When two companies merge, their position in the relevant market, and the position of other companies with respect to the merging companies undergoes a change. Section 5 and 6 of the Competition Act impose a prohibition on those combinations or mergers that create an ‘appreciable adverse effect on competition’ (AAEC). The basic objective of these sections is to curb concentration of economic power in the hands of the merged company. Some guidelines have been provided in the Competition Act, along with the CCI (Procedure in regard to transaction of Business relating to Combinations) Regulations, 2011 to prevent such anti-competitive mergers.
A perusal of the CCI orders of the past two years shows that, after an initial screening to remove anomalies as per Section 6, most mergers have been passed, leaving no room for legal or scholarly development on the AAEC test as applicable in case of combinations.
In the upcoming Sun Pharma and Ranbaxy US $4 billion merger, major speculation has been based around the market share and dominant position aspect of the possible anti-competitiveness due to the sheer scale of the deal. However, keeping in mind several other factors, the CCI has suggested appropriate changes such as divestment of certain brands of the two pharmaceuticals to avoid substantial horizontal overlap in the molecules market and, as a result, to avoid appreciable adverse effect on competition.
The central question is what considerations the CCI kept in mind to ascertain what would lead to lessening of appreciable adverse effect. In all other cases as well, how does the CCI weigh its decisions with respect to merger control? The CCI has largely remained silent on the meaning, and more importantly the scope of AAEC. The most important question in ascertainment of AAEC, i.e, how different factors leading to AAEC are to be weighed against each other, remains unanswered. This is considered on a case to case basis. Since Indian competition law is largely based on US and EU laws, looking into these laws in reference to merger control could provide a clearer picture of the considerations of the CCI when passing orders.
Every type of merger, be it horizontal (mergers between companies that are active on one or more of the same markets), vertical (mergers between companies operating at different levels of the supply chain), or conglomerate (mergers that are neither strictly vertical nor horizontal, for example, merger of companies involved in the sale of complementary products) can lead to appreciable adverse effect on competition in two ways.[1]
Firstly, ‘coordinated effects’ may apply. Coordinated effects involve coordination between firms to raise prices or otherwise harm effective competition, which is made much easier through mergers. Secondly, ‘unilateral’ or ‘non-coordinated effects’ may be used. In such mergers, competition between merging firms is internalized[2] when direct competitors merge to reach such a position where they have the ability to unilaterally raise prices without needing to induce their rivals to alter their strategy. For example, in a duopolist economy, a merger between two competitors would lead to a far less competitive monopolist economy, and raising prices of a product would be easy. Unlike coordinated effects, in such a case, the objective would be to pursue unilateral self interest, and not to alter the competitive strategy of other firms.
Earlier, in the EU, the ‘dominance test’, as prescribed in the European Commission Merger Regulations, 1989 (ECMR), was used to check whether a merger would be deemed anti-competitive. According to Section 2 of ECMR, the European Commission was to examine whether a merger would lead to the creation of a ‘dominant position’, and if so, whether this position would lead to a significant impediment to competition. Therefore, establishing ‘dominance’ was the primary prerequisite which would have to be met. As explained in United Brands v. Commission[3], the traditional notion of dominance related to “a position of economic strength enjoyed by an undertaking which enabled it to prevent effective competition being maintained on the relevant market by giving the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers”.
However, it was felt that the requirement of dominant position left loopholes[4] which would deem otherwise anti-competitive mergers valid simply because a dominant position could not be established. This lacuna was recognized by the Commission and in cases such as the Carrefour/Promodes case[5], the European Commission stopped a merger even though the final market shares did not lead to dominance, since such a merger created a major entry barrier, substantially impeding competition.
The biggest loophole of all was the exclusion of unilateral effects from the ambit of anti competitive mergers, due to the lack of a dominant position in such situations. In unilateral or ‘non-coordinated’ mergers, a dominant position is not required to control competition and to conduct anti-competitive practices and therefore the dominant position test would fail. Further, ‘coordinated effects’ may also arise without fulfilling the condition of a dominant position when a number of competitors with high but not dominant market share control the market through coordinated action.
Recognizing the lacuna in the EU law, in 2004, a new ECMR was adopted which used the ‘significantly impeding effective competition’[6] as the primary test and cited dominance as merely an example. Such a test was appealing since it brought back the focus on impeding competition, which is a dynamic concept, instead of falling back on a static calculation of market share. Further, it also brought under its ambit unilateral effects. Therefore, the focus was shifted from dominance to the primary ‘effect’ of the merger on competition.
In doing so, the European Commission essentially turned towards the US based Clayton Act which uses the ‘substantial lessening of competition’[7] test. As held in United States v. General Dynamics Co.[8], post merger market share of a firm alone was not a true indicator of market power. In United States v. Waste Management, Inc.[9], for example, even though the post merger market share was over 50%, since there were negligible barriers to entry in the relevant market, the static figure of 50% held no real meaning, since it could easily be shaken with the free and fair play of market forces. As a result, though such a merger resulted in a dominant position, since it did not ‘substantially lessen competition’, it was validated.
Along with ease of entry into the relevant market, various other factors were enumerated under the 1982 Department of Justice Merger Guidelines, such as factors increasing the likelihood of collusion, and level of concentration in the market after merger. Similarly, in the EU, the Horizontal Merger Guidelines provided a non exhaustive list of factors, other than dominance, that may give rise to unilateral effects such as the degree to which merging firms are close competitors, potential competition, efficiency considerations, and ability of merged firms to hinder expansion by competitors. In India, similar factors have been provided under Section 20(4), such as level of combination in the market, nature and extent of vertical integration, possibility of a failing business, etc.
Today, dominance is listed as one of the several factors resulting in anti competitive mergers. Though a major concern in cases such as the pending Sun Pharma Ranbaxy deal, dominance is now treated as a part of the many factors judicial bodies such as CCI bear in mind. Instead of treating one factor as the absolute requirement that must mandatorily be fulfilled, a group of general factors are taken into consideration as a whole to detect anti-competitive mergers.
[1] Van Bael & Bellis, Competition Law of the European Community (5th edn, Kluwer Law International 2010).
[2] Werden, Gregory J., and Luke M. Froeb, ‘Unilateral competitive effects of horizontal mergers’ Handbook of antitrust economics 43 (2008).
[3] [1978] ECR 207.
[4] Neil Horner, ‘Unilateral Effects and the EC Merger Regulation-How the Commission Had Its Cake and Ate It Too’ Hanse L. Rev. 2 (2006) 23.
[5] EC, Commission Decision in Carrefour/Promodes, M.1684, January 25, 2000 at para. 60.
[6] Article 2(2). European Commission Merger Regulation,
[7] Section 7, Clayton Act, 15 U.S.C. §18 (1914),
[8] 1974-1 Trade Cas. (CCH) P 74967 (1974).
[9] 1984-2 Trade Cas. (CCH) 66190 (2d Cir. 1984).
This post has been authored by Paavni Anand, a third year student at the West Bengal National University of Juridical Sciences.
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