Trends in U.S. & European Competition Law

Trends in U.S.
& European
Competition Law
Matthew Bennett Samid Hussain

Director of Economics Principle
Office of Fair Trading Cornerstone Research
Richard Feinstein Douglas Lahnborg

Director of the Bureau of Competition Partner
U.S Federal Trade Commission Orrick, Herrington & Sutcliffe LLP
Ted Henneberry Paul Muysert

Partner Partner
Orrick, Herrington & Sutcliffe LLP CEG Europe
London, 9 February 2011

Some areas of interest in
competition policy
Matthew Bennett
Director of Economics, OFT
February 2011
The opinions within are mine alone and not necessarily those of the
OFT.
1
Overview of a few broad trends
● UPP/IPR:
- More quantitative analysis in phase one mergers.
● Price Relationship Agreements:
- Pricing parities.
- MFN clauses.
● Information exchanges:
- Clarifying concerns and insurance commitments.
● Others?
2
Growth of IPR/UPP
Methodology in Mergers
3
UPP/IPR
● Background
- Previously market definition (often not done
rigorously?), fascia counting.. or market shares.
● IPR/UPP/GUPPI
- Simple merger simulation – basic measure of
closeness of competition.
- Minimal requirement for data – but some
assumptions.
4
The basic idea
PA 
Merged A/B
Firm A
Firm B Firm C
DAB DAC
Diversion to others
5
Diversion and margin and price
rise
Price, Margin and Diversion ● Higher margins imply higher
likely price rise:
Ratio Relationship
- Each customer no longer
Illu s tra tiv e % P ric e Inc re a s e
60 lost to competitor provides

Diversion greater profits and hence
50 incentive to increase price
Ratio = 50%
40
is greater.
30
Diversion ● Higher diversion ratios imply
Ratio = 33% higher likely price rise:
20
- With higher diversion ratio
merger implies fewer
10
Diversion Ratio = 25% customers will be lost to
0 merged party, thus more
0 10 30 50 100 incentive to increase price.
Gross Margin %
UPP/IPR
● Regularly used in OFT first phase retail mergers:
- IPR as a ‘narrowing’ tool.
- See Asda/Netto for most sophisticated use.
- Use in manufacturing mergers?
● Transparency versus complexity?
● Not a perfect measure of merger impact,
- Third party responses – dynamic impact?
….but better than market shares or fascia counting.
● Will continue to be used and developed at OFT.
7
Price Relationship
Agreements
8
Price relationship agreements
● Background
- Vertical agreements between companies that stipulate
how own price should relate to that of competitors.
● Examples:
- Parities (UK Tobacco case).
- MFN and MFCs, Reverse MFNs.
- Price guarantees.
9
Parities
● Normal competition
Manufacturer Manufacturer
- If A increases W 1
A,
retailer increases P1A

A B
and A loses market
W1B share to B.
W1A
- Thus higher relative
prices results in lower
Retailer 1
relative market shares.
A B
Retailer 2
- Provides constraint on
manufacturer A not to
P1A , P1B P2A = P2B increase its price.
10
Parities
● Manufacturer A constrains
Retailer 1 and 2 to charge A’s
products identically to B.
Manufacturer Manufacturer - NB: Manufacturer does not
determine retail price – not
A B necessarily RPM.
W1B ● Dampens competition at
W1A manufacturer level.
- Parities ensure price relativities
are constant.
Retailer 1
Retailer 2
- Thus A will no longer lose
market share to B.
A B - Reduction in pricing constraint
increases incentive for A to
raise wholesale prices.
P1A = P1B P2A = P2B
● Results in higher retail
prices. 11
MFN and other agreements?
● Most Favoured Platforms?
- Platform A states that a seller can only distribute via
its platform if seller agrees it won’t sell anywhere else
(either directly or on other platforms) for lower.
● What impact will this have?
● Similarities with parities?
● Impact on platform entrants?
12
Information Exchanges
13
New horizontal guidelines
● Clarifying that main concern is coordination.
- Concern about reductions in transparency not in
themselves, but only in so far as they leads to
coordination.
● Object/Effect where does one draw the line?
- Future versus current.
- Private versus public.
14
OFT Motor insurance case
● Exchanges of future pricing information:
- Information exchanged to create a product such that motor
insurance firms could see how much each other was pricing.
- Highly detailed information at individual firm level.
- Information provided before prices went live in policies sold by
brokers.
● Concern that information could facilitate coordination.
● But possible pro-efficiency effects:
- Facilitate entry by identifying profitable opportunities.
- Provides risk information for entrants without substantial
databases.
15
Commitments under consultation
● Remove the possibility of anti-competitive effects by
aggregating such that coordination is not feasible.
● But make possible retention of information to
facilitate entry and identify profitable entry
opportunities.
- NB: not a balancing exercise.
● Anonymise and aggregate so individual price cuts are
not observable, but average prices still retain
information.
- Considered how much aggregation needed before a 20% cut is
statistically indistinguishable from normal price fluctuations.
- OFT analysis of insurance data suggested minimum number in 16
motor insurance industry is five.
Others trends in UK?
● More behavioural economics
● More empirical analysis
● Online sector?
17
Thank-you!
Matthew Bennett
Director of Economics, OFT
18
Trends in U.S. & European
Competition Law
Matthew Bennett Samid Hussain

Director of Economics Principle
Office of Fair Trading Cornerstone Research
Richard Feinstein Douglas Lahnborg

Director of the Bureau of Competition Partner
U.S Federal Trade Commission Orrick, Herrington & Sutcliffe LLP
Ted Henneberry Paul Muysert

Partner Partner
Orrick, Herrington & Sutcliffe LLP CEG Europe
London, 9 February 2011

Merger
Assessment
Guidelines
September 2010
CC2 (Revised) OFT1254
A joint publication of the

he Competition Commission
and the Ofﬁce of Fair Trading
Merger Assessment Guidelines, Part
Contents
Contents
Part 1: Introduction .......................................................................................................................... 4
Part 2: Merger review by the OFT and the CC................................................................................ 9
Part 3: The ‘relevant merger’ situation.............................................................................................. 12
Section 3.1: Introduction................................................................................................................ 12
Section 3.2: Enterprises ceasing to be distinct............................................................................. 13
Section 3.3: The turnover test, the share of supply test and the time period ............................. 16
Part 4: A substantial lessening of competition................................................................................ 19
Section 4.1: What is an SLC?......................................................................................................... 19
Section 4.2: Theories of harm........................................................................................................ 20
Section 4.3: The ‘counterfactual’................................................................................................... 21
Part 5: Analytical approach and methodologies............................................................................. 28
Section 5.1: Introduction................................................................................................................ 28
Section 5.2: Market definition........................................................................................................ 29
Section 5.3: Measures of concentration....................................................................................... 38
Section 5.4: Horizontal mergers—unilateral effects...................................................................... 41
Section 5.5: Horizontal mergers—coordinated effects................................................................. 45
Section 5.6: Non-horizontal mergers ........................................................................................... 49
Section 5.7: Efficiencies................................................................................................................. 55
Section 5.8: Barriers to entry and expansion................................................................................ 58
Section 5.9: Countervailing buyer power ..................................................................................... 62
Part 6: Public interest cases............................................................................................................. 65
Section 6.1: Types of cases........................................................................................................... 65
Section 6.2: The conduct of public interest cases........................................................................ 68
Section 6.3: Decisions for the CC and the Secretary of State..................................................... 70
Part 7: Publications relevant to the UK merger regime................................................................... 73
Page 3
Merger Assessment Guidelines, Part 1
Part 1 Introduction
Overview
1.1 This publication (the Merger Assessment Guidelines) forms part of the
advice and information published by the Office of Fair Trading (OFT) and the
Competition Commission (CC) under sections 106(1) and (3) respectively of the
Enterprise Act 2002.1 It is the first joint guidance document and supersedes the
following OFT and CC guidelines:
• OFT publications: Mergers—substantive assessment guidance (OFT516),

Guidance note revising Mergers—substantive assessment guidance
(OFT516a) and Restatement of OFT’s position regarding acquisitions of
‘failing firms’ (OFT1047);2 and
• CC publication: Merger References: Competition Commission Guidelines, CC2.
1.2 he publication explains the approach of the OFT when considering whether
T
or not to refer a merger to the CC for further investigation and the approach
of the CC when exploring more extensively the statutory questions posed
in merger references. It highlights the differences of emphasis, as well as
the commonalities, between the approaches of the OFT and the CC (‘the
Authorities’). The new guidelines comprise seven parts:
• Part 1 provides some explanatory notes and outlines the UK merger regime.
• Part 2 sets out the overarching questions the OFT and the CC must consider
in conducting reviews of mergers.
• Part 3 explains what is meant by a ‘relevant merger situation’.
• Part 4 explains the Authorities’ approach to the concept of a ‘substantial

lessening of competition’ (SLC) and outlines the notions of ‘theories of harm’
and the ‘counterfactual’.
1 http://www.opsi.gov.uk/acts/acts2002.
2 As at September 2010, Chapters 7 (exceptions to the duty to refer) and 8 (undertakings in lieu of reference) of
the OFT publications Mergers—substantive assessment guidance (OFT516) (revised by Mergers—substantive
assessment guidance—Exception to the duty to refer: markets of insufficient importance (OFT 516b)) continue
to apply prior to publication of Mergers—exceptions to the duty to refer and undertakings in lieu of reference
(OFT1122).
Page 4 Competition Commission & Office of Fair Trading

