PABLO FELIPE ROBLEDO DEL CASTILLO Superintendent of Industry and Commerce GERMÁN BACCA MEDINA Deputy Superintendent for Protection of Competition FELIPE SERRANO PINILLA Advisor to the office of Superintendent of Industry and Commerce ROSA CASTRO ZARZUR CAROLINA LIÉVANO LIÉVANO MELBA CASTRO CORTÉS Mergers working Group. Translation by MANUELA TRUJILLO GONZÁLEZ.
ANALYSIS MERGER (HORIZONTAL, VERTICAL AND CLUSTERS) GUIDE CONTENT
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Introduction Applicable regulations Definitions Procedure Control unit Assumptions to inform Relevant market definition Pontential effects of the merger Damage theory Constraints
Guidelines For Analyzing Mergers Introduction 1. This paper aims to present the analysis criteria used by the Superintendence of Industry and Commerce (SIC) for the study of applications of economic mergers, in order to determine if they could cause an undue restriction on the free competition, under the terms of Law 1340 of 2009, Resolution No. 12193 of 2013 and other related regulations. 2. A horizontal merger is defined as a transaction among enterprises located on the same level of the production and/or distribution chain that results in the disappearance of one competitor from the marketplace or in a reduction of competition (for example in the case in which firms create a new one), under circumstances where, depending on market conditions, it would enable enterprises to acquire the capacity to determine independently or with its immediate competitors the conditions for selling, prices, conditions for marketing and other competitive factors. 3. Vertical mergers, defined as a merger brought about between enterprises located at different levels of production and/or distribution but in the same value chain, even if they do not necessarily reduce competition, would be able to cause restrictions or limitations on the sale upstream or downstream on the value chain. 4. Normally, the SIC develops the analysis of concentration transactions in the following step by step stages: (i) Definition of the relevant geographic and product market, (ii) Analysis of the relevant market structure: concentration levels, dominance and barriers to entry, (iii) Analysis of the potential effects of the transaction, and (iv) Study of efficiencies that offset such risks.1 5. By analyzing a merger transaction, the SIC will aim to protect free competition in the affected markets and, above all, will look to safeguard the interest of consumers. 6. Depending on the type of transaction under analysis, the SIC will focus the examination on certain areas such as production, distribution or marketing, on effective competition in the specific market, on barriers to entry for potential competitors, etc. These Guidelines point out the various phases of the merger evaluation procedure, which vary depending on the complexity of the transaction that is in question. Thus, those mergers that at the Phase I. Pre-evaluation, permit a reasonable inference that they will have a significant impact on competition will require to step into Phase II. Evaluation in order to have more information that allows for a broader analysis. In contrast, those mergers in which no effects on competition are
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In the case of horizontal integrations between firms with highly heterogeneous or differentiated products, the SIC will not define relevant markets.
perceived will be decided during Phase I, as long as there is enough available information. 7. Given the particularities of each market, these Guidelines do not pursue the resolution of all those questions that all markets might present, nor to confirm absolutely any interpretation of applicable norms. The specific analysis in each case will depend on the corresponding market, the type of goods or services and the information that may be provided by the merging parties and third parties required to provide information by the SIC. 8. APPLICABLE LEGISLATION 9. The applicable procedures are established in Law 1340 of 2009, Resolution No. 12193 of 2013 and other governing norms which modify the second chapter of Title VII of the Unified Circular of the SIC, giving instructions regarding the manner on how to comply with the obligation of notification of merger transactions. Likewise, the criteria for facilitating compliance are set out in this document, noting the procedures for its full implementation. DEFINITIONS For purposes of this Guidelines will be considered the following definitions: 10. Acquisition of control: Within the terms of Section 4 of Article 45 of Decree 2153 of 1992, control is defined as: “(. . .) the ability to influence directly or indirectly the policies of enterprise, the initiation or termination of the enterprise, changing activities to which the enterprise is directed or the disposition of good or rights essential for carrying out the activities of enterprise.�
the the the the
11. Control can be exercised directly or indirectly or control may be exercised jointly by two or more enterprises over another enterprise in the market. 12. Fiscal year: In accordance with Article 14 of Decree 111 of 1996, the Organic Statute of the Budget, the fiscal year commences on the 1st of January and ends on the 31st of December of each year. 13. Barriers to entry: There are various definitions of what constitutes barriers to entry in a market. On the one hand, they have been defined as the degree to which, in the long run, firms established in a market are able to
raise prices above average minimum costs of production and distribution without inducing entry by new firms.2 14. Likewise, they can be understood to be the factors that impede entry by new firms into a market that has been determined may be profitable, while at the same time permitting already established firms to set prices higher than marginal cost and, therefore, obtain non-transitory monopoly profits.3 Barriers to entry have also been defined as the additional costs of production that are borne by a firm that seeks to enter a market but are not borne by firms that are already established in it.4 The different definitions mean that it is possible to have different opinions with respect to specific types of barriers to entry and/or ignore certain barriers to entry.5 15. For the reasons given above, the SIC will not limit itself to one particular definition of a barrier to entry and will, instead, analyze each merger transaction with attention to its specific characteristics. Nevertheless, it can be generally said that there are two large categories of barriers to entry. One is the legal/regulatory type, understood as those that public entities impose. The other is the type inherent to the market, such as sunk costs, capital investments or economies of scale. 16. Value chain: Within the terms of Resolution 12193 of 2013 is defined as: a. “(. . .) the combination of activities from which it is possible to generate a system in which a product obtained from one activity results in being an input for another. In this manner, each activity or link adds value to the goods or services at the time of analyzing such process, from the inception of the product until it reaches the final consumer. “ 17. Market share: This is a measure of the size of an enterprise relative to the size of a defined relevant market. The variable used in making this calculation can be different depending on the market and the principle activity conducted by the enterprises. The variables generally used correspond to, among others, the value of sales, the volume of sales, production capacity, and the volume and value of imports.
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Bain, Joe. Industrial Organization, New York: Wiley & Sons, 1968. P.252. Ferguson, James M., Advertising and Competition: Theory, Measurement, Fact, Cambridge: Ballinger, 1974. 4 Stigler, George, The Organization of Industry, Homewood: Richard D. Irwin, 1968. 5 Demetz, Harold, “Barriers to Entry,” Amercian Economic Review, Vol.72, No. 1 (March 1985), pp. 45-57. 3
18. Enterprise: Is understood according to the terms of Article 2 of Law 1340 of 2009. The legal definition of an enterprise is set forth in Article 25 of the Commercial Code: “An enterprise shall be understood to include all economic activity organized for the production, transformation, distribution, administration or care of goods or for extending services. Such activity can be accomplished through one or more commercial establishments.” 19. Legal form of merger: Refers to the method of merger which may be by acquisition of shares, purchase of assets, merger, an enterprise split, creation of an enterprise, alliances between enterprises , franchise contract, etc. Regardless of the legal form, a transaction shall be subject to the reporting procedure whenever competition is substantially affected in at least one market where prior to the transaction competition existed and after the transaction the enterprises form one single unit ceasing to compete. 20. Group Enterprises: Defined in Article 28 of Law 222 of 1995, is when there exists a relationship of subordination and a unity of purpose and direction between a parent society (translator’s note: society is a legal term of art that includes, sole proprietorships, partnerships, LLC’s, publicly traded corporations, and other forms of organizing a commercial enterprise.) and its subsidiaries and/or affiliates, and a unity of purpose and direction. They must be registered in their respective registries in the chamber of commerce. There is unity of purpose and direction when the existence and activities of all entities seek to achieve one objective determined by the parent or controlling entity by virtue of the direction that it exercises over the whole, without prejudice to carrying out the social objective or individual activity of each one of the enterprises.6 Control shall be presumed for all Group Enterprises. 21. Report: As required in the provisions of Law 1340 of 2009, Resolution No. 12193 of 2013 and other related provisions of law. Enterprises are required to give the SIC prior notice of transactions that are projected to bring about the acquisition of control by one or several enterprises, whatever the projected legal form of the transaction may be. This duty applies to enterprises that carry on the same economic activity or participate in the same value chain and that meet the provisions of Article 9 of Law 1340 of 2009. 22. Notification: As required in the provisions of Law 1340 of 2009, Resolution No. 12193 of 2013 and other related provisions of law, in which enterprises 6
Superintendence of Societies. Resolution 2467 of September 18, 1997.
