A Road Map to Assessing Local Market Mergers David Wirth
Total Page：16
File Type：pdf, Size：1020Kb
Chapter 1 1 A Road Map to Assessing Local Market Mergers David Wirth Ashurst LLP Tom Punton Introduction It is also important to consider whether the aggregation of local overlaps may affect national aspects of competition. Many mergers that are reviewed by competition authori- For example, where the parties are close competitors across a ties involve an assessment of competition in markets that are number of different local markets, this is more likely to impact narrower in scope than national, such as mergers between on the dimensions of competition that they set nationally. In retailers, wholesalers and local service providers. Such sub-na- Sainsbury’s/Asda (2019), the CMA explained that elements of the tional markets are often termed “local markets”, even in cases competitive offering that are set centrally and apply uniformly where competition takes place at a broader regional level. across all stores “affects their effectiveness as a competitor in every local Whilst the substantive threshold for assessing mergers area where they operate”, and therefore it considered the impact of involving local markets is the same as for all other mergers, local the transaction both at a national level as well as in each of the market cases raise their own unique issues, most notably since areas of local overlap. they often result in a large number of individual markets having Whilst the extent of the local overlap is a relevant factor to to be scrutinised as part of the same transaction. For example, assessing the impact of the transaction at a national level, it is not in Greene King/Spirit (2015), the transaction involved the acqui- the only factor. In its Phase 1 decision in JD Sports/Footasylum sition of over 1,200 pubs, Ladbrokes/Coral (2016) involved over (2019), the CMA explained that is also relevant to consider other 1,800 betting shops, and in Sainsbury’s/Asda (2019) the merging evidence that more accurately reflects the overall aggregate parties operated over 1,000 supermarkets and 600 petrol filling constraints on the parties, such as internal documents, third- stations. In such cases, it would be impractical to conduct a party views, evidence on the Parties’ service propositions and detailed competition assessment into each local area, which can third-party reports and commentary. In Sainsbury’s/Asda (2019), raise practical and timing issues both for the parties and the as well as undertaking a GUPPI assessment at the local level, competition authorities reviewing the transaction. the CMA also carried out a nationally weighted GUPPI assess- The aim of this article is to provide an overview of the issues ment in order to assess the closeness of competition between the that arise in the assessment of local market mergers. We also parties at a national level.2 consider a number of the techniques that have been used by A merger between retailers may also give rise to other effects the UK’s Competition and Markets Authority (CMA) and other competition authorities in assessing whether local market that are not merely a reflection of the aggregated loss of compe- mergers are likely to give rise to competition concerns. tition at a local level. In particular, harm may arise at a national level where retail mergers result in the loss of potential compe- tition that goes beyond the parties’ respective current estates. Local Versus National Competition Similarly, the loss of competition in relation to innovation in a While this article focuses on assessing competition in local given retail sector or certain nationally set pricing parameters markets, it is important also to consider whether a transaction may not be limited to an aggregation of the loss of local compet- involving local markets has an impact on competition at the itive constraints. national level. For example, in Ladbrokes/Coral (2016) the CMA had histor- In this regard, even if consumers’ choices are limited to local ical information on shop openings and closures in the industry. retailers, some parameters of competition, such as price, quality, The CMA noted that the parties had frequently opened stores range or service (collectively referred to as PQRS), may be set in competition with each other over the five years preceding nationally. For example, for firms with many outlets, it may be the merger. Similarly, in Pure Gym/The Gym (2014), the CMA more cost effective to set national prices, rather than giving each at Phase 1 found that the parties were the two leading budget store the discretion to flex prices locally. gym players and were each significantly larger than the third and It is therefore important first to consider what elements of fourth largest players. Their expansion plans were also materi- competition are set locally (rather than nationally), and whether ally more significant than those of other budget gym players, the parties would have an incentive to adjust their retail offer and meant that they would open a large number of new gyms in in response to local competitive conditions post-merger. The the near future. CMA’s commentary on retail mergers emphasises that the CMA’s “strong starting assumption at phase 1 has been that there will The Use of Catchment Areas be material local competition on one or more aspects of the PQRS retail offer”.1 It is important, however, that there is a nexus between The aim of geographic market definition is to focus on the area the theory of harm being considered at the local level, and the over which competition takes place. When defining the relevant incentives and ability for local retailers to behave in the way geographical market, competition authorities typically refer to advanced in the theory of harm. the SSNIP test (Small but Significant Non-transitory Increase Merger Control 2020 2 A Road Map to Assessing Local Market Mergers in Price). This test starts from the most narrowly defined catchment area using the Parties’ data, and two narrower geographic market and considers how customers and suppliers catchment areas (20 miles and 50 miles) based on the views would behave towards a relative increase in prices by 5–10%. of third parties; and In local market cases, however, competition authorities tend ■ are catchment areas based on the locations of customers to focus on the catchment areas of customers (described in the consistent with the other evidence available (e.g. the CMA’s Retail Mergers commentary as a pragmatic approach parties’ internal documents and monitoring of compet- to identify the geographic market), which is unrelated to the itors, the parties’ decision-making and how they react SSNIP test. More specifically, the CMA’s guidelines refer to to competition and new entry, how customers view the catchment areas accounting for the closest 80% of customers market and so on). being used as a proxy for geographic market definition, which Catchment areas can also be derived from customer surveys involves ranking customers by distance from each of the sites which can ask about the customer’s journey and where they in question and using the 80th percentile as the catchment area.3 might shop if the store was not available (e.g. Celesio/Sainsbury’s The following chart provides an example of the distance (2016)) or from the parties’ internal documents, which monitor profile of customers (e.g. around a particular site) that is often the competitive offering of local competitors. It may also be found in local market cases. Of note, the distances of customers possible to use other quantitative techniques to estimate the size from a site will usually increase significantly beyond a certain of the catchment area, such as by looking at the impact on sales threshold, often reflecting some inconsistencies in the data of new store openings within a local area or the impact on prices (e.g. people on holiday or visiting/working in a different area of varying levels of concentration at different distances. to where they live). This can have a significant bearing on the overall catchment area used for the competitive assessment Methodological Issues With Using th unless a lower threshold, such as the 80 percentile, is applied. Catchment Areas In this regard, it is often helpful to plot the distance profile of customers in order to identify whether there are any obvious There are also a number of factors to take into account when kinks in the data. considering catchment areas. First, the size of the catchment area depends on the specific measure used (e.g. straight-line distances; road distances; drive- time distances; public transport journey times, etc.). These different approaches have all been used in previous cases, and can result in some material differences in the catchment areas defined. Different software and modelling assumptions may also generate different results as to the distances which can be travelled within the relevant journey times (with journey times and distances varying depending on the time of day of the journey and the road layout). There appears to be little discus- sion in merger decisions as to why one particular approach is The use of catchment areas typically requires details of favoured over another. customers’ addresses to be available. The CMA has used a Second, it is important to consider where to centre the catch- number of different types of evidence to identify the location ment area. The approach adopted by the competition authori- of a store’s customers. Sources include: (a) data from loyalty ties has typically been to centre the isochrones on (i) each of the cards or mailing lists (e.g. Greene King/Spirit (2015)); (b) home/ target’s sites, and (ii) each of the acquirer’s sites, as the compet- site delivery records (e.g.