The Serbian Commission for Protection of Competition initiated on 1 July 2014 Phase II investigation of the planned acquisition of the Serbian company Intercell by the multinational group Mondi. The investigation was opened due to market overlap between the parties to the concentration. The acquirer is a leading global producer of processed packaging (including industrial bags). In Serbia, it operates a factory of industrial bags in the town of Paraćin. The target is present only in Serbia (the town of Šabac) and produces industrial bags.

The case is interesting because the acquirer has called upon the competition authority to define the relevant geographic market as the market of the European Economic Area (EEA), while the authority has announced it would examine whether to bifurcate the relevant geographic market into wider (EEA) and narrower (Serbia) one.

Relevant market

Product market

In the concentration filing, the acquirer proposed that the relevant product market be defined as the production of industrial bags. In its decision on the opening of Phase II investigation, the Serbian competition authority characterized such proposal as “realistic and acceptable” but also noted it would investigate whether industrial bags are substitutable with other types of flexible industrial packaging, such as consumer bags or FIBCs (flexible intermediate bulk containers), both from the demand-side and the supply-side. The Commission further announced it would examine whether determination of separate product markets depending on the end use of the packaging, i.e. depending on the customer’s industry, would be justified.

Geographic market

The acquirer proposed that the relevant geographic market be defined as the territory of the EEA. In support of such view the acquirer noted the absence of trade barriers and customs between EEA member countries, the fact that Serbia has abolished customs duties for the importation of the relevant products from the EU, and that transportation costs make up only a small portion of the unit price of industrial bags.

The Commission noted the argument is generally acceptable, provided the facts supporting it are proved to be accurate and further provided Serbia is taken as the narrower geographic market within the wider EEA market. (Technical remark: because Serbia is not a member of the EEA, the wider market would have to be defined as the EEA plus Serbia and not merely as the EEA.)

The Serbian Competition Act does not know the notions of “wider” or “narrower” relevant markets. These concepts were introduced by the Relevant Market Decree(Uredba o kriterijumima za utvrđivanje relevantnog tržišta). The decree provides that, within a relevant geographic market, one or more narrower geographic markets can be carved out if the conditions of competition on such narrower market(s) are different compared to other markets. Conversely, a wider relevant geographic market can be established to encompass two or more relevant geographic markets, if there are undertakings able to supply the relevant product in the short term and without substantial costs concurrently on different geographic markets.

The concepts of “wider” and “narrower” relevant market have been rightly criticizedby Professors Begović and Pavić as confusing and without any basis in the Competition Act. The European Commission’s Relevant Market Notice does not know these concepts either.

It is difficult to see how the relevant geographic market with respect to the same relevant product can be national and supranational at the same time. In the case at hand, if the substitutability of the presumed relevant product were tested against a wider market (EEA plus Serbia), it would be found to exist either only within Serbia (in which case the relevant geographic market would be the national one) or within the wider market (in which case such wider market would be the relevant geographic market).

Judging from its publicly available case-law, the Commission has never so far endorsed a supranational market as the relevant geographic market. To the contrary, it has in several cases dismissed the party’s proposal to define the relevant geographic market as pan-European, noting that such definition would not enable an assessment of the concentration’s effects on the Serbian market (e.g.Tetra Laval-Miteco and Overseas Transport-Weiss-Röhlig).

Effects of the concentration

Horizontal effects

The ultimate choice of the relevant geographic market is material to the outcome of the assessment of the concentration’s horizontal effects. If the geographic market were defined as pan-European, and assuming the relevant product market is defined as the market of production of industrial bags, the planned concentration would not raise any horizontal competition concerns. Due to the target’s small market share on the European industrial bags market, following the concentration the combined market share of the parties would in the EEA increase only negligibly and be in the range between 20% and 30% (based on production volume) and 10% and 20% (based on production value).

The assessment changes dramatically if only the Serbian market is considered. Based on volumes, Mondi’s market share in Serbia is between 30% and 40%, the target’s is between 20% and 30%, the combined market share post-merger amounting to between 50% and 60%. If the production value were taken as the relevant criterion, the market shares of the parties would be lower although still considerable (individual market share of each party is between 10% and 20% while the combined market share post-merger would be between 30% and 40%).

Apart from the market share increment, the Commission will in the course of the investigation also analyze possible constraints on the exercise of market power on the relevant market, such as the existence of buyer power and the possibility for larger customers to start manufacturing the relevant product in-house in case of high prices or insufficient supply of flexible packaging on the market.

Vertical issues

The Commission will also analyze vertical effects of the concentration, becauseMondi produces craft paper, an input for the production of industrial bags. The authority announced it will establish the target’s share in craft paper purchases, how the target has been procuring this input thus far, and whether the concentration is likely to bring about any changes in the target’s business relations with its suppliers.