In
furtherance of my earlier piece on defining relevant market, another important
factor for determining and accessing the appreciable adverse effect on
competition (AAEC) due to the proposed combination is market concentration. I have made an attempt to discuss the issues
faced by the practitioners and the parties to the combination while dealing
with this issue below.
8.3 – Provide an estimate
indicating the relevant source and the basis of estimate of the total size of
the market, in terms of value of sales (in Rs) and volume (units), of identical/ substitutes/ similar products or
services produced/ distributed/ supplied in India.
8.4 – Provide details with regard
to the sales in value (in Rs) and volume (units) along with an estimate of the
market share of each of the parties to the combination for identical/
substitutes/ similar products or services produced/ distributed/ supplied in
India. In case of a group, same information should be given for all the
enterprises of the group.
Introduction
Key
aggregation indicators used in assessing market structure and concentration
include market shares, concentration ratios and Herfidahl-Hirschman Index. Data on market shares may be collected from a
number of sources including trade associations, customers or suppliers and
market research report.
For most
competition authorities, including the Competition Commission of India (CCI) market shares are the starting
point of the merger review. They are indicative of the past market success of
the firms who are entering into a combination and their rival firms. CCI looks
are the pre-combination market share and the post-combination market share for
its analysis of market structure. In case, the post-merger market share is same
as or any increase in market share is insignificant, there are very few
horizontal overlaps and vertical relationship, then CCI will take relatively
less time in clearing the combination transaction.
Typically,
market share denotes percentage of total sales (or some other measure) of the
product or services to be held by the merging firms and each of their rivals in
the relevant market.
Herfidahl-Hirschman Index (HHI)
HHI is
calculated by summing the squares of the market shares of all the firms active
in the market. Both the absolute level
of the HHI and the change in HHI as a result of merger can provide an
indication of whether a merger is likely to raise competition concerns.
It may
so happen that the entire market share (because not all players market share is
known) is not known. In that event, it would be appropriate to calculate delta
of HHI (i.e., difference between HHI pre and post-merger). Delta is also calculated as 2ab, where a and
b denotes the market share of the respective firms.
CCI has
not come out with any guidance as to the absolute HHI and delta HHI, which
provides for a safe harbour to the parties to combination for assessment as
under the Competition Act and Combination Regulations.
CCI guidance note
CCI in
its guidance note has provided a format which is required to be filled and
submitted by the parties to combination with the CCI. According to CCI, the
market share figures should preferably be based on the reports available in
public domain and/or prepared by the independent third parties. The parties are
required to properly place on records the source of the information. In the
event the public reports etc., are not available then the parties should submit
its internal estimated (and these internal estimates should be backed by some
solid rationale and full methodology of calculation should also be submitted to
the CCI). The parties may also submit their working papers and draft notes
before the CCI for its consideration.
Orders by CCI
Simply
on the basis of market shares of the parties of the relevant product, CCI has
on two occasions asked the parties to divest the assets of one of the parties
to the transaction.[1]
Reasons of the decision
·
The combined market share of the Parties post
combination for the relevant products mentioned above is very high/ substantial
resulting in near monopoly. The Parties post combination is likely to face more
or less no competition from the competitors/ only one significant competitor
remains in the relevant market.
·
The remaining players have negligible market share and
thus may not be in a position to exert significant competitive constraints on
the merged entities.
·
Because of the combination, number of players of the
relevant product will be reduced to two and in some cases, giving near monopoly
to the Parties.
·
The proposed combination will eliminate a significant
competitor and is likely to have an AAEC in the relevant market.
In case
the post-merger scenario leads to a monopoly situation, then, CCI may ask for
divestment of certain assets. Parties should clearly determine such
possibilities while undertaking the competition law assessment and the due
diligence process i.e., time period before even notifying to the CCI.
Other remarks
Determination
of market share and concentration in itself will not lead to a conclusion that
the combination transaction has any AAEC. A detailed analysis of other market
factors and of theories of unilateral and/ or coordinated effects is always
required for determining and concluding any AAEC.
Parties
often submit Upward Pricing Pressure analysis before the CCI for ascertaining
the market concentration.
[1] Sun
Pharmaceutical Industries Limited /Ranbaxy Laboratories Ltd (C-2014/05/170); Holcim Limited/ Lafarge
SA (C-2014/07/190)
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