Any potential merger must give details to the OFT. If the OFT is concerned they can refer the merger to the Competition and Markets Authority, which can examine whether the merger is in the public interest.
CMA has the power to investigate a merger if
- Turnover of the new firm exceeds £70 million or
- The new firm has over 25% market share.
In exceptional circumstances, the secretary of state can intervene if they believe it affects the national interest, (e.g. if Chinese internet firm Huawei merged with UK internet firm like Vodafone)
The CMA weigh up the pros and cons of a merger. They state
“Mergers can bring benefits to the economy and help businesses and markets grow. Many are pro-competitive or have a benign effect oncompetition. However, some can harm competition and result in, for example, higher prices, reduced quality or choice for consumers, or reduced innovation. The aim of merger review is to ensure that mergers do not substantially lessen competition and lead to worse outcomes for consumers, for example, through higher prices, lower quality or reduced choice.” CMA
Reasons to prevent Mergers
If a merger leads to a significant increase in market share, either in local or national markets, the new firm could exercise monopoly power. The legal definition of a monopoly is a firm with more than 25% of the market. If the firm has monopoly power there could be the following disadvantages:
- Higher prices leading to allocative inefficiency)
- Lower Quantity and reduction in consumer surplus
- Monopolies are more likely to be productively inefficient and not produce on the lowest point on the average cost curve
- Easier to collude
- If there is less competition complacency amongst firms can lead to lower quality of products and less investment in new products
- Fewer firms, therefore, less choice for consumers
- With increased supernormal profits the firm can engage in cross-subsidisation or predatory pricing increasing Barriers to Entry.
- The new firm can pay lower prices to suppliers
- Mergers can lead to job losses.
- If the firm becomes too big it may suffer from diseconomies of scale
- The motives for mergers is often poor. E.g. managers may prefer to work for a big company where they get higher salaries and more prestige.
Reasons to allow a merger
- Merger can lead to economies of scale – leading to lower average costs and lower prices for consumers
- Merger can help keep an unprofitable business/service going. For example, a merger between two bus companies may enable rural services to be maintained.
- The merger creates a firm with less than 25% market share, so there is little effect on reducing competition.
- If the merger is a vertical or conglomerate merger – then there is less likely to be a reduction in competition.
- If the firms do not have overlapping business. For example, the case of Amazon investing in Deliveroo (Restaurant delivery) which is different from Amazon’s core business.
Responses to a proposed merger
The Competition and Markets Authority can
- Block the merger
- Allow the merger to occur
- Allow it to occur under a certain condition such as divesting some parts of the business to keep market share low.
Notes on the effectiveness of UK merger policy
- Only a few mergers are referred in 1997 10/186. Most of these were prohibited, perhaps more should be referred
- Size and scope of the market is important for determining policy, a narrower market gives rise to greater concentration
- Mergers depend on the industry and local conditions
- Pragmatic. Dominant market power doesn’t necessarily lead to market dominance. Contestability is very important, if there is freedom of entry and exit the market will be competitive
- Secret and tacit collusion difficult to tackle.
- High fines do bite e.g. British Steel and toy companies
- Competition in the UK has to be weighed against international strength.
Recent Successful investigations
- Mis-selling of PPI
- See case studies at CMA
- Advantages of Mergers
- Case study – Asda – Sainsbury’s merger (2018)