Issue O: The Assessment of Efficiency Gains and Losses
Background
189. The Commission assesses efficiency gains and losses by defining a factual and counterfactual, comparing the outcomes and attributing the difference to the merger.57 The factual and counterfactual are both forward-looking hypothetical situations. The factual is the situation with the merger. The counterfactual is the situation without the merger.
190. Establishing a counterfactual is a critical step for the subsequent analysis because it forms the benchmark against which any changes arising from the proposed merger are to be measured. In framing a suitable counterfactual, the Commission states that it bases its views on a pragmatic and commercial assessment of what is likely to occur in the absence of the proposed acquisition.58
191. The Commission's Merger Guidelines also state that the status quo cannot necessarily be assumed to continue in the absence of the merger, although that may often be the case. It may be, for example, that an acquisition is expected to extinguish the prospect for greater competition through the elimination of a vigorous recent entrant, or it may involve a business that would not otherwise continue in the market.
The issue
192. The issue to consider is whether the analytical approach described above is well-targeted.
The approach used in other jurisdictions
193. Other countries' merger guidelines tend to be less direct about the approach to be used in relation to the counterfactual. Nevertheless, the Commission's approach appears to be fully consistent with that of other competition authorities. The ACCC states that "where there is a reasonable likelihood that prices in the relevant market will be maintained at a significantly greater level than they would be in the absence of the merger, or where competitive outcomes would otherwise be distorted, the Commission will consider there to be a substantial lessening of competition."59
194. The Canadian Competition Bureau guidelines state that the "Bureau assesses whether any of the following alternatives to the merger exist and are likely to result in a materially greater level of competition than if the proposed merger proceeds."60
195. The UK Competition Commission states that in many cases the counterfactual will relate to "the existing, pre-merger, competitive conditions." The UK Commission also states that in certain circumstances it may need to take into account other factors, such as "expected changes in the structure of the market or alternative developments that may be expected in the absence of the merger." 61 When assessing merger efficiencies, the UK Office of Fair Trading states that "the key issue is that the analysis is incremental, so that efficiencies must be judged relative to what would have happened without the merger."62
Question
Q26. To what extent does the Commission's analytical framework adequately take account of what would happen if the proposed merger or arrangement did not go ahead (the counterfactual)?
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