• Part 5 describes the analytical approach and methodologies applied by the

Authorities in considering the SLC test.
• Part 6 provides guidance on public interest cases.
• Part 7 lists additional guidance relevant to the UK merger control regime.
1.3 Separate guidance relevant to mergers is published by the OFT and the CC
from time to time. Such guidance available or under preparation at the time
of publishing these guidelines (September 2010) includes publications on
procedure, jurisdiction, the exceptions to the duty to refer mergers and, interim
measures and remedies (see Part 7).
Status of the Merger Assessment Guidelines

1.4 The Merger Assessment Guidelines apply with effect from the date of
publication on the websites of the OFT or the CC.
1.5 In carrying out their functions, the OFT and the CC will have regard to these
guidelines. The language in them is more definitive about some issues than
about others, indicating that those areas of practice are more settled. However,
merger assessment is inevitably case specific. It must take account of the
particular transaction and the markets being analysed. The methodologies
of merger analysis cannot be applied in a rigid and mechanistic way. The
Authorities will therefore consider each merger with due regard to the particular
circumstances of the case, including the information available and the time
constraints applicable to the case,3 and will apply these guidelines flexibly,
departing from them where they consider it appropriate to do so. Past case
references are included for illustrative purposes only and do not constrain the
approach of the Authorities.
1.6 These guidelines reflect the views of the OFT and the CC at the time of
publication. Markets, economic theory, legal thinking and best practice
evolve; the Authorities may revise the guidelines from time to time to reflect
developments and may publish new or supplemental guidance. The latest
version of the Merger Assessment Guidelines is always that appearing on the
OFT and CC websites.
Note on terminology
1.7 Throughout this publication:
• the term ‘the Authorities’ is used when the guidelines apply to both the OFT
and the CC; where that is not the case, the relevant body is specifically
identified;
• all references to statute, unless otherwise stated, relate to the Enterprise Act
2002—referred to throughout as ‘the Act’ and all references to ‘section(s)’,
unless otherwise specified, relate to the Act;
3 For further information about the statutory deadlines applying in Phase 1 and Phase 2, see OFT Mergers—
Jurisdictional and Procedural Guidance (OFT527) and CC General Advice and Information, CC4, respectively.
Page 5
• situations leading to an SLC are generally described in the future tense,

regardless of whether the merger involved is completed or anticipated;
• the term ‘products’ is used to apply to goods and/or services;
• the term ‘merger’ covers all types of arrangements that may give rise to two
or more enterprises ceasing to be distinct; and
• the term ‘price’ is used as shorthand for all aspects of competition unless
otherwise specified.
The UK merger regime

1.8 The assessment of mergers in the UK is conducted as a two-phase process,
giving distinct but interrelated roles to the OFT, the CC and, exceptionally, the
Secretary of State for Business, Innovation and Skills. Both anticipated and
completed mergers are covered by the Act.
1.9 At Phase 1, the OFT obtains and reviews information relating to merger
situations.4 UK merger control law does not require that a qualifying merger (ie a
relevant merger situation5) be notified to the OFT. However, firms can seek legal
certainty by informing the OFT about a prospective merger in advance so as to
obtain clearance. The OFT has a duty to refer to the CC for further investigation
any relevant merger situation where it believes that it is or may be the case that
the merger has resulted or may be expected to result in an SLC.6 A decision by
the OFT not to refer may be made unconditionally or be made subject to the
provision of undertakings in lieu of reference.
1.10 By contrast, under the Water Industry Act 1991,7 the OFT has a duty to refer
water mergers between two or more water enterprises if their turnovers
are above defined thresholds (see Water Merger References: Competition
Commission Guidelines, CC9).
1.11 The Secretary of State has a role in certain merger cases where there is a
specified public interest consideration and the Secretary of State has served an
intervention notice. In these circumstances, the OFT must advise the Secretary
of State on jurisdiction and competition issues, if any, of exceptions to the duty
to refer and the appropriateness of addressing the competition concerns through
undertakings.8 In media cases Ofcom, the regulator and competition authority for
the UK communication industries, must also provide a report. The Secretary of
State may refer public interest and special public interest cases to the CC. (The
different types of public interest cases are described in Part 6.)
1.12 At Phase 2, the CC investigates mergers that are referred to it, either by the OFT
or, in public interest or special public interest cases, by the Secretary of State.
4 Section 5: the OFT is responsible for obtaining, compiling and keeping under review information about matters
related to the carrying out of its functions, including merger review.
5 See Part 3.
6 Sections 22 and 33. The duty is subject to discretionary and mandatory exceptions (see paragraphs 2.8 to 2.10).
7 Section 32 of the Water Industry Act 1991.
8 For further information on the OFT’s role, see OFT Mergers—jurisdictional and procedural guidance (OFT527).

It has no authority to investigate any merger unless it has been asked to do so

by the OFT or the Secretary of State under a relevant statutory power. The CC
determines the outcome of merger cases referred to it by the OFT. In the event
that it finds that the merger will lead to an SLC, the CC decides upon remedies
and has powers to implement them. The possible outcomes of public interest
cases referred to the CC are described in Part 6.
The European dimension

1.13 Mergers that have a ‘Community dimension’ under the EC Merger Regulation
(ECMR) (ie mergers above certain thresholds) fall outside the scope of the
Act’s jurisdiction.9 Instead they must be notified in advance to the European
Commission in Brussels.
1.14 Such mergers may be considered under the Act in certain circumstances. The
European Commission may decide to transfer the merger, in whole or part, to the
UK at the request of the merger firms10 or of the OFT.11 A merger falling under the
ECMR may also be considered by the Authorities at the initiative of the Secretary
of State so as to protect certain legitimate interests12 (see Part 6).
1.15 In some circumstances, mergers that do not meet the thresholds for notification
to the European Commission under the ECMR may be transferred to the
European Commission at the request of the merger firms13 or the OFT.14
Accordingly, it is possible that a merger notified to the OFT under the Act could
be referred to the European Commission. Further details on the relationship
between the UK and European merger control systems are set out in the OFT’s
Mergers—jurisdictional and procedural guidance (OFT527) (Chapter 11).
1.16 Whereas the UK merger regime applies an SLC test, the European Commission,
in its review under the ECMR, considers whether the merger would significantly
impede effective competition, in particular as a result of the creation or
strengthening of a dominant position.15 Nonetheless, the underlying economic
approach to assessment carried out by the Authorities is generally similar to that
carried out by the European Commission.
1.17 However, the structural difference between the regimes has implications for
the substantive assessment of mergers. For example, the compulsory pre-
notification requirement of the EU merger control regime allows the European
Commission to assess the transaction in the light of the competitive situation that
prevailed at the time of the notification. In the context of parallel transactions in
the same market between different parties this effectively allows a ‘first past the
post’ system based on the date of notification. By contrast, the counterfactual
9 Article 21(1), (2) and (3) of Council Regulation (EEC) No 139/2004/EC of 20 January 2004. The ECMR remains the
official title of the regulation and its terminology is used throughout this publication.
10 Article 4(4) of the ECMR.
11 Article 9 of the ECMR.
12 Article 346, Treaty on the Functioning of the European Union (TFEU) and Article 21(4) of the ECMR and section 67
of the Act.
13 Article 4(5) of the ECMR.
Page 7
used by the Authorities cannot be so standardized (see Part 4, section 4.3, for a
description of the Authorities’ approach).
1.18 The OFT fulfils several functions as the UK’s competent authority under the
ECMR. This includes liaison with the European Commission on the assessment
and determination of cases notified to the European Commission. The OFT’s
role, the jurisdictional aspects of the ECMR and the role of the Secretary of State
are more fully described in the OFT publication Mergers—jurisdictional and
procedural guidance (OFT527).

Merger review by
Part 2 the OFT and the CC
Part 2 of the guidelines deals with the overarching questions the OFT and CC
must address. It describes both the similarities and the differences between
the ways in which the OFT, at Phase 1, and the CC, at Phase 2, approach
these questions.
2.1 In assessing a merger, both Authorities must consider whether:
(a) a relevant merger situation has been created (or, for anticipated mergers, will
be created); and, if so,
(b) whether or not this situation will lead to an SLC.
2.2 Under the UK’s two-phase merger control regime, the OFT and the CC are
required to apply different thresholds when answering the statutory questions
in the Act. The OFT applies a ‘realistic prospect’ threshold16 whereas the CC
applies a ‘balance of probabilities’ threshold (see paragraph 2.6, 2.7 and 2.12).
Therefore, while the approach described in these guidelines will generally be
followed by both Authorities, the difference in evidential threshold will sometimes
require a difference in the emphasis attached to certain aspects of the analysis
(see paragraph 5.1.3). Examples of where this will be the case are highlighted
throughout these guidelines.
2.3 When answering the statutory questions it is not necessary for the Authorities
to apply the SLC test separately at each step of the analytical process. The
standard of proof applies to the Authorities’ overall conclusions on the statutory
questions which they have to decide.17
Phase 1
OFT’s duty to refer mergers to the CC
2.4 The OFT has a duty to refer completed and anticipated mergers to the CC for
investigation if it believes that it is or may be the case that:18
16 The ‘realistic prospect’ formulation is shorthand for more complex statutory language. The Court of Appeal clarified
the meaning of ‘is or may be the case that … may be expected to result’ used in sections 22 and 33 in its judgment
dated 19 February 2004 in IBA Health Limited v OFT [2004] EWCA Civ 142.
17 Clarity about the application of the threshold applicable to the CC when answering the SLC question was provided
by the Court of Appeal in BSkyB and Virgin Media v Competition Commission and BERR [2010] EWCA Civ 2,
paragraph 69; http://www.bailii.org/ew/cases/EWCA/Civ/2010/2.html.
18 Sections 22 and 33.
Page 9
• a relevant merger situation has been created, or arrangements are in progress

or contemplation which, if carried into effect, will result in the creation of a
relevant merger situation; and
• the creation of that situation has resulted, or may be expected to result, in an

