competition: firms already in the market (effectiveness gauged by,

among other things, market shares, barriers to expansion) Potential competition: firms that may enter the market and prevent exercse of

market power (effectiveness gauged by entry barriers) Buyer power: credible threats to switch to new suppliers or sponsor entry and

growth (but do all customers have this threat?)

With mergers, the issue is whether prices (or, quality adjusted prices) would rise relative to the “counterfactual”, i.e. the level that would otherwise have occurred absent the merger

Merger Analysis (IV): Unilateral Effects

• Unilateral effects arise when two closely competing products are brought under common ownership

– The price of the two parties’ products is likely to rise because sales which would have previously been lost to the acquiring firm are partially recaptured in higher sales of the acquired firm (and vice versa)

– The higher the share of lost sales diverted from one merging party to the other the higher will be the unilateral incentive to raise price

– These effects do not rely on any accommodating response by the firm’s remaining competitors (unlike coordinated effects)

Merger Analysis (V): Unilateral Effects

• Homogeneous products

– Mergers where products are (almost) identical from the point of view of consumers

– If products are (more or less) commodities, the main issue is the extent to which non merging parties face barriers to growth

• capacity constraints• switching costs• awareness of rival offers

– Mergers of firms with relatively large market shares may not give rise to a significant lessening of competition (SLC) where products are commodities and non merging parties face no barriers to growth

Merger Analysis (VI): Unilateral Effects

• Differentiated products– Differentiation may be by: geography, product characteristics, time,

switching costs, marketing, consumer information

– Most products differentiated to some degree – question is whether so differentiated that market shares not meaningful

– Mergers of “closer” competitors more likely to lead to higher prices than mergers of “distant” competitors…

– …but, even mergers between close competitors unlikely to be problematic if sufficient competitive constraints remain:

• Other close competitors exist and do not face barriers to growth

• Supply side responses – new entry, product repositioning into the product or geographic “space” of concern

• Demand side responses, e.g. buyer power

Developing an Investigation Plan

Planning: Initial Phases

• Main goal in initial phase is to determine quickly whether to conduct an in-depth review

– If no obvious competitive concerns, no formal plan required• Quick review of notification filing or public data may suffice• Goal is to clear transaction quickly

– If concerns raised by preliminary review, develop initial plan• Initial phase should focus on extent to which further investigation is required• Can often be focussed to a single threshold issue• Focus on a few discrete tasks and, where appropriate, limited information

requests, calls and/or meetings • Timing critical; as are other constraints and priorities: both internal and

external

– See ICN Investigative Techniques Handbook for Merger Review

Planning: In-Depth Investigations

• Investigation plan should address three key issues:– Theories

• What are the primary areas of concern / candidate theories of harm?

– Evidence• What factual evidence is needed to address critical issues?• What are the best sources of the required information?

– Tasks and constraints• Who does what, when?• What are the timing and resource constraints?

• Commit to initial deadlines and responsibilities, revisit and revise plan as investigation develops if necessary

Investigative Tip 1: Prioritize and Focus

Identify issues based on authority

Does the available information suggest any compelling way the issues pose a potential competitive problem?

Is there any information that rules out a potential for a competitive problem, such as a large number of significant competitors or low barriers to entry?

Before concluding ask what further investigation would be helpful

Investigative Tip 2: Get the Target’s Help Learn target’s view on antitrust issues

What is the rationale for the conduct Have the parties’ business people educate you

Talk to the marketing people or the person that can tell you how prices are set or negotiated

Ask the target to back it up. Obtain key ordinary course of business document such as – Strategic and business plans Studies Board presentations on conduct, particularly those describing

any synergies Pricing plans

Test competitive concerns by disclosing them to the target The disclosure will help you to learn the evidence and arguments

that you will need to overcome in any challenge

Investigative Tip 3: Interviews Learn from competitors

Product overlaps…how firms compete on price, service or innovation.

Entry conditions…market shares, market structure, and history

Learn from customers The number and strength of competitors? What substitutes are available? Do they have any concerns? Are there anecdotes of past competition issues

Hypothetical Merger Exercise

Planning: Case Exercise - Background• The acquiring firm is BigBox Wholesalers (Pty) Ltd. BigBox owns and

operates a national chain of grocery wholesale outlets throughout the fictional republic of Mzansi. Two of its outlets are located in East Port, a coastal city – one in the city centre and one on the outskirts of the city.

• The target firm is Eagle Cash & Carry (Pty) Ltd, an independent wholesaler of grocery products in East Port. Eagle has a single outlet in the centre of East Port.

