On October 2, 2007, the Competition Bureau released a report commissioned from CRA International, a prominent economic consulting firm, which evaluates the Bureau’s treatment of three recent transactions under the merger provisions of the Competition Act.1 Each of the three cases had raised significant competition issues but had not, in the Bureau’s view, warranted remedies or challenge before the Competition Tribunal. CRA evaluated the Bureau’s merger investigation process and sought to determine if the Bureau’s expectations about future market conditions had proved accurate. CRA concluded that, given the information available at the time, the “Bureau’s analysis in all three cases was thorough”, “the economic reasoning employed … was sensible and the analysis closely followed the Merger Enforcement Guidelines.” That said, CRA concluded that the Bureau could make “incremental improvements” to its merger analysis, in particular as it relates to barriers to entry, countervailing market power, and the use of quantitative techniques. Given that one of the authors of the report is a former head of the economics section at the Bureau, we expect the Bureau will pay close attention to the report’s recommendations.
The Three Case Studies
Following consultation with the Bureau, CRA selected three cases for review: (i) the acquisition in 2000 by Corus Entertainment Inc. of the radio assets (as well as some television assets) of Vancouver-based WIC Western International Communications Ltd.; (ii) the 2003 merger of a number of coal companies in Western Canada, referred to at the time as The Fording Coal Partnership; and (iii) a joint venture between Carmeuse and Lafarge that combined, among other things, the Ontario lime producing capabilities of the two companies.2 CRA’s analysis was based on interviews with market participants and, in the case of Corus-WIC, statistical analyses and prior research conducted in the United States.
The Corus-WIC transaction involved the acquisition by Corus from WIC of two radio stations in each of Vancouver, Calgary, Edmonton, Winnipeg, Hamilton and Toronto, resulting in overlap with Corus radio stations in all cities except Winnipeg, and audience shares of 44%, 40% and 33% in Edmonton, Calgary and Vancouver, respectively. In analyzing the transaction, the Bureau defined the relevant product market as radio advertising, as distinct from advertising media more generally. The Bureau concluded that, despite high shares in Calgary and Edmonton, effective remaining competition and modest barriers to entry (including reduced regulatory barriers as a result of policy changes by the Canadian Radio-television and Telecommunications Commission) would prevent a substantial lessening of competition.
Based on the available evidence, CRA concluded that the Bureau did not err in its analysis of the Corus-WIC transaction. In particular, “there was no indication that the merger resulted in any harmful lasting effects for advertisers” as “[a]ny effects of concentration appear to be more than offset by the effects of entry.” Initial posttransaction attempts to tie the sale of advertising on one station to the sale of advertising on another of the owner’s stations proved unsustainable in the face of advertiser opposition. That said, CRA criticized the Bureau’s failure to consider radio listeners in its analysis and to recognize that an “important characteristic of radio is that there are two markets that interact: the market for advertisers and the market for listeners.” CRA commented that “[i]f listeners were to be considered, the relevant product market might need to be considered separately from what would be appropriate for advertisers” because “[f]or listeners, the relevant product market depends on listeners’ willingness to switch from radio listening to other forms of entertainment or other activities in response to an increase in advertising levels on radio (or changes in other radio characteristics).” CRA stated that the Bureau should also have considered refining its market definition in light of the potential for price discrimination by station owners. Finally, CRA noted that the Bureau could have given even greater weight to new entry as a result of then-recent policy changes by the CRTC.
Fording Coal involved the combination by a number of coal companies of their western Canadian thermal and metallurgical coal assets and coal terminal facilities near Vancouver. The joint venture raised issues with respect to (i) the provision of mid-volatility coal used by steel makers in eastern Canada, and (ii) the impact on small coal producers of interlocking ownerships in two coal terminals in the Vancouver area. On the first issue, the Bureau concluded that U.S. metallurgical coal could be used as a substitute for western Canadian mid-volatility coal, thus disciplining price increases. On the second issue, the Bureau concluded that, due to excess capacity and the minimal impact of small producers on the world coal price, the joint venture would be unlikely to restrict third party mines from using the coal terminals in question.
CRA’s review again revealed that, based on available evidence, the Bureau did not err in its analysis of the Fording Coal transaction. As predicted by the Bureau, eastern Canadian steel makers turned to U.S. midvolatility coal when western Canadian coal prices increased, although the price increase was due to a more generalized increase in world coal prices as a result of surging Asian demand. As predicted by the Bureau, “the merger did not adversely affect competing coal producers’ access, pricing or service levels at terminal facilities.” CRA commented that “had the Bureau known that coal markets would take off it would have been more obvious to let the merger proceed,” although “[i]n this case it seems that there was no way the Bureau could have made such a prediction.” CRA’s review did suggest, however, that countervailing buyer power by steel producers may have been overstated in this case in that “the size of the steel producers does not seem to matter much” given their alternative sources of supply.
The Carmeuse-Lafarge joint venture raised issues with respect to the production and sale of dolimitic quicklime (dolime) to steel mills in Ontario and Quebec, where the parties’ combined market share was more than 70%. Although barriers to entry were high, the existence of alternative U.S. suppliers (albeit at higher transportation costs) and the countervailing power of large steel buyers “led the Bureau to conclude that a successful challenge before the Competition Tribunal would be unlikely.”3
In contrast to the other cases reviewed, CRA concluded that “[o]verall, based on customer interviews, it appears that Carmeuse has significant market power and it appears that Carmeuse has been willing, at least recently, to exercise this market power.” In particular, CRA found that “[p]rices increased initially by a significant amount more than 5% (the amount that is considered to be material in many mergers) and they have continued to increase since.” Significantly, CRA also concluded that the “Bureau may have given countervailing market power too much weight” in this case. Despite the large size of steel producers, CRA noted that their “bargaining position is still determined based on the next-best alternatives and these have not been good enough for a number of steel companies to keep prices from rising significantly.” Although CRA found that the Bureau’s position that large steel companies would weather price increases “is not without economic support”, it nevertheless concluded that “there is some danger in applying this reasoning across many merger cases” as it could result in “an inefficient reallocation of resources” from “allowing too much market power in input markets”.
Recommendations for Improvement
CRA recommends several “incremental improvements” to the Bureau’s analysis of mergers. First, in light of the Corus-WIC and Fording Coal cases, where entry was not considered to be a likely response to increased concentration, CRA recommends that “as a general rule it is likely worth investigating the likelihood that entry may occur in the future as a result of other market changes.” Second, with respect to reliance on countervailing buyer power in defence of a transaction, CRA observed that “[s]ize itself plays a relatively minor role, and it is the availability (or lack of availability) of substitute sources of supply that determine the extent of price increases.” As such, CRA recommends a more thorough examination of next-best alternative supply sources. Third, CRA recommends that the Bureau “[r]ecognize that in markets with differentiated products and the ability to reposition products that the dynamics can be complex and a straightforward application of market shares may miss some key aspects of the merger that need to be considered”. Fourth, CRA recommends that analysis of mergers in “complex industries” could benefit from empirical studies, which would be useful to conduct independently of a specific merger. Fifth, CRA recommends a cautious approach to reliance on anecdotal customer views as “the customer (and the parties and competitors) are not likely able to disentangle the myriad of factors affecting their industry.” Finally, CRA urges the Bureau to push its analysis “a bit further”, in particular by adopting more quantitative analysis techniques.