that may carry on the same economic activity or engage in the same value chain, that meet the conditions set forth in Numbers 1or 2 of Article 9 of the Law of 1340 of 2009 and that have less than 20% of the relevant market are obliged to report to the SIC, information spelled out in the above mentioned laws and regulations. 23. Merger: Whatever mechanism is used to acquire control over one or several enterprise, control over part of them or to create a new enterprise, with the purpose of jointly developing activities. The term merger, regardless of the legal nature of the transaction, means the combination of one or more activities in which competition ends between the enterprises that carry out the merger after the completion of the merger. 24. Horizontal merger: A merger that takes place between enterprises that operate on the same level of the value chain. 25. Vertical merger: A merger that takes place between enterprises located at different levels of production or distribution, but in the same value chain. 26. Parties: According the terms of Resolution No. 12193 of 2013, they should be understood to be the enterprise parties: “(‌) those enterprises that take part in the planned merger and that are engaged in the same economic activity or belong to the same value chain and that may have effects on the national market.â€? 27. Relevant Market: The market in which competition is going to be affected as a consequence of the planned merger. It consists of a product market and a geographic market. From here on, when any reference to the product market is made, this concept shall include products and/or services. 28. Substitutability: The degree to which products are considered interchangeable by a consumer or user because they have similar characteristics, the same use and similar prices. 29. Substitutability from the point of view of demand (the consumer), determines the substituted good, thus lessening the restrictive effect of a merger. 30. Likewise, substitutability from the point of view of the seller is taken into account upon analyzing the structure of the relevant market in order to include in the study the competitive pressure of other actors in the market that are in a position to change their current production in a short time and with little cost and direct their production to those goods that are in the relevant market, thus lessening the restrictive effect of a merger.
31. Unity of an enterprise: Article 32 of Law 50 of 1990 determines that legal persons are one enterprise when the principal has economic control over the affiliates and subsidiaries. PROCEDURES 32. Stages Stage I. Pre-EvaluationThis phase lasts for 30 working days, counted from the day following the date of initial filing. Once the merger application is filed by the merging parties, the Superintendence has 3 working days, from the day following the receipt of the request, to publish the merger operation on the Company’s websites, as long as it considers that the information alleged is complete, in the terms of Annex 1 of Resolution 12193 of 2013. Once this process is completed, merging parties have 10 days to submit to the Superintendence their observations or comments regarding the merger projected. It is to clarify, that the term for third parties to rule on the merger, does not interrupt the term for purposes of the final judgment. 33. Stage II. Evaluation If within the 30 days provided to develop the first phase, the SIC remains silent about the merger on the ground that the gathered information was insufficient to assess the real impact of the transaction among the market, the Superintendence shall continue with the second phase of the process and so it shall notify the parties. This phase is designed for the Superintendence to request third parties to provide further information it may consider useful for the purposes of further analysis regarding the merger. This second phase lasts for three calendar months from the date on which the intervening parties provide all the information contained in Annex No 2 of Resolution No 12193 of 2013 as well as any other information that is required by the SIC. •
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UNITY OF CONTROL: Control exists in different ways. Control in legal terms, de hecho or de facto control, and joint control derived from a merger or a pre-existing situation. From a legal perspective, whenever a person submits decision making power to the will of another person or persons, there will exist a situation of subordination or control, according to article 260 of the Commercial Code. In order to determine what the elements of control are, the first reference is to Article 261 of the Commercial Code where some cases of subordination are articulated among which are cases of economic control, administrative control and legal control. Nevertheless, it is necessary to point out that the
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above-cited Article does not treat the subject in an exhaustive way, and, therefore, subordination may be present in any situation in which the commercial or economic direction of the company is subordinated to another entity. It is worth highlighting that, in accordance with the law; the existence of an Enterprise Group does not in itself imply the existence of a situation of subordination. Whenerver, in terms of Article 28 of Law 222 of 1995, in addition of the subordination requirement, there must exist unity of purpose and direction among companies
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TYPES OF CONTROL
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Type 1. Control should be understood as the ability to make decisions and exercise joint control over an enterprise. Such control can be direct or indirect.7 In accordance with Article 28 of Law 222 of 1995 there will be a Group Enterprise when, besides a connection by virtue of subordination, there exists between the entities a unity of purpose and direction understood as: “. . . when the existence and activities of all of the enterprises seek to achieve a goal determined by the parent Company or is controlled by virtue of the direction that the parent Company exercises over the group, notwithstanding the individual development of its corporate purpose of each one of them”.
Type 2. Another situation involved subordination occurs in those opportunities where, in the exercise of any agreement concluded between the companies, regardless of their nature, empowers the parent Company to provide the board of directors of the subsidiary, a series of instructions that must be followed. • •
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Type 3. As already indicated, control has been defined in our law as the possibility of direct or indirect influence on the policies of the enterprise, initiating or terminating the activities of the enterprise, changing the activities to which the enterprise is dedicated, or disposing the goods or rights essential to the development of the activities of the enterprise.8 Commercial legislation contains other situations related to the concept of control, such as the facto control in which it is possible for a corporation to have its decision making power subordinated to the will of another
Commercial Code. Article 261, Number 3, Paragraph 1. There will be equal subordination, for all legal purposes, when the control conforms to the previous condiions in this article, when it may be exercised by one or more natural persons, whether directly or through an intermediary or with the concurrently with entities in which these hold more than fifty percent (50%) of the capital or make up the minimum majority needed to make decisions, exercise dominant influence over the direction, or make the decisions of the entity. 8 Article 45 of Decree 2153 of 1992.
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person or persons that participate in a joint way in the will of a corporation by means of a dominant influence on the organs of the controlled. This situation is known as a joint control or an association in order to acquire control. Type 4: Finally, another form of subordination that is frequently seen is joint. Just as the Commercial Code points out, control of a society can be accomplished by one of many persons that participate in a joint manner in the will of one society by means of a dominant influence in the “social organs of the controled” This situation is known as joint control or an association in order to acquire control.
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EXCEPTIONS FROM THE DUTY TO REPORT
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Enterprises that merge, are acquired or reorganize and are able to accredit the existence of an Entrepreneurial Group or those in which the parties find themselves under the same control unit in the terms of section 4 of Article 45 of Decree 2153 of 1992, are exempt from the duty to inform the Superintendence of Commerce and Industry, in conformity with Paragraph 3 of Article 9 of Law 1340 of 2009 and section 4 of Resolution No 12193 of 2013. STANDARDS FOR REPORTING
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The regulations have referred to the term enterprise generically in order to refer generally to the wide variety of subjects that are subject to the system of enterprise concentrations. However, not only are enterprises considered subject to the system for integrations but also other entities such as: any corporations legally established in Colombia, foreign corporations engaged by contract, or have property or real rights in Colombia, Colombian corporations or participate in and act on them within the legal prerequisites of control or business group. It shall be understood that these rules also apply to natural persons engaged in commercial activities or commercial, and sole proprietorships. It shall be understood that those who have commercial enterprises that supply the territory of Colombia or whose effects are felt in Colombia are found to be covered by the law. Thus, enterprises that plan to carry out a merger, regardless of its legal form, are required to inform it to the SIC, through the Pre-evaluation procedure and once they comply with all the assumptions provided by Article 9 of the Law of 1340 of 2009. Which are: The subjective assumption The objective assumption That the enterprises hold 20% or more of the relevant market.