SLC within a market or markets in the UK for goods or services. The OFT is
not required to consider this question if it does not believe that there is or may
be a relevant merger situation.
2.5 In considering whether to refer a merger to the CC, the OFT must form a
reasonable belief, objectively justified by relevant facts, as to whether or not it is
or may be the case that the merger has resulted, or may be expected to result,
in an SLC.
2.6 The OFT must make a reference to the CC when it believes that the merger is
more likely than not to result in an SLC. The Act also contemplates reference
at lower ranges of probability. If the OFT believes that the relevant likelihood is
greater than fanciful, but below 50 per cent, it has a wide margin of appreciation
in exercising its judgement. In such cases, it has a duty to refer when it believes
there to be a realistic prospect that the merger will result in an SLC.
2.7 The realistic prospect threshold is intentionally a lower and more cautious
threshold for an SLC finding than that applied by the CC after more extensive
investigation (see paragraph 1.2). The OFT’s judgement on whether there is a
realistic prospect of an SLC will take due account of the extent of the evidence
available to it at the time of its decision.
2.8 The OFT’s duty to refer is also subject to the application of discretionary excep
tions.19 The OFT may decide not to refer if it believes that:
(a) the market(s) concerned is (are) not of sufficient importance to justify the
making of the reference (the ‘de minimis’ exception);
(b) any relevant customer benefits outweigh the SLC and any adverse effects of
the SLC; and
(c) in the case of an anticipated merger, the arrangements concerned are not
sufficiently far advanced, or are not sufficiently likely to proceed, to justify
a reference.
2.9 By precluding a CC reference, application of the first two of the above three pro
visions has the same effect as an unconditional clearance of the merger.
2.10 In addition, the OFT may not make a reference in certain other circumstances.
These include when the OFT is considering whether to accept undertakings in
lieu of making a reference.20 Further information about the exceptions to the duty
to refer will be set out in the OFT publication Mergers—exceptions to the duty to
refer and undertakings in lieu of reference (OFT1122).21
19 Sections 22(2) and 33(2).

20 Sections 22(3)(b) and 33(3)(b).
21 To be published.

Phase 2
Questions for the CC
2.11 The CC has first to decide two questions:22
• whether a relevant merger situation has been created (or for anticipated
mergers, whether arrangements are in progress or in contemplation which,
if carried into effect, will result in the creation of a relevant merger situation);
and if so
• whether the creation of that situation has resulted, or may be expected

to result, in an SLC within any market or markets in the UK for goods or
services.
The CC is not required to consider the second question if it decides that no

relevant merger situation exists or will do so.
2.12 In answering the two questions the CC will apply a ‘balance of probabilities’
threshold to its analysis, ie it addresses the question: is it more likely than not
that an SLC will result?23 It must therefore form an expectation which has a
higher level of probability than that required of the OFT (see paragraphs 2.6 and
2.7), calling for a more extensive investigation than that carried out at Phase 1.
If the CC decides that there is an anti-competitive outcome24—that is, it has
answered both questions in the affirmative—it must then consider possible
remedies.
2.13 In its consideration of remedies, the CC must decide three questions:25
(a) whether action should be taken by the CC for the purpose of remedying,
mitigating or preventing the SLC concerned or any adverse effect which has
resulted from, or may be expected to result from, the SLC;
(b) whether the CC should recommend the taking of action by others for the
purpose of remedying, mitigating or preventing the SLC concerned or any
adverse effect which has resulted from, or may be expected to result from,
the SLC; and
(c) in either case, if action should be taken, what action should be taken and
what is to be remedied, mitigated or prevented.
Further information on the CC’s approach when deciding the remedy questions
is set out in Merger Remedies: Competition Commission Guidelines, CC8.
22 Section 35(1) for completed mergers and section 36(1) for anticipated mergers.
23 The Court of Appeal has endorsed the approach of expressing an expectation as a more than 50 per cent chance—
IBA Health Ltd v OFT [2004] EWCA Civ 142, paragraph 46.
24 Defined in section 35(2).
25 Sections 35(3) and 36(2).
Page 11
The ‘relevant merger’

Part 3 situation
Part 3 of the guidelines deals with the first question each Authority
has to consider: whether or not a ‘relevant merger’ situation has been,
or will be, created.
Section 3.1: Introduction

3.1.1 The Act applies to a ‘relevant merger’ situation, ie a merger that meets one
of the jurisdictional thresholds, and covers several kinds of transactions and
arrangements. A company that buys or proposes to buy a majority shareholding
in another company is the most obvious example. However, acquisitions of
lesser shareholdings may also give rise to a relevant merger situation, as might
the transfer or pooling of assets or the creation of a joint venture. In this Part of
the guidelines, the criteria for determining whether there is a relevant merger
situation are set out and guidance is provided on the following:
(a) the meaning of ‘enterprises ceasing to be distinct’;
(b) the turnover test;
(c) the share of supply test; and
(d) the time period for referring mergers.
3.1.2 A variety of issues relating to whether a relevant merger situation has arisen has
been considered by the OFT. The OFT has therefore issued its own guidance
providing further detail on what it will consider to be a relevant merger situation:
the OFT’s Mergers—jurisdictional and procedural guidance (OFT527) (Chapter 3).
Criteria for a relevant merger situation

3.1.3 A merger must meet all three of the following criteria to constitute a relevant
merger situation for the purposes of the Act:
• two or more enterprises must cease to be distinct, or there must be

arrangements in progress or in contemplation which, if carried into effect, will
lead to enterprises ceasing to be distinct; and

• either the value of UK turnover of the enterprise which is being acquired

exceeds £70 million (known as ‘the turnover test’—see paragraphs 3.3.1
and 3.3.2);
or the enterprises which cease to be distinct supply or acquire goods or

services of any description and after the merger together supply or acquire at
least 25 per cent of all those particular goods or services supplied in the UK
or in a substantial part of it (see paragraphs 3.3.6 to 3.3.8). The merger must
result in an increment to the share of supply or consumption. In practice,
therefore, the share of supply test can only be met where the enterprises
concerned supply or acquire goods or services of a similar kind (known as
‘the share of supply test’—see paragraphs 3.3.3 to 3.3.5); and
• either the merger must not yet have taken place (see paragraph 3.3.9);
or (subject to certain exceptions) the merger must have taken place not
more than four months before the reference is made (see paragraph 3.3.9
and 3.3.10).
3.1.4 It is clear from these criteria that at least one of the enterprises must be active
within the UK. This must be the case where the turnover test is met, because the
target generates turnover from sales to UK customers. For the share of supply
test, both of the enterprises ceasing to be distinct must be active in supplying or
acquiring goods or services within the UK or a substantial part of the UK. These
principles apply equally to non-UK companies that sell to (or acquire from) UK
customers or suppliers.
Section 3.2: Enterprises ceasing to be distinct

3.2.1 Two enterprises will ‘cease to be distinct’ if they are brought under common
ownership or control.
‘Enterprises’
3.2.2 The term ‘enterprise’ is defined in section 129 as the activities, or part of
the activities, of a business. The enterprise in question need not therefore
be a separate legal entity. The definition states that the activities in question
should be carried out for ‘gain or reward’. However, there is no requirement
that the transferred activities should be profitable, or generate a dividend for
shareholders, and the definition may include transferred activities conducted on
a not-for-profit basis.
3.2.3 In making a judgement as to whether or not the activities of a business, or part

of a business, constitute an enterprise under the Act, the Authorities will have
regard to the substance of the arrangement under consideration, rather than
merely its legal form.
3.2.4 An enterprise may comprise any number of components, most commonly

including the assets and records needed to carry on the business, together with
the benefit of existing contracts and/or goodwill. In some cases, the transfer of
Page 13
physical assets alone may be sufficient to constitute an enterprise, for example

where the facilities or site transferred enable a particular business activity to be
continued. Intangible assets such as intellectual property rights are unlikely, on
their own, to constitute an enterprise unless it is possible to identify turnover
directly related to the transferred intangible assets that will also transfer to the
buyer. The business acquired may no longer be trading but this does not in itself
prevent the business from being an enterprise for the purposes of the Act.
Control
3.2.5 ‘Control’ is not limited to the acquisition of outright voting control but includes
situations falling short of outright control. Section 26 distinguishes three levels of
interest referred to as control (in ascending order):
• Company A, the acquirer, may acquire the ability materially to influence the
policy of Company B, the target (known as ‘material influence’);
• Company A may acquire the ability to control the policy of Company B

(known as ‘de facto’ control); and
• Company A may acquire a controlling interest in Company B (known as ‘de

jure’, or ‘legal’ control).
3.2.6 Section 26(3) provides the Authorities with a discretion to treat material influence
and de facto control as equivalent to legal control.26
3.2.7 The Act also contains provisions to deal with situations in which a company
acquires control by stages or where ‘associated persons’ might act together to
gain control.
‘Material influence’
3.2.8 The ability to exercise ‘material influence’ is the lowest level of control that
may give rise to a relevant merger situation. In assessing material influence in
the context of the Act, the Authorities will conduct a case-by-case analysis,
focusing on the overall relationship between the acquirer and the target and on
the acquirer’s ability materially to influence policy relevant to the behaviour of
the target entity in the marketplace. The policy of the target includes its strategic
direction and its ability to define and achieve its commercial objectives.
3.2.9 The acquirer’s ability to influence the target’s policy can arise through the
exercise of votes at shareholders’ meetings, together with any additional
supporting factors that might suggest that the acquiring party exercises an
influence disproportionate to its shareholding. Material influence may also arise
as a result of the ability to influence the board of the target and/or through other
arrangements.27
26 See Competition Appeal Tribunal (CAT) Judgment in BSkyB v. the CC and Secretary of State, and Virgin Media v
the CC and Secretary of State (September 2008), paragraph 104;
http://www.catribunal.org.uk/files/1.Judg_revised_BSkyB_1095_Virgin_Inc_1096_290908.pdf.
27 See BSkyB/ITV, CC, December 2007.