• BigBox and Eagle supply groceries, liquor and general merchandise primarily to independent retail outlets and convenience stores.– The parties’ product offerings cover a full range of edible and non-edible grocery

products, including perishable (frozen and refrigerated) and non-perishable food, household cleaning products, toiletries, catering supplies, tobacco products, over the counter patent medicines, as well as a range of general merchandise such as toys, electrical goods, crockery, paint, stationery, ornaments, and household utensils

• Eagle has, from time to time, procured stock from BigBox

Planning: Case Exercise – Value Chain

Manufacturers / Suppliers(e.g. Coca-Cola, Procter & Gamble, Cadbury, Unilever, Nestle)

Wholesalers(e.g. BigBox and Eagle)

Buying Groups

Independent Retail(e.g. superettes, garage

forecourts)Corporate Retail

Consumers

Distribution Centres

Case Exercise – Filing Information (I)

• In their merger filing notification, the parties provide the following rationale for the transaction:

– BigBox is focussed on constructing and maintaining a supply chain to independent low-end retailers that is as competitive as the distribution centre models of the large retailers, while maintaining better service levels than the national retailers

– The proposed transaction will facilitate the negotiation of better prices from manufacturers at a regional level based on higher purchase volumes, and greater economies of scale will lower distribution costs

– The Eagle business will complement the BigBox grocery offering as BigBox has a significantly stronger presence in toiletries and general merchandise than Eagle

– The current owners of Eagle wish to retire

Case Exercise – Filing Information (II)

In support of their case for approval, the merging parties submit that:

– The relevant product market is broad and includes both wholesalers and large integrated retail chains

– The relevant geographic market is no narrower than East Port and its surrounding areas

– Even if the relevant product market is restricted to wholesalers, the merged entity will have a post-merger share of less than 40%, and will continue to be constrained by at least 7 other wholesalers and post-merger, 3 with shares greater than 10%

– The merged entity’s combined share in any event overstates the extent to which they competitively constrain each other given their differentiated offerings, in terms of product range and mix (Eagle is strong in confectionary, while BigBox is prominent in general merchandise and toiletries), location, credit and delivery terms (Eagle does not offer these services), i.e. the merging parties are not close competitors

– Barriers to entry in wholesaling are low, and upstream suppliers possess countervailing power.

Case Exercise – Initial Information (I)The competition authority has compiled the following information from the responses to initial information requests

- United Cash & Carry entered only 2 years ago- Last year, Afri-Save had a market share of less than 5%- In the last 6 months, USave C&C moved away from Central East Port

to the outlying suburbs – its market share last year was 7%

Wholesale Market Shares (2012 Revenues)Greater East Port

BigBox 25%

TradeValue 19%

United Cash & Carry 16%

Eagle 13%

Afri-Save 11%

Orient Wholesaler 6%

Usave C&C 6%

Jumbo Stores 4%

Total 100%

Market Shares (2012 Revenues)Central East Port

BigBox 35%

TradeValue 26%

Eagle 18%

Afri-Save 15%

Jumbo Stores 6%

Total 100%

Planning: Candidate Theories of Harm• Set out a summary description of the transaction

– BigBox, a large national wholesale chain, and the largest wholesaler in East Port, proposes to acquire Eagle Cash & Carry, an independent wholesaler in East Port

• Distil the reason(s) to investigate further– Merger would combine the #1 and #4 wholesalers in greater East Port, and the #1

and #3 wholesalers in central East Port

• Develop a working theory of harm (and, if appropriate, remedies to be sought)– Merged firm could charge higher prices to independent retailers in East Port (and/or

otherwise degrade their service) if the parties are particularly close competitors and control a substantial share of sales in a well-defined narrow market for wholesale in central East Port and if price increases would not be defeated by entry and/or expansion into that market.

• Identify the key factual issues to be resolved– Geographic market– Closeness of competition– Entry / Expansion

Planning: Evidence• Goal: Gather sufficient information through the pre-notification stage,

merger notification stage and Phase I review to determine whether the transaction should be cleared or if a Phase II review is warranted

• Types of information needed to resolve key questions– Price and quantity data– Customer churn / switching data

• Sources of information– Merging parties– Competitors– Customers

• Methods to gather information– Interviews– Written requests for information or document production (voluntary or compulsory)– Surveys

Planning: Administrative Tasks & Timing

• Overall timing plan– Key deadlines for the investigation

• Agenda / schedule– Specific task schedule that prioritizes and assigns tasks– Identify tasks, specific actions, responsibilities and target dates– Track and monitor progress

• Administrative items– Analytical economic projects– Coordination with other agencies and/or jurisdictions– Expert projects– Staffing needs

Planning: Keeping Assessment Focussed

• Planning is continuous

• Develop and prioritize candidate theories– Identify potential issues, pursue those most likely to reveal effects

• Discuss theories of competitive harm– Expose arguments to critical analysis from merging parties and third

parties

• Test with evidence, reevaluate and revise– Test theories with facts, revise theories according to facts

• Focus the Facts– Prioritize and narrow the search for relevant information– The critical and possibly disputed facts become narrower as the matter

progresses

Planning: Managing Investigation and Evidence

• Organize the Information– Develop a document that organizes case information (by product or by issue)– Consider how technology may help you be more efficient

• Maintain Communications– Dialogue with Merging Parties – regular opportunity to discuss progress– Dialogue with Third Parties – can provide crucial fact information and

perspectives on merger– Keep decision makers informed

• Keep an eye on the clock– Investigation team should use the initial phase to frame issues for inquiry and

quickly identify issues that are not of concern– In an in-depth review, the investigation team may confront timing issues in

three contexts:• Statutory Periods• Internal Timetables• Timing Agreements

– Managing an investigation within time limits is a challenge