34. SUBJECTIVE STANDARDS 35. The subjective assumption refers to the conditioning provided in the rule regarding to whom it is addressed. According to Article 2 of Law 1340 of 2009, the provisions on the protection of competition will apply: 36. “ . . . with respect to all that may engage in an economic activity or may affect or may be able to affect this activity, regardless of the form or legal nature and in relation to the conduct that may have or can possibly have total or partial effects in the national market , whatever the activity or economic sector may be�. (Underline not in the original text) 37. Thus, to determine if they meet the subjective standard, enterprises will have to consider, among other elements, whether: (a) they are carrying out the same economic activity, that is, producing or distributing the same goods or offering the same type of service; (b) if the companies are located in the same value chain, as the term is defined in these Guidelines, that is if one of them makes an input or raw material used by the other(s) to make or distribute a final product, that is, one adds value to what the other makes. 38. OBJECTIVE STANDARDS: ASSET AND REVENUE TEST The objective assumption refers to the conditioning provided in the rule that deals with the specific object of the same. In terms of mergers, the law sets an objective threshold that includes the following requirements: a) That the companies involved, together or individually considered, obtained during the previous fiscal year preceding the planned merger, operating revenues above the minimum wage amount established by the SIC, or b) That, at the end of the fiscal year preceding the proposed transaction, the companies involved, together or individually, they had total assets above the minimum wage amount established by the SIC. In this respect, it is to note that enterprises only must meet one of the two above requirements. 1. The 20% or more of the respective relevant market, The standard also sets a threshold of market share, and in this sense it was determined that those companies with a participation quota that represents over the 20% of the relevant market, have the duty to inform the operation to the SIC, on order to be integrated.
• In this regard, the transactions must be reported, whether companies comply with: - The subjective assumption. - The objective assumption (ie, if the assets or revenues, as applicable, exceed the amounts provided), and - If they hold 20% of more of the relevant market. The Superintendence of Industry and Commerce may approve, object or condition the merge. By contrast, the operations must be notified if the companies comply with: - The subjective assumption. - One of the two alleged objective conditions, but - In conjunction, they both hold less than the 20% of the relevant market, case in which the operation shall be deemed approved. 1. Definition of the Relevant Market9 2. In the first place, every market is a group where it is possible to identify actors (producers, distributors, retailers, and consumers, among others) products or services and prices. Defining the relevant market is a search to establish which is the group of actors, products or services and their corresponding prices whose production, supply, distribution or consumption ought to be investigated with the purpose of determining who are subject to report the enterprise’s merger transaction, and likewise the restrictive or beneficial effects on competition that may be derived from the merger transaction. With the goal of delimiting the relevant market correctly, it must include all the alternatives available to consumers of the products made and offered for sale by the firms that may be merged and to include those sources that the firms in the market consider their competition. 3. Once the firms have submitted all the information that is considered necessary to do the analysis, the process of conducting the economic study necessary to define the market begins. However, as shall be seen further on, it is not always necessary to define the relevant market. 4. The market is defined from two perspectives: 9
See the Flow Diagram Annexed
5. The product and geographic dimensions refer to the group of products that consumers consider close substitutes and the smallest geographic area in which they are offered, if they are acting as one firm, they can influence prices in a profitable quality, variety, service, advertising, innovation and other conditions of competition belonging to the market being analyzed. The geographic market can be local, regional, or broader including even a world-wide geographic market for some products. 39. Relevant Product Market 40. In the first instance, we determine the sector where the participating enterprises carry on their activities, with the goal of making a general description of the characteristics of the market where the enterprises are located. It is important “to know the business� where the enterprises carry out their activities in order to understand their behavior and that of their competitors. In order to identify the product market we take into account fundamentally three elements: demand side factors; supply side factors, and other characteristics of the market that eventually are able to influence price. 41. Demand-side factors 42. It is important to rely on the most information possible from the firms that are parties, since they know the enterprises the best. For this, we ask for all the studies of the market that may be available, such as descriptions of the products or services, their characteristics, uses, prices, and quantities sold. Likewise, we ask for information regarding products considered to be substitutes, justifying calling them reasonable substitutes. 43. In this way, the product market ought to include products to which consumers can be diverted when there is a small, but significant not transitory increase in the price of the products or services offered by the enterprises that are merging, assuming sales conditions of remaining products or are constant-44. To establish correctly those goods or services that can be considered as substitutes by consumers, it is necessary to analyze factors that determine the degree of substitutability of the products or services. 45. Characteristics of the product or type of service being offered 46. In order to determine if the characteristics of the product or service are similar to those of a candidate for substitute, the SIC studies if the raw materials that are used, the active ingredients10, the inputs or the specific characteristics and the way services are provided, are equivalent, so that the physical and technological properties, and general characteristics that define the products or services make them substitutes for consumers. In this way, the characteristics of the products or services are the first factor 10
For analyzing mergers in the pharmaceutical sector.
used to establish substitutability. However this is not a conclusive element and therefore the SIC also studies other attributes of the product or service. 47. In the case of a service, in the definition of the relevant product market, the characteristics that permit one to determine if substitute services exist will be different from those that are taken into account for a manufacturing or distribution enterprise. Thus, when we make reference to those services some of the characteristics that have to be taken into account are the coverage of the service, opportunity and agility, availability, guaranties offered, and compliments. 48. General uses of the products (purpose of the service) 49. The degree to which the products or services are functionally interchangeable is an important factor in determining if it is probable that substitution between them exists. Nevertheless, this is not a sufficient condition for the two products being substitutes since the uses are determined according to the characteristics of the consumer or user, his preferences and habits. To carry out this analysis we turn to market studies, studies regarding the behavior and habits of consumers and, attitudes and consumer preferences. If these studies are not available we turn to consumer questionnaires. 50. Price of the product 51. Elasticity estimates are technical tools that make it possible to determine changes in the quantity of a product in the face of changes in its price and changes in the price of substitute products. Thus, the price elasticity of demand makes it possible to quantify the variations in the percentages of the quantity demanded facing changes in the percentages prices of the product. The cross-elasticity of demand makes it possible to quantify to what extent an increase in the price of a product causes a diversion of its consumers to other products, in terms of percentages. The greater the substitutability between the two products from the point of view of the consumer or user, the greater will be the diversion of the consumers from the first product to the second as a consequence of the non-transitory increase in the price of the first, all other variable remaining constant. 52. Theoretically, the cross-elasticity of demand is positive for substitutable products and will be higher when substitutability between them is higher. On the other hand, the cross-elasticity of demand is negative for complimentary products and approaches zero when those products have no relationship between them, that is to say, when demand for them is independent. 53. Elasticity permits more certain conclusions regarding the substitutability between products or services. Nevertheless, in most cases doing the calculations requires statistical information regarding a series of prices, sales quantities, seasonality of demand and other variables that affect
demand for the products produced and/or distributed not only by the firms that are parties, but also by their competitors. 54. The SIC would prefer to define the products or services that form part of the relevant market by means of elasticity calculations when it has the information needed to do so on which to rely. Nevertheless, when is does not have the information needed to estimates the variables, it will use other technical tools that make it possible to infer, through the behavior of prices and sales what is the relevant product market affected by the merger. 55. Price correlations are the other statistical tool used to define the relevant product market. Thus, if two products or services belong to the same relevant market, its prices will tend to move in the same way over time thus that if the prices of two products or services evolve in absolute or relative terms with a high degree of correlation we can infer that they form part of the same market. The absence of a strong correlation in the movement of prices between two products or services over a significant period of time prior to the merger, it suggests that they do not form part of the same relevant product market. 56. Nevertheless, it is necessary to point out that this evidence is indicative, more so than sufficient, to determine if the products or services form part of the same relevant market. In accordance with the above, using the correlation test runs the risk of including within the same relevant market two products or services whose prices have evolved in a similar fashion due to the behavior of common factors (for example, inflation or the increase in the price of some input) but not because they belong to the same relevant market. Therefore, to avoid the risk of including within the same relevant product market products that belong to different product markets, the correlation test will be used only to disprove that, two products or services belong to the same market. 57. The tools described above will always be used and applied when enterprises present all of the necessary and sufficient information for doing so. In the typical case, it will be necessary to have as a minimum qualitative factors, such as an analysis of the behavior and usual strategies usually adopted by consumers faced with price changes relative to the products or services being studied and the switching costs that can inhibit a large number of consumers from opting for other products that have the same purpose. In cases in which information about price and/or specific quantity does not exist to do the quantitative analysis, is important that in cases in which information about price and/or quantities for carrying on a quantitative analysis does not exist, it is important for the firms that are parties to provide studies of the market that are recent and that permit a qualitative analysis to support and reach reasonable conclusions regarding substitutes. Supply-side factors
