Targeted ex post evaluations in a data-poor world

ABSTRACT

Competition agencies have faced increased pressure to demonstrate their worth by showing they have positively contributed to consumer surplus or market efficiency. As a result, there has been increased interest in carrying out ex post reviews of cleared mergers, seeking to determine whether prices have increased. A demonstration whether prices rose and whether that increase can be attributed to the merger may tell us something about the correctness of the decision in that transaction but not about decisions in other transactions more generally. The New Zealand Commerce Commission, as a result of this and the paucity of data that would allow for a difference-in-difference approach to ex post merger evaluation, has changed its approach. Rather than seeking to determine the veracity of a decision, the Commission seeks to determine whether anticipated market developments that were key to its decision, such as entry or increased imports, did in fact take place and if not, why not. This is done across a wide number of transactions with the goal of determining which techniques and types of evidence best serve its purpose so as to improve on them. This paper outlines this ex post methodology and presents learnings to date.

KEYWORD:

• Ex post evaluations

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Abuse of market power cases are not considered as readily in large part because of the challenges of identifying a counterfactual.

2. Roundtable on Impact Evaluation for Merger Decision – Note by the Delegation of the United States, Directorate for Financial and Enterprise Affairs, OECD, 2011 at para 5.

3. The three mergers examined in this way were Tomarata Sand Ltd./Coastal Resources Ltd., Pyne Gould Guinness Limited/Wrightson Limited, and Schering Plough Corporation/Organon BioSciences.

4. Even if entry does not occur, it does not preclude the possibility of the threat of entry assuring post-merger competitive outcomes. Whether the threat of entry potentially had such an effect was outside the scope of this study.

5. The reason for entry was not considered in the review and so was not necessarily in response to a post-merger price increase.

6. Additional benefits proved to be that industry participants were able to remember pre- and post-merger situations, and industry participants were often still with their companies.

7. Of the 31 merger decisions between May 2008 and June 2011, two were declined.

8. An additional review of a declined merger also took place. That merger was declined on the basis of insufficient remaining competition and high barriers to entry. While it was found that a market participant exited the market and there was no entry, since the merger was declined, it cannot be known how the market would have developed had the merger taken place. Due to the absence of such a counterfactual, this review is not included in the analysis.

9. Of the 19 merger decisions between July 2011 and July 2013, two were declined.

10. The last merger subject to the January 2015 review took place in February 2013.

11. This was Universal Music Holdings Ltd./EMI Group Global Ltd. The merger took place at a time of many dynamic changes in the market place, making it difficult to isolate changes post-merger.

12. The 31 merger decisions over the relevant period that were not reviewed, including the four cases that were declined, are listed in Appendix 2. The 27 clearances that were potentially subject to review were not chosen because they were all cleared on the basis of a multitude of reasons with relatively equal weight, rather than a strong expectation in regard to one of the four ‘clear-cut’ issues identified above.

13. One merger – Bligh Finance/Hire Equipment Group – involved eight separate regional markets. Two mergers involved the same market -- internal parasite treatment for production animals.

14. This does not preclude the possibility that the threat of entry, or some other source of competitive discipline, helped assure pre-merger competitive outcomes. Whether this was the case is outside the scope of the study.

15. Cavalier Wool Holdings Limited and New Zealand Wool Services International Limited [2015] NZCC 31, Determination, 12 November 2015, at paragraphs 333–335.

16. As noted above, new entry occurred two years after the firm in question exited.

17. Eight of the markets were different regional markets for the same product – building construction and maintenance equipment hire services.