3.2.10 In considering whether material influence may be present by virtue of a

shareholding in a particular case, the Authorities will consider not only the
ownership of the shareholding but also whether, as a matter of practice, the
acquiring party is able to exert influence. Factors that may be relevant to an
assessment of a particular shareholding include:
• the distribution and holders of the remaining shares, in particular whether the
acquiring entity’s shareholding makes it the largest shareholder;
• patterns of attendance and voting at recent shareholders’ meetings based on

recent shareholder returns, and in particular whether voter attendance is such
that the shareholding under consideration would be able in practice to block
special resolutions;
• the existence of any special voting or veto rights attached to the shareholding
under consideration;
• the status and expertise of the acquirer and its corresponding influence with
other shareholders; and
• any other special provisions in the constitution of the company conferring an

ability materially to influence policy.
3.2.11 In addition to the ability materially to influence policy through the voting of
shares, the Authorities’ determination may also turn on whether the acquirer is
able materially to influence the policy of the target entity through board represen
tation. Indeed, it is possible that board representation alone could, in certain
circumstances, confer material influence.
3.2.12 The Authorities may also consider whether any other factors, such as
agreements with the company, enable the acquirer materially to influence
policy. These might include the provision of consultancy services to the target
or might, in certain circumstances, include agreements between firms that one
will cease production and source all its requirements from the other. Financial
arrangements may in certain circumstances confer material influence where the
conditions are such that one party becomes so dependent on the other that the
latter gains material influence over the company’s commercial policy.
‘De facto control’

3.2.13 It is possible that merger arrangements give rise to a position of ‘de facto’ control
when an acquirer becomes clearly the controller of a company, notwithstanding
that it holds a 50 per cent voting stake or less in the target company (ie it
does not have a controlling interest). This is likely to include situations where
the acquirer has control over more than half of the votes actually cast at a
shareholders’ meeting. It might also involve situations where an investor’s
industry expertise leads to its advice being followed to a greater extent than
its shareholding would seem to warrant (although this factor could equally be
relevant to a finding of material influence).
Page 15
A ‘controlling interest’
3.2.14 A ‘controlling interest’ generally means a shareholding of more than 50 per cent
of the voting rights in a company. Only one shareholder can have a controlling
interest, but it is not uncommon for a company to be subject to the control (in the
wider sense described above) of two or more major shareholders at the same
time—in a joint venture, for instance. Thus it is possible for a minority shareholder
to have material influence over a company’s policy even though someone else
owns a controlling interest.
Acquiring control by stages

3.2.15 Under section 26(4), should the circumstance (eg a shareholding or a level of
board representation) that confers the ability materially to influence a company’s
policy increase to a level which amounts to de facto control or a controlling
interest, that further acquisition will produce a new relevant merger situation. The
same applies to a move from de facto control to a controlling interest.
3.2.16 In principle, therefore, if Company A acquires Company B in stages, this could

give rise to three separate mergers: first, as Company A moves to material
influence; then to de facto control; and, finally, to a controlling interest. But
further acquisitions of a company’s shares by a person who already owns a
controlling interest do not give rise to a new merger situation.
3.2.17 Where a person acquires control of an enterprise (in any of the three senses
described above) during a series of transactions within a single two-year period,
section 29 allows the transactions to be considered as having occurred or
occurring simultaneously on the date of the last transaction and thus to be
treated as a single reference. In giving effect to this provision, the Authorities may
take into account transactions in contemplation.
‘Associated persons’
3.2.18 For the purposes of considering whether an enterprise has ceased to be
distinct, section 127 requires the Authorities to consider whether several persons
acquiring an enterprise are ‘associated persons’ and thus should be viewed as
acting together.
3.2.19 This situation will most commonly arise where the acquiring persons are related
or have an agreement to act jointly to make an acquisition, although the Act does
not require that each of the acquiring parties should individually have control over
the acquired entity for them all to be regarded as being associated persons.
Section 3.3: The turnover test, the share of supply test and the
time period
‘Turnover test’
3.3.1 The ‘turnover test’ is satisfied where the annual value of the UK turnover of the
enterprise being acquired exceeds £70 million.

3.3.2 In most situations, the turnover test is applied to the turnover of the acquired
enterprise that was generated by the sale of goods or services to customers
within the UK in the business year preceding the date of completion of the
merger or, if the merger has not yet taken place, the date of the reference
to the CC.28
‘Share of supply test’

3.3.3 Under section 23, the ‘share of supply test’ is satisfied if the merger enterprises:
• supply or acquire goods or services of a particular description; and
• will after the merger collectively supply or acquire 25 per cent or more of
those goods or services, in the UK as a whole or in a substantial part of it,
provided that the merger results in an increment to that share.
3.3.4 The increase in the share of supply must result from the enterprises ceasing to
be distinct. In the case of an acquisition, the share of supply is based on the
activities of the acquirer and the target company. In joint venture situations, the
share of supply is calculated by reference to the activities of the joint venture,
although it will include shares of the joint venture parents where they continue to
undertake the same activities as the joint venture.
3.3.5 The Act expressly allows the Authorities a wide discretion in describing the
relevant goods or services, requiring only that, in relation to that description, the
parties’ share of supply or acquisition is 25 per cent or more. The share of supply
is different from a market share (paragraph 5.3.4), and goods and services to
which the share of supply test is applied need not amount to the market defined
for the economic analysis. In addition, the Authorities may have regard to any
reasonable description of a set of goods or services to determine whether the
share of supply test is met—the value, cost, price, quantity, capacity, number of
workers employed or any other criterion may be used to determine whether the
25 per cent threshold is reached.
Substantial part of the UK

3.3.6 The share of supply test may be applied to the UK as a whole or to a substantial
part of it. There is no statutory definition of ‘a substantial part’. The House of
Lords ruled in the context of similar provisions in the Fair Trading Act 1973 that,
while there can be no fixed definition, the area or areas considered must be of
such size, character and importance as to make it worth consideration for the
purposes of merger control.29 The Authorities will take into account such factors
as the size, population, social, political, economic, financial and geographic
significance of the specified area or areas, and whether it is (or they are) special
or significant in some way.
28 See Section 28 and SI 2005/1370 as amended by SI 2005/3558.

29 See Regina v Monopolies and Mergers Commission and another ex parte South Yorkshire Transport Limited
[1993] 1 WLR 23.
Page 17
3.3.7 For the application of the share of supply test, there is no need for the substantial
part of the UK to constitute an undivided geographic area.30
Supply of goods or services in the UK

3.3.8 The share of supply test requires that the merger would result in the creation or
enhancement of at least a 25 per cent share of supply or acquisition of goods or
services either in the UK or in a substantial part of the UK. Services or goods are
generally deemed to be supplied in the UK where they are provided to customers
who are located in the UK.31
Time period for investigating mergers

3.3.9 To meet the criteria for a relevant merger situation, the merger must either not
yet have taken place or have taken place not more than four months before the
reference is made. However, in cases where the OFT has not been informed
directly of material facts about the merger, the four-month period is deemed to
have commenced when material facts are ‘made public’, ie when they are ‘so
publicised as to be generally known or readily ascertainable’.32 The OFT also has
the power to ‘stop the clock’ in certain circumstances, for example where it is
waiting for requested information from the merging parties.33
3.3.10 Section 27(5) and 27(6) allow the Authorities to treat successive events within a
period of two years involving the same parties (or in consequence of the same
arrangements or transaction) as occurring simultaneously on the date of the
latest event (see paragraph 3.2.17). The Authorities have discretion on whether or
not to apply this section.
30 See Archant Ltd/Independent News and Media plc, CC, September 2004, Appendix C, paragraph 2.
31 See, for example, Thermo Electron Manufacturing Limited/GV Instruments Limited, CC, May 2007; and
Anticipated merger between NYSE Group Inc and Euronext NV, OFT, October 2006.
32 Section 24.
33 Section 25.

A substantial lessening of
Part 4 competition
Part 4 of the guidelines is set out in three sections. Section 4.1 describes what is
meant by an SLC. Sections 4.2 and 4.3 outline the concepts of ‘theories of harm’
and ‘the counterfactual’ respectively.
Section 4.1: What is an SLC?