58. In some cases it is necessary to include in the relevant product market definition those firms that, even though they are not competitors of the merging firms, are able to adjust their production in order to produce products or services involved in the merger transaction when faced with changes in the factors that affect demand (such as price). 59. Just as substitution is analyzed from the point of view of demand, the same analysis is required from the point of view of supply. To do this, we look to see if the makers of other products or services are able to redirect their production facilities in a short time and at low cost to the production of the goods relevant to the merger transaction when faced with a price in price increase, thus neutralizing the price increase. Based on the enterprises’ description of the productive processes, for cases involving enterprises that offer services we analyze the installed capacity in locations and the physical infrastructure needed to offer the service, but the concept of productive capacity applies specifically to enterprises engaged in production or distribution. 60. An alternative source of supply comes from importing products or services. The SIC will verify is importation of the products, raw materials or inputs is free, under competitive conditions facing the supply of the firms that are parties and the parties in charge of distribution of such products. 61. Some of the factors that the Superintendence of Industry and Commerce will take into account in deciding to include in the definition of the relevant market firms that have the ability to enter into competition with firms that are parties after the merger transaction are: 62. Information regarding the costs of adjusting productive processes and the variable marginal benefits such firms would gain. 63. Information regarding the productive processes, the stages that the different products shares, and the excess productive capacity that would be generated. 64. Information regarding distribution systems for the different supplies and the speed with which they can increase their volume of sales of a product. 65. Evidence of frequent changes in the productive capacity when faced with fluctuating prices and profitability. 66. Evidence of the profit margins similar to different products. 67. Other characteristics of the market 68. Taking into account that not all markets are the same, on some occasions it is necessary to include in the definition of the relevant market an analysis of other factors such as: i. indirect competition; ii. Two-sided products; iii. Secondary or connected products ; iv. Self-supply; and, v. asymmetric limitations. 69. Indirect competition refers to those products that are not direct substitutes but that are sold in the same market because they compete in the ultimate market. 70. With respect to two-sided markets, it is necessary to include them in the definition of the relevant market because in them are found one platform
that acts as the supplier and two different types of consumers that interact with each other. Given that it is necessary to have one platform the users of a good or service encounter each other.11 71. Secondary and connected products are those that are purchased as a result of the purchase of the first product.12 72. Finally, asymmetric limitations means that not in every case under study is the relevant market the same because in some markets for goods and services where two goods belong to the same relevant market the first turns out to be a substitute for the second, but not the reverse.13 73. The Superintendence of Industry and Commerce will carefully define the relevant market in order to avoid firms being able to have a significant influence on the conditions for selling, especially by imposing prices or limiting production or distribution or offering a service. 74. Relevant geographic market 75. Horizontal mergers 76. The definition of a relevant geographic market consists in determining the smallest area necessary for the firms, acting in a coordinated manner, to raise their prices profitably while all relevant products sold in other geographic markets remain constant. Thus, the zone is defined as that in which the participating enterprises carry out their activities, in which competitive conditions are sufficiently similar and that can be distinguished for other zones because competitive conditions in it are different or potentially different. 77. First, we will determine the area where the activities of the firms that are parties overlap. Then we look at transportation costs and the location of consumers. Starting from the location of the production plants and/or distribution points we will expand the geographic market to those regions where consumers have access to the products or services under equal conditions, without incurring greater costs that may make the purchase decision of something else because of transportation costs. 78. To define the limits of the geographic market correctly, we will take into account the participation of the firms in the areas being analyzed and past behavior of consumers. It is important to analyze the physical
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Newspapers are an example of two-sided products because, in addition to being a means of informing consumers (readers), they are also spaces for advertising and marketing for other types of consumers (promoters) 12 For example, the market for automobile replacement parts is connected to the market for the sale of automobiles because a consumer comes to the replacement parts market to the extent that he needs to repair a car. 13 For example, in the telecommunications market both the mobil phone and the fixed land phone, the first turns out to be a good substitute for the second but not the reverse.
characteristics of the product,14 exchange rates,15 transportation costs, the relative prices of the products, loading and warehousing operations, shipping frequency, competition from imports or from outside the area, among other things. 79. Additionally, the Superintendence of Industry and Commerce will analyze competitive pressures that the external market exerts on transportable goods. To do this we will obtain information with respect to the volume of imports of the product or products that form the relevant market, analyzing if barriers to entry for those products exist. Therefore, we will evaluate if there exist delays in the delivery, minimum volume, anticipated cash payments, differences between the price in imported and domestic goods, the logistics of importing, the accessibility of unloading ports, among other factors. 80. Vertical Mergers 81. With regard to vertical mergers, the above analysis will take place for each relevant market in which the parties planning the merger participate and where they participate in the same value chain. 82. The relevant geographic market will be defined as a function of the alternative sources of supply of the raw materials or inputs required by firms competing with the party located downstream, their ability to be supplied by different suppliers located in different geographic areas. Likewise, we will evaluate the possibilities or limitations on their ability to serve customers that confront alternate suppliers from the party located in the upstream stage of production. 83. Analyzing the limits of the geographic market, therefore, make it possible to establish how significant is the cost of purchasing a relevant product in a certain area from another geographic area, in such a way that said product or service satisfies the demand under the same conditions of competition. The criteria for defining the geographic market in each stage of the value chain are the same as those described for a typical horizontal merger. 84. Competitors and Market Shares 85. Once the relevant market has been defined and the competitors that participate in it identified, we proceed to calculate their market shares. 86. We will take into consideration the following factors: 87. The degree of differentiation and substitutability of the products and services: To calculate the participants, the sales by value or by volume or 14
These are the factor or attributes belonging to a good or product that determines its uses. Additionally, they permit it to be differentiated from other goods. Among the physical characteristics of the products we can find: presentation, design, form, perishability, brand, etc. 15 Exchange costs refer to those costs that consumers incur when they change from the products that they currently consume for products are offered in other geographic areas. Within this concept both the value of the products and the time that consumers must spend to make the change are taken into account.
whatever other variable that is considered adequate must be verified, 16 depending on the market, from at least year immediately prior to the year in which the merger transaction will take place. With respect to horizontal mergers, if the products are homogeneous and suppliers use similar methods of production, one of the variables used to do the calculation is the installed capacity. With respect to products differentiated by their quality or price, it would be more appropriate to base the calculation on revenue from sales. 88. Dynamic analysis of the shares: This means that we will analyze fluctuations in market shares over a significant time period. Based on variables that the Superintendence of Industry and Commerce considers adequate, the total size of the relevant market and the market shares of each competitor can be calculated. The goal of comparing the market share of the enterprise before and after the transaction is to measure the impact on the level of concentration that the merger transaction will have. 89. Degree of maturity of the market: Generally speaking, the effects felt from a merger are greater in mature markets where the possibilities of new entrants have been exhausted and where innovation is not present as a determining factor. 90. Relative size of the enterprises: The greater the number of enterprises competing in a market, the less is the possibility of reducing levels of competition as a consequence of the merger that is being analyzed. Likewise, it is important to take into consideration the difference between the shares of the enterprises that are planning the merger and the shares of their closest competitors. This factor is directly related to the importance of the firms that will be merged because it is not the same thing for the leader firms in a market to firm as when a leading firm and a follower that has no market power or whose participation may be small relative to the leaders merger. (Analysis of market shares in absolute and in relative values). One of the indexes used to analyze the relative market shares is the dominance index of KOWKA. 91. Analysis of the market shares 92. Market shares are an indicator of the market power and dominance of an enterprise. Nevertheless, they are indicators that can be biased because they only consider elements within endogenous to the relevant market. The SIC will use the market shares of the firms that are parties to determine if they are able to restrict free competition as a result of the merger transaction. Thus, if, as a consequence of the transaction, the structure of the market is not changed substantially, it will not be necessary to have a more detailed analysis that would include barriers to entry and other factors. 16
The variables generally used are: production, sales in units, sales in pesos, installed capacity, number of large retail outlets, area of retail outlets, etc.
