Mergers and the Competition Act Don McFetridge, Carleton University

1. Mergers and the Competition ActDon McFetridge, Carleton University The Act empowers the Commissioner of Competition to seek a remedial order from the Competition Tribunal for mergers deemed likely to prevent or lessen competition substantially, either on a contested basis under S.92 or jointly with the merging firms as a consent order under S.105. How well has this process worked? Is justice not only done but also seen to be done? Are there examples of false positives or false negatives? Have remedial orders been effective? What role has economic analysis played in the determination of the likelihood of a substantial prevention or lessening?

2. Merger Enforcement Activity • The Competition Bureau deals with between 200 and 300 merger cases per year. • 80% pose no issue under the Act, 20% raise “possible competition concerns.” • No mergers challenged by the Commissioner under S.92 between 2005 and 2010. • Only Tribunal decision under S.92 since 2000 was CWH in 2004. No jurisprudence since then. • Remedy of choice for a substantial prevention/lessening of competition is a consent order. Change from the use of undertakings in the early days. • In some cases, a foreign consent order also serves a remedy in Canada (Nufarm/A.H.Marks, BASF/Ciba, Schering-Plough).

3. Consent Orders • Consent order process was facilitated by an amendment to S.105 in 2002. • Under amended S.105, a consent order can simply be registered with the Tribunal without supporting evidence and with limited scope for intervenors. Prior to this, a proposed order had to be approved by the Tribunal and could be contested by intervenors. • Contrast Suncor/PetroCanada (2009) and Imperial Oil/Texaco (1989). • The process is efficient and may conform to the practice of administrative determination elsewhere. • Leaves MEGS and TBs in place of jurisprudence. How much do TBs reveal about the techniques used to estimate the magnitude of anti-competitive effects?

4. Remedies under consent orders • Consent orders emphasize structural remedies. • Divestiture of facilities (CWH, Agricore United, Saskpool, Suncor, Cineplex) • Divestiture of equipment (WSI/BFI, Superior Plus) • Divestiture of products, brands or lines of business (Akzo Nobel, Pfizer/Wyeth, Johnson & Johnson) • Divestiture of subsidiaries (Ticketmaster), JV interests (Saskpool/JRI) • Divestiture of contracts (WSI/BFI), licenses (Teva/Ratiopharm, Novartis/Alcon) • Behavioral remedies include access to facilities, supply guarantees, non-bundling, non-exclusive dealing (Suncor, Agrium/CF, Ticketmaster, Akzo Nobel)

5. Results of Enforcement Activity • Bureau Merger Remedies Guidelines (2006): Emphasis on structural remedies and timeliness • The divestiture process has been lengthy in some cases (Agricore United) and failed in others (Chapters/Indigo, Rona) • Effectiveness of remedies being studied by the Bureau. • Neumann/Sanderson (2007) studied Bureau’s decision-making process in 2 mergers and a JV not challenged by the Commissioner • Hutton & Hogan (CCR 2008) – suggest measures to increase transparency and fairness • Recent flurry of consent orders – what has changed?

6. Major Cases (in terms of reported Bureau spending, 2005-2010) • Suncor/PetroCanada (consent, 2009, divestiture, supply agreement) • Ticketmaster/Live Nation (consent, 2010, divestiture, licensing) • Agrium/CF (consent, 2009, partial divestiture, supply agreement) • Labatt/Lakeport (insufficient evidence to challenge, 2009) • Google/Yahoo (TB 2008, transaction abandoned) • XL Foods/Tyson Foods (TB 2009, Bureau to monitor)

7. Major Cases continued • Abitibi/Bowater (TB 2007, “insufficient evidence” for challenge) • BellGlobemedia/CHUM (TB 2007, “no grounds for challenge”, CRTC subsequently required divestiture of 5 TV stations) • Cargill/Better Beef (TB 2005, no grounds for challenge) • Tolko/Riverside (interim hold-separate consent, 2004, no challenge) • Grain Handling - UGG/Agricore Coop (consent, 2002) - Saskpool/Agricore United (consent, 2007) - JRI (consent, 2007)

8. Interesting Issues of Economics • Cargill/Better Beef – effect of BSE on the geographic market for live cattle and monopsony power of beef packers (Church & Gordon, 2007 econometric analysis) • CWS - alternative theories of the market – price-taking with marginal suppliers in Michigan versus price-setting spatial oligopoly (Baye vs. Hay) • Superior/ICG - prediction of price effect of merger (LA-AIDS model vs. various SCP models) (Ward vs. Carlton/Bamberger) • Rogers/Microcell, Labatt/Lakeport – potential maverick model of interdependence.

9. Proposed Revision of the MEGS • The MEGS were published in 1991 with revised MEGS published in 2004. • There has been no merger jurisprudence since 2004 and no change in the substantive provisions of the legislation. • Revision appears driven by changes in guidelines elsewhere. • Possible issues include movement away from market definition toward direct analysis of competitive effects. • A prominent form of this direct analysis is the calculation of Upward Price Pressure based on the pre-merger Lerner Indexes of the merging firms and the Diversion Ratio between them. • UPP always predicts a price increase and has been much debated.

10. Proposed Revision of the MEGS • Coordinated effects – moving from canvassing facilitating practices and structures to inferences about the magnitude of the anti-competitive effect • Changing the market share and concentration safe harbour thresholds • Replacing concentration measures (especially CR4) with the number of competitors, diversion ratios and ΔHHI • Defining a maverick (vs. vigorous and effective) • Clarifying criteria for inferring the likelihood and timing of new entry

11. S.96? • Useful commentaries on Superior Propane (2000) by Mathewson & Winter (CCR 2000), Ware (CCR 2001) • Pursuant to the FCA decision in Superior Propane, domestic transfers of surplus from “consumers” to “producers” may not be regarded as netting out. Surplus is deemed to be worth more in the hands of “consumers” than in the hands of “producers” if the former are “worse off” than the latter (balancing weights standard). Useful commentary on debate by Sanderson (CCR 2006) • In Superior Plus (TB, 2009) efficiency gains were found by the Bureau as insufficient to offset the anti-competitive effect of a merger to monopoly. Not stated if weights applied. Settled with a consent order.

12. S.96 continued • 2009 Efficiencies Bulletin suggests “relative profitability” weights on B-to-B transfers. Others suggest presumptive neutrality of B-to-B transfers. Suggested weights on C-to-B transfers based on relative income and whether product is a necessity. • The Efficiencies Bulletin also confines efficiencies to S.96 except when they reduce interdependence by increasing cost asymmetries. • This is could be incompatible with the adoption of the UPP methodology which typically incorporates projected reductions in marginal cost in determination of the price effect of a proposed merger.

13. Conclusions • The process of debating, refining and polishing the MEGS substitutes for merger jurisprudence in Canada. • While non-transparent, the consent order process economizes on transaction costs. Could TBs be more timely and perhaps more instructive for economists? • Is there something between “rubber stamping” consent orders and the IOL circus? • The merger review process under the Competition Act has managed to focus on the competitive process and largely to immunize itself from rent-seeking. • This is not true of merger review by other government agencies. One of the alleged sins of the proposed BHP-Potash Corp. merger was that it was pro-competitive.