TT. . Takigawa Takigawa 20062006 11

APEC Training Course on Competition APEC Training Course on Competition Policy For APEC Member EconomiesPolicy For APEC Member Economies

• 8-10 August 2006. Bangkok, Thailand.

• Regulation of Business Combinations by Competition Law

• Toshiaki Takigawa

– Professor, Kansai University School of Law , Japan.

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Contents n II. MERGERS AND OTHER COMBINATIONS: HOW

DIFFERENT SHOULD REGULATION STANDARDS BE? n III. REGULATORY PROCEDURE n IV. SUBSTANTIVE STANDARDS

n A. Market power standard n B. Market delineation n C. Concentration ratio standards and Safe-harbors n D. Entry consideration n E. Efficiency defense

n V. VERTICAL AND CONGLOMERATE COMBINATIONS

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Mergers and other combinations (1)

n Companies combine each other in diverse forms

n “hardcore cartels” should be clearly distinguished n Competition authorities should prohibit

hardcore cartels and impose penalties to offenders

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Mergers and other combinations (2)

n Business combinations (excluding hardcore cartels) are divided between.

n (1) soft or limited term combinations or cooperation.

n (2) mergers. n mergers should be regulated before their

consummation, and pre-merger notification is mandated.

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Mergers and Joint-ventures

n Mergers are accomplished through acquisitions (including exchanges) of stocks or assets.

n Joint-ventures that incorporate joint subsidiaries should be treated as mergers.

n Acquisition of controlling quantity of stocks in other companies also should be treated as a merger.

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Market Power Standard

n Both for mergers and other combinations. n “Market power to a seller is the ability

profitably to maintain prices above competitive levels for a significant period of time.”

n distinction between mergers and business combinations (excluding hard-core cartels) has become much less meaningful than in old days

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Some differences

n some differences exist between regulation of mergers and other combinations (cooperation).

n exception from market power standard is applied more widely in case of business combinations than mergers. For business combinations, “rule of reason” standard is applied.

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Core reason for distinction

n regulators should establish pre-merger notification requirement for mergers.

n In case, mergers are prohibited after their consummation, serious difficulties are caused to merging companies, their debtors, and investors.

n soft combinations need not be scrutinized before their consummation.

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Notification obligation

n Companies should be obligated to notify their planned mergers to competition agencies.

n Only mergers beyond certain threshold scale are worthy to be notified.

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Agency consultation

n After receiving pre-merger notification, competition agencies should finish scrutiny of a merger in a limited time

n Informal consultation between merging companies and competition agencies are often held before pre-merger notification.

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Negotiation

n Large majority of mergers found to form market power are not simply prohibited, n but are approved on the condition that

merging companies take measures to reduce its market power: i.e. sale of assets.

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Merger Guideline

n (1) Vast majority of merger cases are solved by agencies (not by courts), and, therefore, agencies should provide guidance to companies as to their standard for approving (or disapproving) mergers.

n (2) In order to help companies to plan their organization strategy, agencies should provide them with easy-to-understand explanation on illegal mergers.

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Market power standard

n “Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.”

n Market power standard has now been unanimously adopted by US, EU, and Japanese merger guidelines.

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Two types of market power

n Market power is divided between. n (1) one formed through implicit

coordination by industry members including the merged company.

n (2) one formed unilaterally by the dominant merged company.

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Market power achieved through coordination

n Close relation with condemnation of hardcore cartels. n competition authorities are required to prove that

cartel members “agreed” to raise or maintain price.

n In a concentrated market, prices may be raised, without agreement, through implicit meeting of minds.

n Cases appeared to be price leadership cases may actually be secret agreement cases.

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Market Concentration

n Market power is formed through coordination (implicit coordination or secret cartel) when a merger increases market concentration

n Market factors other than concentration also affect possibility of coordination. n product heterogeneity n characteristics of buyers, etc.

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Unilateral market power

n competitors’ production capacities are too small to fulfill increased demand.

n It takes considerable time before new

production facilities are built. n Unilateral market power usually

postulates at least 50% market share.