4.1.1 The term ‘substantial lessening of competition’ is not defined in the Act. What the
Authorities mean by it and related terms is set out below.
4.1.2 Competition is viewed by the Authorities as a process of rivalry between firms

seeking to win customers’ business over time by offering them a better deal.
Rivalry creates incentives for firms to cut price, increase output, improve quality,
enhance efficiency, or introduce new and better products because it provides
the opportunity for successful firms to take business away from competitors, and
poses the threat that firms will lose business to others if they do not compete
successfully.
4.1.3 The Authorities will consider any merger in terms of its effect on rivalry over time
in the market or markets affected by it. Many mergers are either pro-competitive
or benign in their effect on rivalry. But when levels of rivalry are reduced, firms’
competitive incentives are dulled, to the likely detriment of customers. Some
mergers will lessen competition but not substantially so because sufficient
post-merger competitive constraints will remain to ensure that rivalry continues
to discipline the commercial behaviour of the merger firms. A merger gives rise
to an SLC when it has a significant effect on rivalry over time, and therefore on
the competitive pressure on firms to improve their offer to customers or become
more efficient or innovative. A merger that gives rise to an SLC will be expected
to lead to an adverse effect for customers. Evidence on likely adverse effects will
therefore play a key role in assessing mergers.
4.1.4 In broad terms, there are two types of merger:
• horizontal mergers: mergers between firms that supply competing products;

and
• non-horizontal mergers: mergers between firms that operate at different

levels of the supply chain of an industry (vertical mergers) or mergers
Page 19
between firms supplying products at the same level in the supply chain which
do not compete (conglomerate mergers).
4.1.5 There are three main reasons why mergers may lead to an SLC:
• Unilateral effects. These may arise in horizontal mergers where the merger
involves two competing firms and removes the rivalry between them, allowing
the merged firm profitably to raise prices (see paragraphs 5.4.1 to 5.4.21).34
• Coordinated effects. These may arise in both horizontal and non-horizontal

mergers where the merger enables or increases the ability for several firms
within the market (including the merged firm) jointly to increase price because
it creates or strengthens the conditions under which they can coordinate (see
paragraphs 5.5.1 to 5.5.19).
• Vertical or conglomerate effects. These may arise principally in non-

horizontal mergers where the merger creates or strengthens the ability of
the merged firm to use its market power in at least one of the markets, thus
reducing rivalry (see paragraphs 5.6.1 to 5.6.15). However, these effects can,
in some circumstances, also arise in horizontal mergers (see paragraphs
5.4.22 to 5.4.23).
4.1.6 In looking at horizontal mergers, the Authorities will generally focus on the impact
of the merger on the market(s) in which the merger firms both supply goods
and services. They may also consider the possible impact on other markets. In
non-horizontal mergers, the Authorities will look at the impact of the merger on
both the upstream and downstream markets and on any related markets (see
paragraph 5.6.2). They will consider in particular the impact on rivalry in those
markets and the possible foreclosure of markets to the merger firms’ competitors
or to firms in upstream or downstream markets.
Section 4.2: Theories of harm

4.2.1 Theories of harm are drawn up by the Authorities to provide the framework for
assessing the effects of a merger and whether or not it could lead to an SLC.
They describe possible changes arising from the merger, any impact on rivalry
and expected harm to customers as compared with the situation likely to arise
without the merger (referred to as the counterfactual, see section 4.3). The
Authorities may revise the theories of harm as their assessment progresses.
4.2.2 The Authorities will seek to understand the commercial rationale for the
transaction from the perspective of each of the parties concerned. They will
routinely request background documentary evidence, including board papers
and planning documents, from the parties so as better to understand how the
transaction fits within the firms’ wider commercial strategies, and in particular
within the future strategy of the acquirer.
34 In mergers involving the acquisition of partial but not total control (see paragraphs 3.2.8 to 3.2.13) unilateral effects
may arise from the reduction of rivalry between the merger firms rather than from its removal.

4.2.3 In formulating theories of harm, the Authorities will consider how rivalry might be
affected. They may set out those aspects of the merger firms’ competitive offers
to customers over which firms compete and which could worsen as a result of
the merger, whether in terms of price or non-price aspects such as the quantity
sold, service quality, product range, product quality and innovation. The ability of
firms to adjust these aspects, and also the time within which they can do so, will
depend upon the market concerned.
4.2.4 For some mergers, the Authorities may consider several theories, sometimes
affecting the same market.35 Consideration of multiple theories does not detract
from the essential proposition that each Authority must determine whether,
overall, it believes that there is a realistic prospect of an SLC (in the case of the
OFT) or that an SLC is expected (in the case of the CC). (See also paragraph 2.3
and its footnote.)
4.2.5 The OFT’s reference test will be met when it considers there to be a realistic
prospect of an SLC in respect of one or more of the theories it considers.36
4.2.6 The CC’s assessment of the merger is not limited by the OFT’s conclusions on
different theories of harm. The CC will determine whether an SLC arises or is
expected to result from a merger, having considered one or more theories. It
need not determine this in respect of each of the theories considered and its
overall expectation of an SLC may be based upon one theory only or upon its
composite view of multiple alternative theories. It will often be important to be
clear about all the theories of harm that contribute to an SLC finding so as to
ensure a properly focused assessment of remedies.
Section 4.3: The ‘counterfactual’

4.3.1 The application of the SLC test involves a comparison of the prospects for
competition with the merger against the competitive situation without the merger.
The latter is called the ‘counterfactual’.37 The counterfactual is an analytical tool
used in answering the question of whether the merger gives rise to an SLC.
While based on evidence obtained by the Authorities in their investigations, it is
generally not comparable in detail to their analysis of the competitive effects of
the merger.
4.3.2 The description of the counterfactual is affected by the extent to which events or
circumstances and their consequences are foreseeable, enabling the Authorities
to predict with some confidence. The foreseeable period can sometimes be
relatively short.38 The Authorities may still consider the effects of the merger
in the context of an event or circumstance occurring even if that event or
35 These may include different effects on the same aspect of competition (for example, unilateral and coordinated
effects on price), the same effects on different competitive aspects (for example, unilateral effects on price and on
quality), or different effects on different aspects (for example, unilateral effects on price and coordinated effects on
innovation). These theories of harm may apply over different time periods—for example, short-run unilateral effects
on price and long-run coordinated effects on innovation.
36 These theories may be mutually exclusive.
37 Developments which have arisen or are likely to arise as a result of the merger will not form part of the
counterfactual assessment but will be examined as part of the SLC test.
38 For example, British Salt Ltd/New Cheshire Salt Works Ltd, CC, November 2005.
Page 21
circumstance is not sufficiently certain to include in the counterfactual.39 Future

changes in market conditions, such as regulation or market liberalisation, are
often addressed as part of the Authorities’ competitive assessment.
4.3.3 A counterfactual cannot be constructed that involves violations of competition

law, eg a cartel.
4.3.4 Since the counterfactual may be either more or less competitive than
the prevailing conditions of competition, the selection of the appropriate
counterfactual may increase or reduce the prospects of an SLC finding by the
relevant Authority.
The Authorities’ approach to the counterfactual

4.3.5 In reviewing mergers at Phase 1, the OFT is required to assess whether the
merger creates a realistic prospect of an SLC. The ‘is or may be the case’
standard in the OFT’s SLC test also has implications for its approach to the
counterfactual. The OFT considers the effect of the merger compared with
the most competitive counterfactual providing always that it considers that
situation to be a realistic prospect. In practice, the OFT generally adopts the
prevailing conditions of competition (or the pre-merger situation in the case of
completed mergers) as the counterfactual against which to assess the impact
of the merger.40 However, the OFT will assess the merger against an alternative
counterfactual where, based on the evidence available to it, it considers that
the prospect of prevailing conditions continuing is not realistic (eg because the
OFT believes that one of the merger firms would inevitably have exited from the
market) or where there is a realistic prospect of a counterfactual that is more
competitive than prevailing conditions.
4.3.6 As a Phase 2 body, the CC takes a different approach since it has to make an
overall judgement on whether or not an SLC has occurred or is likely to occur.
To help make this judgement on the likely future situation in the absence of the
merger, the CC may examine several possible scenarios, one of which may
be the continuation of the pre-merger situation; but ultimately only the most
likely scenario will be selected as the counterfactual. When it considers that
the choice between two or more scenarios will make a material difference to
its assessment, the CC will carry out additional detailed investigation before
reaching a conclusion on the appropriate counterfactual.41 However, the CC will
typically incorporate into the counterfactual only those aspects of scenarios
that appear likely on the basis of the facts available to it and the extent of
its ability to foresee future developments; it seeks to avoid importing into its
39 Such an approach by the CC was supported by the Appeal Court judgment BSkyB and Virgin Media v
Competition Commission and BERR [2010] EWCA CIV 2, paragraph 55; http://www.bailii.org/ew/cases/EWCA/
Civ/2010/2.html. The OFT, In its competitive effects analysis, will not take account of possibilities (for example,
future entry plans of the target company) that it has dismissed at the counterfactual stage as being fanciful,
although it might have regard to facts that are insufficient for it to adopt a counterfactual other than the pre-merger
conditions (for example, by taking account of the reduced competitive impact of a firm in financial difficulties even
though the conditions of the exiting firm scenario are not met).
40 See Anticipated acquisition by Tesco Stores Limited of five former Kwik Save stores (Handforth, Coventry,
Liverpool, Barrow-in-Furness and Nelson), OFT, December 2007.
41 For inquiries in which the assessment of the counterfactual played an important part, see, for example, Stagecoach
Group plc/Preston Bus Limited, CC, November 2009, and Ticketmaster/Live Nation, CC, May 2010.