93. Even if the market is concentrated as a result of the merger, the operation may not necessarily result in the creation or strengthening of a dominant position. To confirm the effects of the merger the SIC will conduct a dominance test, such as Kwoka or Stenbacka´s indexes. 94. With respect to vertical mergers, we will conduct the analysis of market shares for each of the relevant markets involved in the transaction. In the upper links of the chain, we will determine the markets shares of the suppliers of inputs, including imports based on the level of sales, volume, or any other relevant indicator depending on the nature of the transaction. In the lower links in the chain, we will calculate the market shares based on the level of sales in pesos and/or volume in order to determine which firms require the mentioned inputs and who will be able to supply those inputs other than those involved in the merger transaction. 95. To evaluate if a merger may reinforce or create dominant position, we use indicators that describe both the number and the relative power of the companies. The index commonly used is the Herfindahl-Hirschman (HHI) which is obtained by summing the squares of the market shares of each of the competing enterprises in the relevant market as it was define. In theory, this indicator reflects the degree of concentration in the market. 96. In merger transactions for firms evaluated by the SIC during the period between 2009 and 2011, we found that before the merger transactions took place the markets analyzed were already highly concentrated. In 70% of those markets, the HHI levels were over 1,800. After the mergers took place, we found that in 75% of the cases analyzed the HHI levels were over 1,800. 97. Other concentration indices used are: NEE which represents the number of firms of identical size before and after the merger and reflects the reduction in the number of competitors of equal size in the relevant market after the merger. 98. Equally important are the Lider Index, CR2 and CR 4. The Lider Index represents the market share of the leader in the market, while the CR2 and CR4 indices represent the market shares of the two largest and the four largest firms in the market. 99. Additionally, the SCI uses the KWOKA17 index of dominance and the STENBACKA index of dominance.18 17
The KWOKA index focuses on the structure of the participants in the market In this way, when the inequality between the sizes of the firms increases, dominance increases, and consequently, the index rises. This index is determined by the following formula: Where . . . Kwoka, John, “Large Firm Dominance and Price-Cost Margins in Manufacturing Industries”, Southern Economic Journal, Vol 44, No. 1 (July 1977), pages 183-189. 18 The formula for calculating the STENBACKA threshold is the following: Where . . . Stenbacka et al., “Assessing Market Dominance” Journal of Economic Behavior, Vol.68, Issue 1, (October 2008), pages 63-72.
100. The KWOKA index of dominance focuses on measuring the symmetry of the size of the firms in the market. It focuses on the pattern of distribution of the market shares of the agents. In this way, when there is a big difference between the size of the firms, the index tends to a high value (1). On the other hand, when the market shares of the firms converge, the value of the index tends toward zero, independent of the number of firms in the market. 101. For its part, the STENBACKA index of dominance is a measure for identifying when a firm would be able to hold a position of dominance in the determined market. Taking into account the market share of the market leader and the second most important firm, the STENBACKA index yields a threshold market share beyond which the leading firm might possibly be in a dominant position. 102. In accordance with the above, whatever market share above the said threshold could mean a dominant position. Nevertheless, this index constitutes a first approximation. It is necessary to analyze other elements to determine the dominant position of an enterprise. 103.
POTENTIAL EFFECTS OF THE TRANSACTION19
104.
Horizontal Mergers The effects of a merger transaction are linked to the type of transaction under analysis. Thus, for horizontal mergers, the reduction in the number of competitors in the relevant market may give the merged firms the power to harm the market unilaterally or in coordination with other firms in the market. Such power may encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm consumers. .
105.
Unilateral effect
106. The SIC will consider harmful effects more likely to be exercised unilaterally by the merged firms when the merger has caused a substantial increase in concentration resulting in a highly concentrated market; the merged entity is substantially more powerful than its immediate competitor (relative dominance); a strong competitor has been eliminated from the market as a result of the merger; customer switching costs are high and/or barriers to entry have increased.. 107. Unilateral effects with homogeneous products 108. In the case of homogeneous products, the principal concern will be with a unilateral suppression of output and a consequent increase in price. The SIC will consider it more likely that a merger between firms with 19
See, Flow Chart Annex, Paso IV
homogenous products will have harmful unilateral effects when the following conditions exist: 109. When the merger firms market share is relatively high. 110. When the market share of merged firms output already committed for sale at prices unaffected by the output suppression is relatively low. 111. When the margin on the suppressed output is relatively low. 112. When the supply responses of rivals are relatively small; and; 113. When the market elasticity of demand is relatively low 114.
Unilateral effects with differentiated products
115. In the case of differentiated products, the effects caused translate into the enterprises being able to obtain greater benefits from price discrimination, upon having joint control over the price of the products after the merger. They manage, in this way, to set a higher price for those consumers that are disposed to pay more, in accordance with their reserve price. The risk is that the firms have before the merger -- the loss of sales from price increases -- is reduced because the merger diminishes the number of competitors to which the consumers willing to pay such price can turn. In the same sense, if there are fewer symmetric and asymmetric substitute products the benefits to the merged firms will be greater. 116. When the products of the firms that are parties compete closely and are differentiated – whether by brand, quality or whatever other variable – it is probable that the transaction will bring about unilateral effects. To evaluate if, as result of the transaction, this type of effect would be generated, the SIC will be able to analyze the change in the incentives for setting prices that the new entity would have under the scenario where it controls both differentiated goods. 117. Unilateral effects can arise because a price increase on one good would be less costly under the post-merger scenario, when both products belong to the same legal or natural person. Without the merger transaction, it would be costly for one of the filing firms to increase prices on its product. A price increase on one good would divert consumers to the products made by the other firm that is a party and to other competing firms. Thus, the cost for one firm to increase prices on its good in the pre-merger scenario is composed of two elements, which are: 118. The loss of the sales to consumers that divert their demand for the product offered to the other firm that is a party; 119. The loss of the sales to consumers that divert their demand to products offered by competing firms. 120. After the merger transaction, it is so costly to the merging entity to raise the price of whatever of its products because it will recoup the sales made to those consumer that divert their demand to the good of the other firm that is a party.
121. In evaluating the likelihood that a merger involving differentiated products will result in harmful unilateral effects, the SIC will take into account the following factors, among others:: 122. Subsitutability. If the products of the filing parties are close substitutes, it is more probable that unilateral effects will arise as a result of the merger. Thus, taking into account that the merged entity will be able to recoup a significant portion of the sales that are diverted to other goods in response to the increase in the price of one of the products of the merged firms. The diversion ratio20 of the good of one of the filing parties to the good of the other filing party is a useful indicator for analyzing the ability of the second product to limit the price of the first. Variable Marginal Revenue. In some cases, when the variable income margins of the involved products are higher in relation to the market, the emergence of unilateral effects as a result of the operation is more likely, since the integrated enterprise will recapture more sales and the increase in the price of one of the goods will be less expensive. 123. 124. Price sensitivity on the part of consumers. If consumers are not very sensitive to changes in the prices of the products of the filing parties, it is more probable that the merger transaction will bring with it harmful unilateral effects. In this case, a price increase on one of the goods will not cause a significant reduction in its sales, making that price increase be less costly. The elasticity of demand for a product is a good indicator for determining the magnitude of the diversion of consumers in the face of a price increase. 125. The SIC will also consider in its evaluation the potential response of the competitors of the firms that are parties to whatever attempt by the parties to raise price. 126. It is important to note that an analysis of unilateral effects on differentiated products does not necessarily require a relevant market definition. 127.
Coordinated effects
128. In the same manner, a horizontal merger can give rise to coordination between the firms resulting from the merger and its immediate competitors, to restrict supply, increase prices, etc. An important element to consider is prior evidence of coordination in the corresponding market, prior to the merger.
20
The diversion ratio between A and B represents the portion of sales that are diverted to B (as opposed to C, D, E, etc.) as the second best option for the consumer facing a price increase on product A.
129. Characteristics of the market that facilitate coordination among the firms are principally: 130. A reduced number of firms because it is easier to coordinate a smaller number of them. 131. An oligopolistic market structure with high levels of uncertainty facilitate coordination. 132. Similar market shares and homogeneous conditions of competition 133. Homogeneous products. 134. The ability to detect firms that are not engaging in the coordination and retaliate against them. 135. Having incentives to coordinate 136. The existence of high barriers to entry. 137.
