Bonsai is Beautiful: Market definition in the CMA’s draft Merger Guidelines
Warning: This post is one for the very ssmall but ssignificant ssub-ssection of ssubscribers who self-identify to the Venn diagram overlap between real UK merger control
aficion … nerds and scholars of ’80s movie references.
Check back soon for some more useful practical thoughts on the new MAGs when they are published.
Grown from just a ssnip-etty snippet
Small has long been an important adjective in merger enforcement. Antitrust lawyers the world over have explained to clients that when agencies, mostly metaphorically, apply the SSNIP (small but significant non-transitory increase in price) test to the Hypothetical Monopolist of a candidate market in the market definition exercise – they are uh … not necessarily thinking of a 20% or a 50% price increase, Mr. Friedman. More like 5-10%. And, in the UK, when we say 5-10%, we really mean five, not ten.
(Or if the market’s big enough, maybe not five, maybe down into basis points territory. Sainsbury’s national GUPPI score in Sainsbury’s/Asda of 1.25% after efficiencies implies, all else equal, a predicted SSNIP of 63 basis points assuming linear demand (i.e. with 50% pass-through; double that with 100% pass-though). That’s pretty small by normal SSNIP standards but – as the CMA emphasised – pretty significant when the market concerns essential groceries and, at £180 billion in total, a significant share of household spend. Platypus says: measured by Phase 2 market size, that’s over 7,200 Vanilla/Washstation merger inquiries. Which … is a lot of student laundry.)
Turning to the purpose of market definition (and in turn the SSNIP test), the current 2010 Merger Guidelines (not long for this world, with the new 2021 Merger Guidelines expected to be published any day) note (at 5.2.1) that the purpose of market definition is ‘to provide a framework for the analysis of the competitive effects of the merger’. They devote 2,684 words to product market definition alone. The starting point for the framing exercise of product market definition is of course demand-side substitution, and the 2010 Guidelines spend the first 1,189 words on that topic. The SSNIP test itself scores ten references.
As market definition tends to come first, you might be thinking: “ok, so, the first hit on the search term ‘small’ in the new draft Guidelines is going to be the first S in SSNIP, the first time SSNIP appears”. (Am I right?)
Well now. If the SSNIP or Hypothetical Monopolist tests were a lead actor duo in the original release, in the 2021 remake, there is room for one fleeting cameo appearance, right at the end. Oh that’s cool – it’s the original Starsky & Hutch. Or how about the end of the Hollywood reboot of the classic 21 Jump Street – hey it’s Johnny Depp and ...uh that other guy? With budgets tight, the new consultation draft devotes one wait-can-you-pause-and-rewind? paragraph of some 66 words to discussing demand-side substitution… on page 76 of 79 of the draft Guidelines:
The relevant product market is identified primarily by considering the response of customers to a small but significant increase in price (or equivalent reduction in the value offered to customers) on the products of the merger firms (demand-side substitution). Types of evidence the CMA might consider when evaluating the closeness of substitution between products are described at paragraph 4.12 of the chapter on Horizontal unilateral effects.
That’s it folks! Mic drop. If brevity (not Platypus’ strongest suit) is the order of the day, our preferred discipline is the classic 5-7-5 syllable structure of the Japanese haiku –
This. Is. Where. It’s. At.
While it is understandable that we wax on about unilateral effects in the UK, the SSNIP has been waxed off. Almost entirely. The framework tree of market definition – on which competitive effects analysis was once thought to bloom – may just have been shrunk to a bonsai.
Think only tree?
One of the main historical reasons for expending effort on market definition was to be able to calculate market shares. Is there any point in burning calories on market definition if the result of all that labour – market shares – tells you next to nothing? Or worse: is misleading? In other words, if market definition is relegated to the back of the Guidelines, does it follow that market shares are likewise relegated in terms of their evidentiary value in decisional practice (at least, in the 99% of cases that are not a Cournot widget market)?
Platypus concludes that market shares can still matter in a world of closeness of competition, even in a digital two-sided platform market. Here’s the CMA in viagogo/StubHub at 7.81:
Evidence on structural indicators points towards the Parties being close competitors, with: (a) A very high combined market share, and a substantial increment as a result of the Merger, which remains the case even when a wider set of capped platforms are included.
Market shares can also still be used in a dominance-style rather than closeness-style unilateral effects narrative based on relative shares of major players. While Sainsbury’s/Asda was more about GUPPI (see above), national market shares were also analysed at 8.28:
Together, we estimate that the Parties’ combined share is 29% of sales on a UK-wide basis. Post-Merger, the Parties would be the largest grocery retailer by share of sales, overtaking Tesco (with a current estimated share of supply of c.27%) and nearly three times the size of the next largest grocery retailer, Morrisons, with an estimated share of c.10%.
Finally, even when both the combined share is below a traditional 35-40% range of concern and the increment is simultaneously low (5%), market shares may count for little probative value against unilateral merger effects if there is other evidence the CMA believes is more powerful. Here’s the assessment in JD Sports/Footasylum at 8.131 (where footwear % shares were in the 20s for JD with around a 5% increment):
.. these market shares give only a basic indication of the Parties’ presence in terms of the current structure of the market and do not fully capture the closeness of competition between retailers in differentiated markets, such as this one…
Overall, it is safe to say that the value attached to market shares can vary wildly depending on the facts and circumstances of a case.
The bonsai tree went mainstream as the symbol of the Miyagi-do dojo in 1984’s The Karate Kid. While bonsai are by definition small, in the right case, you may still close your eyes, concentrate, and think only tree. Indeed, even in the new world of the revised Guidelines, Platypus advises that the correct 80s movie reference year is not 1984 but 1983: if large enough, and if all the conditions are just right, market shares can flourish and still loom as large in the analysis as the trees on the Forest Moon of Endor.
Less wax on, wax off. More: Ewoks on a tree, Ewoks off a tree.