assessment any spurious claims to accurate prediction or foresight. Given

that the counterfactual incorporates only those elements of scenarios that
are foreseeable, it will not in general be necessary for the CC to make finely
balanced judgements about what is and what is not the counterfactual (but see
also paragraph 4.3.2 and footnote 39).
4.3.7 The most notable examples of situations where the Authorities may use a
counterfactual different from the prevailing conditions of competition are:
• the exiting firm scenario;
• the loss of potential entrant scenario; and
• where there are competing bids and parallel transactions.
The exiting firm scenario

4.3.8 In forming a view on an exiting firm scenario, the Authorities will consider:
(a) whether the firm would have exited (through failure or otherwise);
and, if so
(b) whether there would have been an alternative purchaser for the firm or its
assets to the acquirer under consideration; and
(c) what would have happened to the sales of the firm in the event of its exit.
4.3.9 The exiting firm scenario is most commonly considered when one of the firms
is said to be failing financially. However, exit may also be for other reasons,
for example because the selling firm’s corporate strategy has changed. When
considering any exiting firm argument, the Authorities will be particularly
interested in evidence that has not been prepared in contemplation of the
merger. It may be particularly important in the context of an exiting firm scenario
for the Authorities to understand the rationale for the transaction under review
(ie to consider why the purchaser is acquiring a firm or assets that it is claimed
would, in any event, have exited from the market).42
4.3.10 For the OFT to accept an exiting firm argument, it would need (on the basis of
compelling evidence) to believe that it was inevitable that the firm would exit the
market and be confident that there was no substantially less anti-competitive
purchaser for the firm or its assets (ie considerations (a) and (b) in paragraph
4.3.8). The OFT would then consider whether, having regard also to consideration
(c), the result of the exit of the firm and its assets would be a substantially less
anti-competitive outcome than the merger. If the OFT concludes that there is
no realistic prospect of a substantially less anti-competitive alternative to the
merger under consideration (taking account of all three considerations), it will
conclude that there is no realistic prospect of an SLC arising. Having taken its
counterfactual into account any loss of competition cannot therefore be attrib
42 Information on the rationale for the transaction may be relevant for considerations of different theories of harm by
the Authorities outside the context of the exiting firm scenario (see paragraph 4.2.2).
Page 23
uted to the merger under review.43 If the OFT cannot reach a sufficient level of
confidence in relation to each of the considerations (a),(b) and (c), it will use the
pre-merger situation as its counterfactual to assess the merger.
4.3.11 The three considerations (a) to (c) are relevant to the CC’s identification
of an appropriate counterfactual. Having identified the most appropriate
counterfactual, the CC will generally consider the implications of (a) to (c) as part
of its SLC analysis. If the CC considers that there were alternative purchasers, it
will try to identify who the alternative purchaser(s) might have been and take this
into account when determining the counterfactual. The analysis of the impact
on competition of the merger (ie whether the effect of the merger under review
would be substantially less competitive than the effect of an acquisition by an
alternative purchaser) would be part of the SLC analysis. Similarly, how the
merger compares to the effect of exit of the firm and the dispersal of its sales is
treated as part of the consideration of the effects of the merger on competition.
4.3.12 Practical considerations relating to the three questions listed in paragraph 4.3.8
are examined below.
(a) Would the firm have exited?

4.3.13 The Authorities will look at the facts of the case to assess whether one of the
firms would have exited.
4.3.14 In the context of a firm exiting for reasons of financial failure, consideration is
given both to whether the firm is unable to meet its financial obligations in the
near future and to whether it is unable to restructure itself successfully. The
Authorities will examine the firm’s balance sheet to determine the profile of
assets and liabilities. They will also consider the action the management has
taken to address the firm’s position and will review contemporaneous documents
such as board minutes, management accounts and strategic plans.44
4.3.15 If the firm was a part of a larger corporate group, the Authorities will look at the
nature and value of the transactions within that group to determine the extent to
which the losses were caused by intra-group charges, and whether the trans
actions were on arm’s length terms. The Authorities will apply the same principle
in determining whether a particular subsidiary or division would have exited the
market without the merger. They will examine the evidence as to why the parent
company would have closed that subsidiary or division. Such cases require par
ticularly careful analysis. There may be several reasons why a profitable parent
company would not close down a subsidiary or division which appeared to be
loss-making. For example, the allocation of costs within a business may mean
that the accounts for the division may not reflect actual operating cash flow, or
the division may have some strategic or other value that is not reflected in the
accounts.
43 For an example of the OFT using a counterfactual other than prevailing conditions, see First West Yorkshire/Black
Prince, OFT, May 2005.
44 Examples of how the Authorities have considered accounting and documentary evidence in practice include
Long Clawson Dairy Limited/The Millway business of Dairy Crest Group plc, CC, January 2009, and Completed
acquisition by Home Retail Group plc of 27 stores from Focus (DIY) Ltd, OFT, April 2008.

(b) Would there have been an alternative purchaser for the firm or
its assets?
4.3.16 Even if the Authorities believe that the firm would have exited, there may be other
buyers whose acquisition of the firm as a going concern, or of its assets, would
produce a better outcome for competition than the merger under consideration.
These buyers may be interested in acquiring the firm or its assets as a means of
entering the market.
4.3.17 When considering the prospects for an alternative buyer for the firm or its assets,
the Authorities will look at available evidence supporting any claims that the
merger under consideration was the only possible merger (ie that there was
genuinely only one possible purchaser for the firm or its assets). The Authorities
will take into account the prospects of alternative offers for the business above
liquidation value. The possible unwillingness of alternative purchasers to pay
the seller the asking purchase price would not rule out a counterfactual in which
there is a merger with an alternative purchaser.
(c) What would have happened to the sales of the exiting firm?
4.3.18 If the Authorities believe that the firm and its assets would have exited, they will
consider what would have happened to the sales of the firm. They will consider
whether sales would have been redistributed among the firms remaining in the
market and, if so, how. If sales were likely to have been dispersed across several
firms, the merger, by transferring most or all of the sales to the acquirer, may
have a significant impact on competition. If, on the other hand, the majority of the
sales were expected to have switched to the acquiring firm, the merger may have
little effect on competition.
Loss of potential entrant scenario

4.3.19 The Authorities will consider whether the counterfactual situation should include
the entry by one of the merger firms into the market of the other firm or, if already
within the market, whether the firm would have expanded had the merger not
taken place.45
Competing bids and parallel transactions

4.3.20 Where there is more than one bidder for a target business, the OFT will
examine each competing bid separately and will consider whether each
proposed merger would create a realistic prospect of an SLC as against
prevailing conditions of competition. It will not engage in a comparative analysis
of multiple competing bids.
4.3.21 For the CC, the appropriate counterfactual will depend on the circumstances of
the case.
45 For an example of the OFT considering potential entry into the market by one of the merger firms, see Air France-
KLM/VLM, OFT, May 2008.
Page 25
One proposed transaction is referred

4.3.22 If only one merger is referred, the counterfactual used by the CC may be the pre-
merger competitive situation or the sale of the target firm to one of the alternative
purchasers. When deciding on the most appropriate counterfactual, the CC will
consider the circumstances of the sale, including the offers of the alternative
purchasers.
Two or more bids are referred

4.3.23 If two or more merger situations involving competing bids are referred to the
CC, but there are other merger situations involving other bids that are not, the
counterfactual is more likely to involve a merger that is not referred (and therefore
does not give rise to competition concerns) than one of the referred mergers
which does raise competition concerns. Depending on the circumstances, the
appropriate counterfactual may be based on either the sale to an alternative
bidder whose bid has not been referred or the prevailing conditions of
competition. The CC would not take into account the possibility of remedies
being implemented to address competition concerns raised by the alternative
mergers, ie a sale to a ‘remedied bidder’ would not become the counterfactual
situation (but see paragraphs 4.3.28 and 4.3.29 on rail franchise awards).
4.3.24 Where mergers involving all the bids are referred, the counterfactual will often
be the pre-merger situation, although before identifying it as such, the CC
will consider the appropriateness of the counterfactual being the acquisition
by another purchaser that does not raise competition concerns. This entails
considering the circumstances of the case, including the likelihood of acquisition
by a purchaser who was not one of the bidders.
Parallel transactions
4.3.25 The Authorities may be required to consider a merger at a time when there is the
prospect of another merger in the same market (a parallel transaction46).
4.3.26 For the OFT, the question is, as always, whether the transaction under review
creates the realistic prospect of an SLC, and it is likely to consider whether the
statutory test would be met whether or not the parallel transaction proceeds47
(unless the parallel transaction can clearly be ruled out as too speculative48). As
explained in paragraph 1.17, given the Act’s voluntary notification regime, the
Authorities, when assessing a merger, cannot ignore a parallel transaction on the
grounds that it has not been notified to the OFT, or was notified after the merger
under review.
46 A parallel transaction is considered as part of the counterfactual on the basis that it would occur whether or not
the merger takes place. In this context, a parallel transaction is one which is either anticipated or which has been
completed but remains subject to the possibility of being unwound as a result of intervention by the Authorities
under the Act.
47 See Anticipated acquisition by Nasdaq Stock Market, Inc of the London Stock Exchange plc, OFT, January 2007,
in which the OFT included the merger between NYSE and Euronext as part of its counterfactual notwithstanding
that that merger had not yet completed.
48 The OFT considered that a successful completed bid by Nasdaq for LSE was too speculative to be taken into
account as part of the counterfactual in Anticipated merger between NYSE Group, Inc. and Euronext N.V., OFT,
October 2006.