Vertical Mergers
138. Vertical mergers are generally pro competitive as they may generate efficiencies. Nevertheless they can lead to undue restrictions on competition in some cases. 139.
Unilateral effects of vertical mergers
140. The unilateral effects of vertical mergers are different from those of horizontal mergers because in vertical mergers a competitor does not disappear from the market. Nevertheless, the effects can result in market foreclosure by raising the costs of competitors on a lower link in the value chain. This situation occurs if, for example, the firms that are parties make raw materials and restrict access to them by high prices in order to favor the parties located on a lower link in the value chain. These effects can also come about if the market shares of the producing companies are sufficient to permit such a restriction and sufficient competition does not exist on the upper links of the value chain. Equally, vertical restriction might occur when the party located on the lower link in the value chain has a significant market share. This can result in market foreclosure for the producers who are competitors of the party that is a producer located on the upper link of the value chain. 141. To measure the unilateral effect of vertical mergers it is necessary to consider the importance that inputs represent in the cost structure of the firms situated on the lower link of the value chain. The more this is so at this level, the greater the impact of the vertical merger may be. Likewise, we will analyze the number of parties supplying such inputs and their sources. If sufficient supplies exist, then the incentive for the merged firms to restrict supplies or increase prices of such inputs will appear lower. 142. It is equally important to determine if substitute goods exist in the upper links of the value chain, to which competing firms located lower on the value chain can divert consumers.
143. In sum, the factors that we will take into account to measure if a unilateral effect exists in a vertical merger are: 144. The ability of the firms on the upper links of the value chain to increase costs, lower quality, or diminish commercial conditions in general for those customers located below them on the value chain and that compete with the other merged firm. The factors that make this easier will be a significant market power, the absence or reduced presence of substitute products and the absence of substitute supplies. 145. The ability of the firms that are not merging that are located on a lower link of the value chain to obtain inputs from alternate sources. 146.
Coordinated effects of vertical mergers
147. A vertical merger can incentivize coordination among firms to raise prices, obstruct competition, reduce the quality of products or services, create or increase barriers to entry, allocate markets, etc. Likewise, it can lead to coordination by firms with an integrated supplier in order to obtain sensitive information about their competitors. 148. In some cases, knowledge about and the transparency of information can make coordination easier among firms by means of access to sensitive information regarding rivals, their distribution systems, production strategies, new product launches, prices, frequency of orders, etc. 149.
Efficiencies generated
150. If from the previous analysis it can be inferred that we have an undue restriction on free competition, we will analyze the efficiencies generated by the transaction that may be transferred to consumers. 151. The types of efficiencies can be divided into: (i) supply-side efficiencies; and, (2) demand-side efficiencies. 152.
Supply-side efficiencies
153. Supply-side efficiencies are produced when as a consequence of a merger between firms, the merged entity is able to supply its product at a lower cost. The principle examples of supply-side efficiencies are: cost savings, avoiding double-marginalization, reducing the lack of incentives to invest and bringing about the repositioning of a product. 154. In the first place, the cost savings correspond to the technical efficiencies of the firms (in administration, financing and accounting). 155. With respect to double marginalization, vertical mergers can lead to better levels of efficiency by merging into a single firm the different stages of production, avoiding double marginalization (double benefit, for the producer and for the distributor and/or seller.
156. Similarly, vertical mergers can reduce the lack of incentives to invest because the merged firm may have incentives to invest in new products, new technologies or marketing strategies that others do not want to introduce because they many benefit competitors. An example of the above is the distributor of a product that is not disposed to invest in promoting products because his investment may benefit other distributors. 157. Finally, the process of repositioning products brought about by the firms that are parties and their competitors gives consumers a greater variety of products. 158.
Efficiencies from the demand-side
159. Efficiencies on the demand-side are present when, because of the merger, an incentive grows for consumers to purchase products offered by the merged entity owing to greater productivity, efficiency, quality, and service. Among this type of efficiency are found: network effects, price effects and “one-stop shopping.� 160. Network effects arise when consumers of services offered through one platform are worth more by means of the network when the number of users of the network increases. A merger can improve the competitiveness of a network offering its use to more users and improving its services. 161. It will be important for the firms involved in the transaction to be able to demonstrate that the transaction will bring about a cost reduction that will translate into a better price, better quality and/or varieties for consumers. Another benefit that can result from a vertical merger is the reduction in transaction costs for consumers that can do business with a single firm. 162. If the efficiencies are quantitatively demonstrable we will analyze the possibility of approving the merger with conditions. Otherwise, we will have to object. 163.
Efficiency exception
164. In conformity with Article 12 of Law 1340 of 2009, we consider the following exception to objecting to a merger transaction that results in an undue restriction on competition: “The National Competition Authority cannot object to a merger if stakeholders demonstrate in the respective process, with studies based on recognized technical merit methodologies, that the beneficial effects of the transaction for consumers exceed the potential negative impact on competition, and that those effects cannot be achieved by other means. In this event, the commitment must guarantee that the beneficial effects of the transaction will be transferred to consumers. The Superintendence of Industry and Commerce may abstain from objecting to a merger when regardless the national market shares of
the merged company, external market conditions ensure free competition in the national territory. Paragraph 1. Whenever the competition authority abstain from objecting a operation of business merger with sustain in implementing the exception of efficiency, the authorization shall be considered conditional on the conduct of the parties, which must be consistent with the arguments, studies, tests and commitments presented to request the application of the exception of efficiency. The authority may require the provision of guarantees to support the reliability and compliance with the commitments thus acquired. Paragraph 2. In performance of the role envisaged in number 21 of Article 2 of Decree 2153 of 1992, the Competition Authority may issue instructions specifying the elements to be considered for the analysis and evaluation of the studies presented by stakeholders.” 165.
Barriers to entry21
166. We reach the stage of analyzing barriers to entry, as previously defined, when the market shares may be sufficient to indicate that indicia of market power are present and they implicate a probable degree of obstruction of competition. What we look for in this analysis is to determine if entry by new competitors is doable in terms of probability and opportunity. 167. To do this, we will identify the barriers that can impede, obstruct, or slow the entry of competitors to the relevant market , analyzing barriers of a structural type22 – that apply to both the merging firms and its competitors23 – and artificial barriers that the firms create or are produced by the transaction and can lead to an undue restriction on competition. 168. Another classification of barriers to entry that is found closely related to the above mentioned classification corresponds to exogenous and endogenous barriers. The first kind are those that are unique to the market and that are equivalent to strategic barriers, and are that the firms cannot control. They include, for example, the existence of firms with cost advantages, differentiated products, brand image, initial capital and investment needs, access to channels of distribution, economies of scale, legal barriers, etc. 169. The other kind are endogenous barriers that are created by the firms through their market strategies and their competitive behavior, that is to say that they correspond to the definition above of strategic barriers.24 21
See, Flow Chart Annex, Paso III Glossary of Terms related to Industrial Economics and competition laws and policies, OECD 1990 23 An example of structural barriers are: technological requirements, production capacity as measured through minimum scale of production and/or distribution requirements, investment in the infrastructure, etc. 24 Caitlin, “businesses of European Union and the world, the barriers to entry” (2009). High Honors Thesis. Document 167. Information taken on the 22 of November, 2011, from the webpage: http://commons.emich.edu/honors/167 22
170. Barriers to entry that present themselves more often and therefore are the object of analysis and study by the Superintendence of Industry and Commerce are the following: 171. Legal barriers: These are the barriers from those legal norms that cause cost disadvantages for firms that want to enter the market. 172. Size of sunk costs: Sunk costs are those costs that the firms are not able to recoup upon exiting the market. Generally, when their value is high, they act as a means of discouragement to entry by new competitors. An example of sunk costs are the costs of setting up a business.25 173. Time and opportunity to enter: The SIC will analyze the time that other entrants have taken to become real competitors. This time may be increased if the firms need to learn how to use certain assets and develop efficient distribution networks. Generally, we will consider acceptable a period of less than one year to make effective entry into a market. 174. Entry scale: It is considered a barrier to entry if it is only profitable for the firm that wants to enter to enter with a high production capacity and large number of unit sales. 175. Brand identity: Some products – in particular food consumed by people and cosmetic products – are identified and recognized by consumers through their brand, to the point that the consumer or user would not divert consumption to similar products of other brands, remaining faithful to the brand. This creates a barrier to entry for new competitors. 176. Technological and capital investment requirements: The SIC will understand as capital investments the minimum investment for a potential competitor to be able to carry out the same activity, offering the same products and services. If the technological requirements are too high, it can impeded or slow down entry into the market of new competitors. 177. Transportation costs: The SIC will consider transportation costs associated with access to the market by competitors. The repercussions of high transportation costs will generally limit the dimensions of the geographic market for products that are high volume and low value. Likewise, the difficulties in accessing distribution in a certain area, regulatory obstacles, quotas, and customs duties can also constitute obstacles that isolate a geographic zone from the competitive pressure of firms located outside the zone. Access to sources of supply: Access to sources of supply refers to the links that firms participating in the market have, besides their commercial link, with suppliers of inputs and raw materials, to determine if access to sources of supply of raw materials and inputs , is restricted somehow. 25
As for the endogenous sunk costs, these depend on the particular strategy chosen by the entrant and the incumbents. An example of endogenous sunk costs is an investment in advertising or creation of a distribution network. Information taken from: Market Power and Strategies, Perloff, Karp & Golan, pp. 3439. Regarding the same issue see also Sutton, who differentiates between exogenous and endogenous sunk costs. Exogenous sunk costs are those that the entrant incurs regardless of the strategy that he chooses.
