“Potential Competition” Concerns in Mergers – Can We Hang our Hats on This?

Economic Consulting

August 30, 2019

Iron Hook

The theory of “potential competition” has increasingly appeared in merger decisions by the South African Competition Authorities recently, wherein it has been questioned whether one of the merging parties would, absent the merger, become a competitor to the other merging party, even if this is not the case at the time of the merger.

This note looks at the types of mergers where this concern may be raised. It also looks at some recent examples and reviews these. And finally, it considers the (relatively high) bar required for this to gain traction as a concern in a merger assessment.

Which type of mergers is this applicable to?

Potential competition concerns may arise in conglomeratemergers, i.e. where the merging firms have no verticalrelationship, nor do they exhibit any horizontal overlap, but are rather active in markets of weak or residual substitution, or in complementary markets. This may arise in discussions of “portfolio effects” or “neighbouring markets”. Complements may be of technical nature (one product cannot function without the other), economic nature (products that are consumed together, like coffee and milk), or commercial nature (when they form part of a range which downstream agents, such as multiple retailers, need to carry).

In such cases no actual competitor is removed by the merger. There may nevertheless be a concern that one of the merging firms may enter into the market of the other, absent the merger, especially since they are operational in a relatively close market and so may have some of the skills and know-how to enter.

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