4.3.27 Parallel transactions do not have to be referred to the CC simultaneously. They

may come to it at different times. The CC does not give consideration of one
referred merger automatic priority over another. When determining the relevant
counterfactual for one of the referred mergers the CC will take into account
whether or not it expects the other transaction to proceed.
Rail franchise awards

4.3.28 In rail franchise cases, the pre-merger situation cannot be the appropriate
counterfactual, as the existing rail franchise is coming to an end and a new
franchise must be awarded to one of the short-listed bidders.49
4.3.29 The Authorities will therefore treat the appropriate counterfactual to the merger
as the award of the franchise either to a firm that raises no competition concerns,
or, if there is no alternative bidder that does not raise competition concerns, to
a hypothetical bidder, with any competition concerns being remedied through
behavioural remedies.50
49 See, for example, Stagecoach/East Midlands passenger rail franchise, OFT, February 2008.
50 See Greater Western Passenger Rail Franchise, CC, February 2006.
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Analytical approach
Part 5 and methodologies
Part 5 of the guidelines describes the general analytical approach and the
methodologies commonly used to conduct the SLC assessment. However, as
emphasised in Part 1, the SLC assessment is inevitably case-specific, and will
depend on the particular transaction and the individual markets being analysed.
Section 5.1: Introduction

5.1.1 The Authorities’ assessment of the SLC test is framed in terms of two related
issues. The first concerns the identification of the market or markets for the
goods or services concerned. The second concerns the Authorities’ assessment
of the competitive effects of the merger in the market(s). In practice, the analy
sis of these two issues will overlap, with many of the factors affecting market
definition being relevant to the assessment of competitive effects and vice versa.
Therefore, market definition and the assessment of competitive effects should
not be viewed as two distinct analyses.
5.1.2 In considering the SLC test, the Authorities generally conduct their analysis
under the following headings (although the headings are not necessarily
systematically followed in the Authorities’ decisions or reports):
(a) market definition;
(b) measures of concentration;
(c) horizontal mergers—unilateral effects (including any vertical effects of

horizontal mergers);
(d) horizontal mergers—coordinated effects;
(e) non-horizontal mergers—unilateral and coordinated effects;
(f) efficiencies;
(g) entry and expansion; and
(h) countervailing buyer power.
5.1.3 The extent of the analysis conducted on each of these aspects, and the evidence
considered as part of that analysis, is likely to vary according to whether the

merger is being considered by the OFT at Phase 1 or the CC at Phase 2. Given

the role of the OFT at Phase 1, the statutory reference test and the reduced time
available, its ability to undertake detailed analysis of all issues may be limited.
Further, when considering efficiencies, prospects for entry and expansion and
countervailing buyer power, and having regard to the realistic prospect threshold,
the OFT will require compelling evidence if it is to conclude on the basis of these
factors that the merger should not be referred to the CC.
5.1.4 During the assessment of mergers by either Authority, parties will be asked,
or choose, to provide evidence. When submitting evidence of a technical
nature to the Authorities, especially survey evidence or econometric estimates,
parties should include any necessary data, descriptions of methodology, and
algorithms to enable the Authorities to assess their analysis.51 The CC sometimes
undertakes its own econometric analysis (either in the light of analysis produced
by the merger firms or of its own accord); the OFT is less likely to do so.
Section 5.2: Market definition

5.2.1 The purpose of market definition is to provide a framework for the Authorities’
analysis of the competitive effects of the merger. The Authorities will identify the
market within which the merger may give rise to an SLC (the relevant market).
The relevant market contains the most significant competitive alternatives
available to the customers of the merger firms and includes the sources of
competition to the merger firms that are the immediate determinants of the
effects of the merger (ie the Authorities’ aim when identifying the relevant market
is to include the most relevant constraints on behaviour of the merger firms).
The Authorities will ensure that the relevant market they identify satisfies the
hypothetical monopolist test (see paragraphs 5.2.9 to 5.2.20).
5.2.2 Market definition is a useful tool, but not an end in itself, and identifying the
relevant market involves an element of judgement. The boundaries of the market
do not determine the outcome of the Authorities’ analysis of the competitive
effects of the merger in any mechanistic way. In assessing whether a merger
may give rise to an SLC the Authorities may take into account constraints outside
the relevant market, segmentation within the relevant market, or other ways in
which some constraints are more important than others.
5.2.3 The relevant market may not be the narrowest market that meets the
hypothetical monopolist test. However, to the extent that they use them, the
Authorities will not normally have regard to market share and concentration
thresholds calculated on anything other than the narrowest market that satisfies
the hypothetical monopolist test (see paragraph 5.3.5).
51 Suggested best practice for the submission of technical economic analysis from parties is at: www.competition-
commission.org.uk/rep_pub/corporate_documents/corporate_policies/best_practice.pdf; and www.competition-
commission.org.uk/press_rel/2009/feb/pdf/07-09.pdf. As at September 2010, the Authorities are conducting a
public consultation on a joint good practice guide for parties on how to design and present consumer survey
evidence; see http://www.competition-commission.org.uk/about_us/our_organisation/workstreams/analysis/
Good%20Practice%20CC3.htm.
Page 29
5.2.4 Reflecting the different functions of the two Authorities, the OFT will usually make
an initial assessment of the boundaries of the relevant market but may not reach
a conclusion, while the CC will usually reach a conclusion on the boundaries
of the relevant market in cases referred to it. In this section reference is made
throughout to ‘defining’ the relevant market but this should be read taking into
account the differences between the two Authorities’ approaches.
5.2.5 There are normally two dimensions to the definition of the relevant market: a
product dimension and a geographic dimension. Markets may also be defined by
reference to customer group or temporal factors.
(a) The relevant product market is a set of products that customers consider to
be close substitutes, for example in terms of utility, brand or quality.
(b) The relevant geographic market: may be local, regional, national or wider.
Imports may be taken into account as well as UK products.
(c) The relevant customer market: when suppliers can target higher prices at
those customers willing to pay more than others (ie price discriminate), the
market may be defined by customer group, with the customers in each
market being offered different terms. When different suppliers can meet
customers’ requirements at different times, the relevant customer market may
have a temporal dimension.
(a) Defining the product market

5.2.6 In identifying the relevant product market the Authorities will pay particular
regard to demand side factors (the behaviour of customers and its effects).
However, they may also consider supply-side factors (the capabilities and
reactions of supplier in the short term) and other market characteristics.
(i) Demand-side factors

5.2.7 The relevant product market is identified primarily by considering the response of
customers to an increase in the price of one of the products of the merger firms
(demand-side substitution). The evidence the Authorities may consider when
evaluating the closeness of competition between different products is described
at paragraph 5.2.15.
5.2.8 The Authorities use the ‘hypothetical monopolist test’ as a tool to check that the
relevant product market is not defined too narrowly. The relevant product market
may potentially be wider than the narrowest market that satisfies the hypothetical
monopolist test.
Hypothetical monopolist test

5.2.9 Paragraphs 5.2.10 to 5.2.20 explain the use of the hypothetical monopolist test
by reference to the relevant product market. The test is also similarly relevant to
other aspects of the market (eg the geographic market).

5.2.10 A set of substitute products (a ‘candidate market’) will satisfy the hypothetical
monopolist test if a hypothetical firm that was the only present and future seller
of the products in the candidate market would find it profitable to raise prices.
Under this framework, a candidate market will fail the hypothetical monopolist
test, and will be too narrow to comprise the relevant market, if customers would
respond to the price rise by switching to products outside the set to such an
extent that the price increase by the hypothetical monopolist would not be
profitable.
5.2.11 When selecting a candidate market in horizontal mergers (see paragraph 4.1.4),
the Authorities will include at least the substitute products (narrowly defined)
of the merger firms. In non-horizontal mergers (see also paragraph 4.1.4), the
Authorities will include at least one of the products of the merger firms. In
applying the hypothetical monopolist test, the Authorities will assess whether
the hypothetical monopolist could profitably raise the price of at least one of the
products in the candidate market by at least a small but significant amount over
a non-transitory period of time (ie by a ‘SSNIP’—a small but significant and non-
transitory increase in price).
5.2.12 When applying the hypothetical monopolist test, the Authorities will normally
use a SSNIP of 5 per cent, though they may sometimes use a higher or lower
number. In most cases, a hypothetical monopolist test would be conducted
relative to prevailing prices. In cases where it is thought that prevailing prices
might be the outcome of coordinated behaviour, the Authorities may consider
conducting the test using prices lower than prevailing prices as a starting point.
5.2.13 The hypothetical monopolist test is based on the possibility that a price increase
becomes less costly when a group of previously competing products is brought
under the control of a hypothetical monopolist. It is costly for the supplier of one
of the products to raise the price beforehand because it will lose the profit on
sales diverted as a result. The cost is composed of two elements:
(a) the profit on lost sales from customers who switch to other products in the
candidate market; and
(b) the profit on lost sales from customers who switch to other products outside
the candidate market.
5.2.14 If the products in the candidate market are, hypothetically, brought under the
control of a single supplier, it is no longer as costly for that supplier to raise the
price of any of the products; it will recoup the profit on recaptured sales from
those customers that switch to other products in the candidate market.
5.2.15 Accordingly the Authorities may consider evidence on the following factors when
evaluating whether a SSNIP by the hypothetical monopolist would be profitable.
(a) Closeness of substitution. If the products in the candidate market are close
substitutes, the hypothetical monopolist test is more likely to be satisfied
because the hypothetical monopolist will recapture a significant share of
the sales lost in response to a SSNIP, making the price rise less costly. The
Page 31
closeness of substitution between products can be indicated by the diversion