178. 179. It is important to point out that barriers to entry do not present themselves in the same manner or with the same intensity in all markets, sectors or types of activity. Therefore, the analysis of barriers to entry ought to lead to determining if the firms participating in the merger transaction will be able to act independently of their competitors and, in conformity with what is said in Article 45 of Decree 2153 of 1992, are able to alter the price, the supply and other competitive factors without being disciplined by new entrants. 180.
Negotiating power of buyers
181. The ability of firms after the merger can be counteracted not only by competitors. Consumers or clients are equally able to use their negotiating power to limit such an ability. Example are large superstores that in some cases determine the negotiating terms for the purchase of supplies or automobile assemblers who negotiate with suppliers for inputs. Nevertheless, not all suppliers, clients, or consumers have such ability, reason why the purchasing power of certain companies should have repercussions for all the rest, so that the capacity to react before the dominant undertaking affects the market as a whole. 182.
Damage theory
183. In accordance with Article 11 of Law of 1340 of 2009, the Superintendence of Industry and Commerce will have to object to a transaction when it finds that the transaction tends to produce an undue restriction on free competition. 184. In conformity with Article 3 of Law 1340 of 2009, a merger of enterprises tends to restrict competition if it affects: 185. Free participation by firms in the market; 186. The welfare of consumers; 187. Economic efficiency. 188. A merger tends to produce an undue restriction on free competition when: 189. It has been preceded by agreements subscribed to by the firms with the goal of uniting and imposing prices on the producers of raw materials or consumers, or to divide markets between them, or to limit production, distribution or offering services; 190. The terms for similar products or services may be such that the merger, consolidation, or integration of the firms that produce or distribute products may set discriminatory prices to the harm of competitors.
191. Finally, after the above analysis, conclusions are drawn from the study and a recommendation to object, not object or require conditions. 192.
CONDITIONS
193. If the result of the analysis of a merger transaction, after the study of the countervailing efficiencies, is that it is permitted with conditions, it will be necessary to guarantee that competition conditions that are seen altered as a consequence of the merger be restored and effective competition be preserved. 194. Conditions are obligations to which the filing firms in a merger transaction commit themselves with the goal of obtaining the Superintendence of Industry and Commerce’s approval of said merger. 195. These obligations usually begin to come into effect as soon as the merger is approved. Nevertheless, this Superintendence also has the power to require prior completion of a condition, in which case the approval of the proposed transaction remains subject to a suspensive condition. 196.
Decision to condition
197.
Article 11 of Law 1340 of 2009 states that: The Superintendent of Industry and Commerce shall object to the operation when finds that this tends to produce an undue restriction on free competition. However, may authorize holding to conditions or obligations when, in his opinion, there is sufficient evidence to consider that these conditions are suitable to ensure effective preservation of competition. 198. The above mentioned conditions or obligations can be proposed directly by the interested parties. In that case, number 4 of Article 10 of the Law of 1340 of 2009 states that the filing firms can present their proposed conditions in the course of the pre-evaluation of the merger transaction within 15 days following the time when the Superintendence initiates the second phase of the process of approval of the merger. This is the phase which must be announced by the SIC within the time set forth in number 3 of the same Article 10. 199. Notwithstanding, given the optional nature that this legislation sets forth for the offer of conditions, the filing parties preserve the possibility of presenting their proposed actions and/or behaviors at any time during the process of approval of the merger, including during reconsideration proceedings.26 200. On the other hand, the Superintendent, based on the studies that have been gathered and the determination regarding the possible anticompetitive effects of the merger on the market, will be able to set the 26
Number 4 of Article 10 of Law 1340 of 2009.
obligations and/or conditions that he may consider appropriate to create the circumstances that would exist under schemes of effective competition.27 201. The proposals related to a possible conditioned approval for a merger will have to be negotiated between the SIC and the filing parties. Once the proposals presented are evaluated, as the law says, it will remain for the Superintendent to judge the appropriateness of the proposed conditions in the face of the purposes that they must fill. Therefore, his approval or rejection will be at his discretion. This decision will be communicated by means of an administrative act signed by the Superintendent of Industry and Commerce. 202.
Content and considerations for the conditions
203. The proposed conditions ought to contain at least the following considerations: 204. Duration: The period during which the conduct and accepted commitments will take place. The duration can be pro-rated or fixed. 205. Parties: The firms that are going to accept the commitments must be clearly identified and they will respond to the SIC for fulfilling them. The firms identified will depend upon the nature of the planned transaction. By this we mean to say that if, for example, the transaction is the complete sale of a line of business, the responsible principles will have to be the new owners of the line of business. 206.
Types of conditions
207. The effects on competition differ depending on the type of transaction that it is. Thus, the conditions imposed in each merger transaction ought to be designed in order to preserve competitive conditions and maintain the efficiencies that the transaction creates. 208. The conditions can be structural or behavioral, depending on the case. Also, they can be structural and accompanied by behavioral conditions needed to reinforce the fulfillment of the structural conditions. 209. In the case of horizontal mergers, the principal effect on competition is the increase in market power of the merged entity as a result of the elimination of an actual or potential competitor, the increase in the risk of coordination with competitors, or both. The increase in market power can come about as a result of combining certain assets to certain conduct that under other circumstances could be used to compete. In the above situation, it is common in the majority of horizontal mergers to require the “spin off of an asset� as a condition for preserving competition. 210. In the case of vertical mergers, the main effect on competition is related to the fact that the merged entity can influence the competitive 27
Article 11 of Law 1340 of 2009.
process in the value chain. In these cases, the appropriate conditions to preserve competitive conditions are behavioral conditions that prohibit or impose certain conduct that can reinforce undue restrictions on free competition arising from the merger or to prevent problems with competition in the future. 211. Behavioral conditions ought to be designed to protect consumers from the anticompetitive conduct that the merged entity can cause. Notwithstanding the above, depending on the type of transaction being analyzed, it is also possible to consider structural conditions to preserve competition. 212. These conditions ought to be spelled out clearly and precisely and be accompanied by continuous SIC follow-up. To accomplish this, an obligation for the firms to report periodically is established. The firms will report on the progress with structural commitments and the observance of the behavioral commitments. Apart from these reports, the SIC reserves the right in each case to carry out visits or pursue whatever type of evidence that it needs at whatever time to determine if the conditions laid down are being fulfilled. 213. When the merger transactions are horizontal and vertical, the negative effects that they have on competition must be analyzed and depending on the case, it is possible to combine structural and behavioral remedies. 214.