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Unilateral market power in differentiated markets

n In a differentiated market, a merger of two companies whose products resemble each other (but differ from other companies’ products) brings about unilateral market power.

n in many cases, differentiated products may be found to belong to different markets.

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Market delineation

n Market delineation is necessary for regulation of all business combinations (excepting hard-core cartels).

n For mergers, market delineation is imperative. n market power need to be estimated in

advance.

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Hypothetical monopolist test (1)

n Market delineation from the viewpoint of consumer response.

n When a large number of consumers of “carbonated soft drink”, in reaction to its price raise, goes to “natural mineral water”, this tend to show that the two products belong to a same market.

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Hypothetical monopolist test (2) n a hypothetical profit-maximizing firm, …. only

present and future producer or seller of those products in that area likely would impose at least a 'small but significant and nontransitory' increase in price, …..

n the reduction in sales of the product would be large enough that a hypothetical monopolist would not find it profitable to impose such an increase in price, then the Agency will add to the product group the product that is the next-best substitute for the merging firm's product.”

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“Function and demand” method

n It is easier but ambiguous. n agencies determine that cellular

phones and fixed phones belong to different markets, because consumers use cellular phones for different objectives and in different manners than when they use fixed phones.

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Supply side consideration n different qualities of paper cannot be used for

a specific use, i.e. an art book or a high quality publication cannot be based on lower quality papers.

n However, paper plants are prepared to manufacture the different qualities, and production can be adjusted with negligible costs and in a short time frame.

n …… the Commission would not define a separate market for each quality of paper and respective usage.

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Geographical market: Domestic or Global market?

n Japanese steel producers sell not only in Japan, but to US, Europe and China.

n So, should JFTC determine that geographical market for steel is world-wide (namely, global market)?

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Domestic or Global market?

n assessment of consumer demand, using the hypothetical monopolist method.

n Japanese consumers’ demand is affected by foreign producers’ export to Japan in response to price increase in Japan.

n The more domestic markets are open to foreign imports, the more probable geographical market is determined as global.

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Concentration ratio standards

n Preferably, merger guideline would include some numerical standards—concentration ratios, or market shares—as thresholds for disapproving mergers.

n US Merger Guidelines indicates that a market with HHI exceeding 1,800 (a market of roughly 6-7 equal size firms) is considered “highly concentrated”, and thus is very likely to be challenged.

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Safe-harbors

n Any clear-cut threshold concentration ratio cannot be presented in merger guidelines. In its place, safe-harbor HHI ratio or market share should be shown in the merger guidelines.

n mergers which bring about concentration ratio beyond the safe-harbor do not necessarily face disapproval.

n In case of the EU Guideline the safe harbor HHI is 1,000.

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Entry consideration

n New entries should be timely (swift) and be of enough quantities in order to deter price raise.

n High entry barriers n “sunk cost”, that is unrecoverable investment

cost. n Airline industry: high initial cost but with low sunk

cost, since airplanes can easily be transported, and sold in a second-hand market.

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Efficiency defense

n Efficiencies include scale economy, improvement in product quality, and innovation enhancement.

n Claimed efficiencies should be “merger-specific.”

n US FTC approved the GM/Toyota joint-venture in consideration of its efficiency effect: GM’s learning of Toyota’s lean production method.

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Vertical combinations

n Typical example is combination between a manufacturer and its distributors.

n Such combination forecloses other manufactures from opportunities to find their outlets.

n Time-Warner/AO merger case, US FTC imposed several conditions for approval of the merger: Time-Warner was obligated, among others, to open its cables to AO’s competitors on equal basis.

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Conglomerate combinations

n Conglomerate combinations are now rarely, if ever, forbidden.

n 2001 GE/Honeywell merger case. n US: pro-competitive efficiencies. n EU: conglomerate combination augments GE’s

dominance.

n 2005 P&G/Gillette case. n economy of scope and economy of one-stop

shopping.