UNDERSTANDING HORIZONTAL MERGERS
UNDERSTANDING HORIZONTAL MERGERS
- Introduction
A merger occurs when one or more firms acquire direct or indirect control in the business of another entity. Such acquisition of control may be achieved through acquisition of shares or assets, the lease of assets or joint ventures between two or more independent enterprises. There are three types of mergers which are i)horizontal, ii)vertical and iii)conglomerate. In recent years, horizontal mergers—where two companies operating in the same industry combine forces—have become increasingly prevalent. While these mergers can bring about efficiencies and growth opportunities, they also pose significant challenges for market competition. As a competition authority, the role of Competition & Tariff Commission (Commission) is to scrutinize these transactions to ensure they do not stifle competition and harm consumers. This article explores horizontal mergers, their potential anticompetitive implications, and the Commission’s approach to evaluating these transactions.
2. Definition of Horizontal Mergers
Horizontal mergers occur between firms that are direct competitors in the same market. The basic concept behind horizontal mergers is set out in the following example. Assume FreshMart – a grocery chain store merges with another grocery chain store SuperSave. Both FreshMart and SuperSave are direct competitors .i.e., they operate at the same level of the value chain or in the same industry. As a result of the merger, the competition that was being ushered by FreshMart to SuperSave, pre-merger, is eliminated as both companies merge into a single entity.
The Commission has handled several horizontal mergers since its inception. A typical example of a horizontal merger is the transaction that took place between Intercape Mainliner Ferreira (Pvt) Ltd (“Intercape”) and Pathfinder Luxury Coaches (Pvt) Ltd (“Pathfinder”) which was approved by the Competition and Tariff Commission in 2018. Both Pathfinder and Intercape were involved in the business of transportation of passengers and goods in Zimbabwe. The entities were direct competitors as they operated in the same market – provision of luxury coach services. Thus, Intercape acquired its direct competitor and therefore the transaction qualified as a horizontal merger. These transactions can potentially lead to cost savings, improved products, and increased innovation. Horizontal mergers can reshape industries and influence the choices and prices available to consumers. However, they can also raise serious concerns about reduced competition and higher prices for consumers.
- Competition Concerns Associated with Horizontal Mergers
Of the three types of mergers highlighted earlier, horizontal mergers pose the greatest risks to competition. Such mergers raise competition concerns because they lead to a reduction in the number of competitors in the market, causing increased market concentration. Furthermore, a horizontal merger usually results in the merged entity gaining a larger market share which may possibly result in a monopoly situation which is contrary to public interest.
Owing to its larger combined market share and the reduced number of competitors in the market, the merged firm may have gained “market power”, allowing it to unilaterally raise prices and restrict outputs (unilateral effects). The resultant increase in market concentration makes it easier for market players to co-ordinate and exercise “joint market power” by engaging in interdependent behaviour (coordinated effects). Horizontal mergers, more than other types of mergers, may pose severe competition concerns, and have the potential to contribute most directly to concentration of economic power and may lead to a dominant position of a single player or to market collusions. Therefore, by examining these mergers, the Commission ensures that markets remain competitive, foster innovation and protect consumers from unfair prices and low-quality products.
3.1 Unilateral Effects
As already highlighted, horizontal mergers result in the merged entity gaining substantial market power or it may significantly increase the market power enjoyed by a firm. Unilateral effects arise when the merged entity due to an increase in its market share, raises its prices above competitive levels, reduces output or quality of its products or services. Such anti-competitive behavior is engaged independently of the reaction of the entity’s competitors. In addition, to the merged entity’s large market power there must be high barriers to entry into that market to prevent new or existing firms from countervailing the anti-competitive effects. The Commission thus assesses the possibility of the merged entity to act unilaterally post-merger.
3.2 Co-ordinated Effects
Co-ordinated effects refer to the harm to competition that may arise post-merger, because of the remaining firms in that market coordinating and modifying their conduct to reduce competition amongst themselves. The key consideration in analyzing coordinated effects is whether the merger substantially increases the likelihood that firms in the market will successfully co-ordinate their behavior or strengthen existing co-ordination. Examples of such coordinated behavior include agreements on price to be charged, customer allocation and geographic market division.
- Conclusion
In conclusion, horizontal mergers are the most anticompetitive mergers out of the three different types of mergers. The Commission’s primary focus is on the reduction in market players caused by horizontal mergers. This poses two main competition concerns: the merged entity’s ability to act independently post-merger, and the potential for post-merger collusion, both of which can significantly harm competition.