Main structural remedies
215. Divestiture of all those assets necessary for the buyer to be an effective competitor: For this condition it is necessary to identify clearly which assets the competitor would need to compete effectively in a timely manner and to maintain his position over time. 216. The assets may be: tangible like machinery and production equipment, intangible like brands or patents or a combination of the two. 217. Also, the assets should be in good condition in order to assure that the buy can make use of them in the short, medium and long-run, and to restore the competitive conditions that existed in the relevant market prior to the merger. The sale of the assets can be done jointly or individually, assuring that the buyer is a competitor and that he is in a position to use the assets under competitive conditions. 218. So that the conditions effectively preserve competition, the buyer of the assets will have to use them in the defined relevant market and not redeploy them for the production of other goods. 219. To insure that the assets are not dissipated, a trustee will be created who will be charged with the administration of the assets and with making it possible to sell them. 220. Divestiture of a business unit: The business unit should be functioning and profitable so that competitors will be interested in it. When
this type of condition is considered, all of the assets connected to the business unit, including the transfer of required technical know-how in order to put the assets to use will be included. 221. Divestiture of the rights to critical intangible assets:28 This type of condition is used when the merging firms have patents that give them certain rights to produce certain types of goods or products. In these cases, the sale or licensing of these rights permits the preservation of competitive conditions in the defined markets. 222. Depending on the case that is being analyzed, it may be necessary for the buyer or licensor to acquire the rights to produce and sell only the relevant product while in other cases, it is necessary also to obtain the right to produce and sell other products. 223. The above has the goal that the buyer or licensor be able to reach economies of scale and scope that would permit him to compete effectively in the defined market. 224. For this type of condition, the following criteria should be taken into account: 225. Time: Depending on the proposed condition, the time may or may not coincide with the complete duration of the conditions, but in cases, for example, of the dissipation of an establishment or machinery it is necessary to specify a prudent time period in order to carry out the respective process. 226. Conditions: The conditions offered cannot be subject to any type of condition and should be concrete actions that can be verified. 227. Identity: Each one of the elements involved in the structural conditions, whether they be machines or material should have identifiable characteristics adequately spelled out within the proposals. 228. Verification: This information is complementary to identification and seeks to have convincing information regarding aspects of quality and/or prices that offer clear criteria regarding the suitability of the condition. An example would be a condition regarding the disposal of machinery that the filing parties have attached to the conditions that they provide an expert report that guarantees that the machines work and estimates their market value. 229. Optional obligations: Optional commitments can be set forth that are for when it may be impossible to complete the principal condition. For example, in cases where the commitment sets an end to the time period such as for the disposal of assets, and within the time set forth execution of the promise does not happen, it becomes necessary to apply the alternatives that are equivalent to the principal conditions, their principal component should function for the purposes of the conditions and are valid as completion of the conditions. 230. 28
Principal behavioral conditions
A critical asset is one that is necessary for the buyer to compete effectively in the defined relevant market.
231. Orders to separate parts of the merging firms “firewall�: With these conditions we seek to prevent the transfer of information between the firm that is found at a higher link in the chain and one that is on the lower link. This restriction seeks to prevent anticompetitive behavior. 232. Orders not to discriminate. This type of condition seeks equal conditions in treatment, access and supplies for all competitors of the filing parties. The above has the goal that as a consequence of the merger the firm that finds itself on an upper link in the value chain may not favor the firm on a lower link and discriminate against its competitors. 233. Orders to license the use of intellectual property. This type of order seeks to insure that the competitor that has access to certain technologies or other assets that are necessary to compete effectively in the defined relevant market. 234. Orders regarding transparency. Under this type of remedy, the merged firm should have available to regulatory authorities certain information that in other circumstances would not be sought. The above has the goal of insuring that the merged firm does not evade regulation. 235. Orders not to engage in reprisals. These order prohibit the merged firm from discriminating or engaging in reprisals against a firm or entity that may provide information. 236. Prohibitions against certain contractual practices. These are used especially in cases where the merged firm uses contracts to block its competitors from having access to important inputs, or to delay or close off entry by new competitors into the market. 237. Despite all of the above, the Superintendence considers that these types of remedy conditions are flexible and, therefore, is possible to structure, design and implement whatever type of obligation that may have the goal of avoiding the possible harmful effects of the transaction under study. 238.
Monitoring Plan
239. Within the proposed conditions it is relevant to keep in mind the need for the SIC to verify that the conditions are being met. Therefore, once the structural and/or behavioral conditions come together, the next step is to set up mechanisms for verification. This monitoring plan does not limit the power of the SIC to add controls that it considers appropriate to make sure that the firms are fulfilling their commitments as well as the other norms for the protection of competition. 240. Some of the criteria that are considered are: 241. Publications 242. Periodic reports 243. Availability of information 244. Responsibilities within the organization.
245. Policy 246. A policy is a measure between the SIC and the filing parties, favoring the SIC, that can be submitted by firms at the time of a conditioned merger. It will last at a minimum for the same time period as the conditions. Therefore, it is necessary to specify clearly the duration of the policy. This measure is a guarantee that the parties have to supply in their proposed conditions, in case the firms to not fulfill the accepted conditions. It is necessary to be clear that the policy at no time exempts the parties form the other sanctions that their conduct may carry, such as those described in Article 25 of Law 1340 of 2009. 247. To estimate the value of the policy, which will be in Current Minimum Monthly Salaries and whose value with have to be calculated each year until the expiration of the conditions, we will take into account the following criteria: 248. The type of merger. 249. The wealth of the firms involved in the merger. 250. The possible damage to the market caused by failing to fulfill the conditions. 251. Taking in consideration all of the above, without prejudice to the SIC, in accord with the particular conditions of each case, it may be necessary to include or analyze additional criteria: 252. Monitoring the conditions 253. Article 11 of Law 1340 of 2009 makes reference to a situation in which a merger may be approved with conditions, the authority alone with be in charge of supervising the fulfillment of these conditions. For this task the Delegature for the Protection of Competition will make available staff charged with overseeing the fulfillment of the approved actions. 254. If the conditions have a major component in the approved monitoring plan, interested third parties with be able to register complaints or report situations that show directly or indirectly the likely failure by the parties to fulfill the conditions. Based on these complaints and the monitoring plan, the Superintendence will proceed to confirm the information necessary for determining if the in fact there is a failure to fulfill the conditions. In carrying out this review, the persons in charge will be able to use the powers conferred on this Superintendence by Decree 4886 of 2011, among which are included, but not limited to, the following: 255. Administrative visits. 256. Review of accounting information. 257. Requiring reports from the parties. 258. Requiring reports from third parties. 259. Collecting digital information from the parties. 260. Taking testimony. 261. All actions taken to carry out the confirmation/verification will have to count on the total availability on the part of the parties as well as the Superintendence to be carried out with total efficiency. To do this, the
parties will put at the disposal of the SIC all the information that may be needed to conduct such monitoring. 262. If, while carrying out the above activities, it is determined that there was a failure to fulfill the accepted commitments, it can be declared that the risk covered by the policy has occurred and collection rights become effective. Likewise, it will be possible to analyze, if the size of the policy is not sufficient to cover the harm caused by the failure to fulfill the commitments, imposing the sanctions contemplated in Title V of Law 1340 of 2009. 263. Monitoring the conditions will end when one of the two following events take place: (i) on the date that is set in the administrative act approving the merger subject to conditions; (ii) the expiration of the policy or the bank guarantee that covers the risk of failure to fulfill commitments, if this is a longer period of time than the conditions that were imposed. 264. On the other hand, in accordance with concrete circumstances that present themselves in the affected market and in the case of significant changes in the affected market, firms have the right to petition for termination or modification of conditions. To make use of this right, they should present their petition in written, according to the provisions established in section 5 of resolution No 12193 of 2013 and adding all of the information that they consider pertinent to demonstrate that conditions in the market have changed sufficiently to reevaluate the conditions that are in effect and their modification or elimination. All of the information and support for the petition, in so far as they have a bearing on the conditions, with be duly evaluated and the SIC will decide in its discretion how to proceed. 265. Contributions 266. Article 22 of Law 1340 sets forth that, among other things, the monitoring actions taken by the SIC with a view to authorizing a merger transaction with conditions will be paid for by an annual monitoring contribution. Therefore, once the merger subject to conditions is approved, the parties will be made responsible for this payment. This payment will be annual and its value will be based on the criteria set forth in Resolution No. 72896 of 2010.