Merger Controls First Edition - J Sagar Associates

Ashurst LLP United Kingdom
important UK national newspaper titles with Sky News, BSkyB’s wholesale and retail news provider. Concerns were
identified that this would result in a loss of plurality as the second and fourth largest news providers came together. Rather
than refer the merger to the CC (as Ofcom had recommended) the Secretary of State concluded, following discussions
with NewsCorp, that undertakings in lieu of reference could be used, requiring BSkyB to separate out Sky News from the
merger so that NewsCorp would continue to have only a minority stake of 39 per cent in it, with other provisions to ensure
the editorial independence and integrity of Sky News. Ultimately, this merger was abandoned.
Many media sector mergers are assessed simply on competition grounds, but transactions involving the larger players
and/or consolidation of the more important news sources in the UK may well merit additional scrutiny and government
involvement in the clearance process, to ensure that the public interest is protected.
Key economic appraisal techniques applied
The UK Guidelines provide a good overview of the range of economic techniques applied by the OFT and the CC, and
these are considered further in Chapter 1 of The ICLG to: Merger Control 2011 on “The Economics of Horizontal Mergers
– recent lessons in avoiding surprises”. The Commentary on retail mergers provides further guidance in the specific
context of retailing mergers.
De-emphasising market definition
One of the key points to note as regards the UK Guidelines is that there has been a shift away from concentrating the
competition analysis on market definition and market shares towards more directly considering the degree of rivalry
between firms, including identifying which businesses are the closest competitors. This is particularly an issue in
“differentiated” markets. Differentiated markets arise where there are tangible differences in products or services, or
according to the locations in which they are available (unlike, for example, internationally traded commodities).
Differentiation is a key feature of many markets due to differences in firms’:
• products/services (characteristics, quality, branding and so on); and/or
• geographical proximity (which impacts on firms’ competitiveness due to transport costs or if customers prefer to
buy from local suppliers).
In differentiated markets, the significance of a merger will not necessarily be reflected by market shares as some firms
may be much closer rivals than others, whilst at the same time it would be wrong to disregard rivalry from those firms
whose products are less close substitutes.
Instead, there is an increasing tendency for market definition questions to be re-focused on whether a merger between
rivals creates upward pricing pressure or reduces rivalry in other dimensions.
Theoretical measures of upward pricing pressure
One particular theoretical measure, Upward Pricing Pressure (“UPP”), has been advanced by Farrell and Shapiro (2010).
(Joseph Farrell is Director of the Bureau of Economics at the Federal Trade Commission, and Carl Shapiro is the Deputy
Assistant Attorney General for Economics at the Antitrust division of the US Department of Justice.)
The intuition underpinning measures assessing upward pricing pressure is that following a merger between competitors:
• each merging firm may have an incentive to raise its price post-merger, because it would recapture through its
merging partner some of the sales it would have lost pre-merger as a consequence of price increases. The “diversion
ratio” refers to the percentage of sales lost by one firm which are won by another – the higher this ratio is between
two firms, the “closer” these firms are as competitors; and
• the value of these recaptured sales is evaluated by multiplying the diversion ratio between the merging firms’
products by the gross profit margin on the merging partner’s product (i.e. the increase in contribution to fixed costs
and profits from winning the additional sales). The higher the diversion ratios between the parties and their gross
profit margins, the greater the value of recaptured sales.
Farrell and Shapiro propose a simple test of upward pricing pressure, which has been referred to as the gross upward
pricing pressure index (“GUPPI”), which is simply based on the value of recaptured sales. They argue that the greater the
value of recaptured sales, the greater the incentive of the merging parties to raise prices post-merger will tend to be, all
other things being equal and in the absence of other competitive constraints.
The first UK case which applied this methodology was the CC’s 2010 report on the Zipcar/Streetcar merger. In that case,
the CC estimated that diversion ratios between the parties’ services were 22-24% based on a survey of consumers which
asked if one party’s car service was no longer in operation, what alternatives would the individual being surveyed consider.
Using these estimates and for a range of estimated gross margins, the CC concluded that “..absent entry or the threat of
entry .. the main parties would have at least a moderate incentive to increase prices post-merger”. Nevertheless, the CC
concluded that new market entry would be likely, expected to be timely and on a scale sufficient to prevent a substantial
lessening of competition. The market was expected to continue to grow rapidly and there were two other credible entrants
with well-developed plans to enter the car club market in the UK.
Unfortunately, the CC was silent as to what it meant by “a moderate incentive to increase prices”. This is important
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