ratio or cross-price elasticity of demand between them.52 Evidence used to
assess the closeness of substitution between products may include:
—— information about product characteristics such as physical properties and

intended use that can indicate similarities between different products;
—— information about relative price levels and the extent to which prices of
products within the candidate market are correlated with each other, as
compared with the prices of products outside the candidate market;
—— information on prices and sales volumes over time or across areas that
permit analysis of the way that customers respond to changes in prices or
to firms entering and leaving the market;53
—— responses from customers, competitors and interested and informed

third parties to questions—sometimes posed in surveys—about customer
behaviour and the hypothetical monopolist test; and
—— documents such as marketing studies, consumer surveys prepared in the

normal course of business, market analyses prepared for investors, and
internal business analyses (eg board papers, business plans and strategy
documents).
(b) Variable profit margins (sales revenue minus direct costs of sales). If the
variable profit margins of the products in the candidate market are high,
the hypothetical monopolist test is more likely to be satisfied because the
value of the sales recaptured by the hypothetical monopolist will be greater,
making the price rise less costly. Evidence about variable margins can come
from internal documents containing accounting information. Evidence that
customers are very sensitive to price can also indicate low variable profit
margins.
(c) Price sensitivity of customers. If customers are insensitive to changes in the

price of products in the candidate market, the hypothetical monopolist test
is more likely to be satisfied because the SSNIP will not lead to many lost
sales, making the price rise less costly. The own-price elasticity of demand
can be an indication of the extent to which customers switch away from a
product when its price increases.54 Evidence that can inform the Authorities
about the closeness of substitution of the products in the candidate market
will often also be useful in providing information about the overall sensitivity of
customers to price. Information enabling the estimation of ‘switching costs’, if
any, that customers might incur in changing from the product of one supplier
to that of another can also be relevant.
52 A diversion ratio between Product A and Product B represents the proportion of sales that would divert to Product
B (as opposed to Products C, D, E etc) as customers’ second choice in the event of a price increase for Product
A. The cross-price elasticity of demand of Product A to Product B is a measure of the percentage change in the
quantity of Product A sold when the price of Product B rises by 1 per cent.
53 See, for example, Completed acquisition by Tesco plc of five stores (Thurso, Bedlington, Little Lever,
Ramsbottom and North Hykeham) from Somerfield plc, OFT, December 2007.
54 The own-price elasticity of demand for a product is a measure of the percentage change in quantity sold for a 1 per
cent change in the price charged.

5.2.16 Information gathered on these factors may be supplemented by other

information and by calculations which can help the Authorities judge how likely it
is that a SSNIP would be profitable.55
(ii) Supply-side factors

5.2.17 The boundaries of the relevant product market are generally determined by
reference to demand-side substitution alone. However, there are circumstances
where the Authorities may aggregate several narrow relevant markets into one
broader one on the basis of considerations about the response of suppliers to
changes in prices. They may do so when:
• production assets can be used by firms to supply a range of different

products that are not demand-side substitutes, and the firms have the ability
and incentive quickly (generally within a year) to shift capacity between these
different products depending on demand for each; and
• the same firms compete to supply these different products and the conditions
of competition between the firms are the same for each product; in this case
aggregating the supply of these products and analysing them as one market
does not affect the Authorities’ decision on the competitive effect of the
merger.56
5.2.18 An example of where the Authorities may aggregate products which are not
demand-side substitutes is in markets characterised by bidding and tendering
processes where firms bid on the basis of the service they can offer to supply
customers with bespoke products. The competitive constraint on firms in this
case comes from a customer’s willingness to award the contract to a rival rather
than to switch to a different bespoke product. Aggregating a range of contracts
where the same set of firms would have been credible bidders can provide
more useful information about the competitive constraints on each firm than is
available from focusing on just one bespoke product.57
5.2.19 The evidence that Authorities may consider in deciding whether to aggregate
markets includes:
• information on adjustment costs and variable profit margins for those

suppliers being considered;
• information on the production processes involved and the extent of spare

capacity within the industry;
• information about the distribution systems of the different suppliers, and the
ease and speed with which they can increase their sales volume for a product
if they increase the capacity devoted to it;
55 See, for example, Long Clawson Dairy Limited/The Millway business of Dairy Crest Group plc, CC, January 2009,
and Anticipated acquisition by LOVEFiLM International Limited of the online DVD rental subscription business of
Amazon Inc, OFT, April 2008.
56 See, for example, Stagecoach Group plc/Eastbourne Buses Ltd, CC, October 2009, and Anticipated merger
between Grainfarmers Group and Centaur Grain Group, OFT, October 2008 (paragraphs 13 and 14).
57 See, for example, Anticipated acquisition by Nike, Inc. of Umbro plc, OFT, January 2008 (paragraphs 10 to 12).
Page 33
• evidence that most suppliers supply many of the products and that they
routinely shift production capacity between products in response to variations
in price differentials over time; and
• evidence that suppliers earn similar variable profit margins on the different
products, and that the margins move together over time.
(iii) Other market characteristics

5.2.20 Depending on the characteristics of the market, the Authorities may take into
account additional factors in their market definition. Some examples of such
factors follow:
• Indirect competition. The Authorities may consider widening the relevant

product market, to include products that are not directly substitutable
because of indirect competition. This can happen, for example, when the
merger firms make inputs used in different production processes to make
the same output. If the merged firm imposed a SSNIP on one of the inputs, it
may make the associated technology more expensive, leading to higher sales
by suppliers that use the competing technology, and greater demand for the
inputs made by the other merger firm. In practice, the extent to which indirect
switching constitutes an important factor when defining the relevant product
market depends on: (i) how competitively the final product is supplied;
(ii) how competitively the input is supplied; (iii) how competitively other,
complementary inputs are supplied; and (iv) what proportion of the total cost
of the output is accounted for by the input.
• Two-sided products. The implementation of the hypothetical monopolist test

may be more complicated when products are two-sided. Two-sided products
are platforms (such as newspapers and other media) that intermediate
between distinct and unrelated groups of customers. The number of cus
tomers in each group affects the profitability of the product, because the
value that one group of customers realizes from using the intermediary
depends on the volume of customers from the other group (‘indirect network
effects’).58 Prices charged to each set of customers take account of the
need to get both sets ‘on board’. It may therefore be difficult to conduct a
hypothetical monopolist test because: (i) there is no single price to both sets
of customers to which to apply a SSNIP;59 (ii) the effect of a SSNIP on the
demand of one set of customers may be exacerbated by indirect network
effects; and (iii) the constraints on the merger firms’ products may come not
only from other two-sided intermediaries but also from ‘one-sided’ firms
serving one set of customers.60
58 For example, in newspaper (and other media) markets both readers (or viewers, or listeners) and advertisers are
served and the value of the product (eg an advertisement) to one group of customers (advertisers) is affected by the
number of customers served in the other group (the number of readers of a newspaper, listeners to a radio station
or viewers of a television channel).
59 For example, some newspapers are advertising-funded and free to readers whereas others charge both advertisers
and readers.
60 An example is radio broadcasting where commercial radio stations serve both advertisers (who pay to advertise)
and listeners (who do not pay) but where BBC radio stations—which also provide free content to listeners—do
not serve advertisers. See, for example, Completed acquisition by Global Radio UK Ltd of GCap Media plc, OFT,
August 2008.

• Secondary products. The Authorities may consider combining primary and

secondary products in the same relevant product market. Secondary (or
aftermarket) products are those that are purchased only as a result of the
customer having purchased a primary product. Examples include spare parts
for cars and razor blades for razors. There are three situations:
(a) If customers predominantly buy the primary and secondary product from
the same supplier, the Authorities may sometimes define a single system
market in which suppliers of systems of primary and secondary products
compete. This is especially likely to be the case where customers consider
the price of both products (ie the system) when making their initial
purchase decision.
(b) If each primary product is associated with a range of secondary products

which are compatible with it—but not with other primary products—the
Authorities may define one market for the primary products and multiple
secondary markets, each one containing the secondary products which
are compatible with one primary product. Sometimes the same firm
supplies both a primary product and one of the secondary products
which are compatible with it. In these cases the Authorities may have
regard to the indirect constraints imposed in the secondary markets from
competition in the primary market.
(c) If most secondary products are generally compatible with a range of

different primary products, the Authorities may define two markets: one for
the primary products, and one for the secondary products.
• Self-supply. When identifying the relevant product market, special

considerations can arise when some firms buy their inputs in a merchant
market (ie from independent, third party suppliers) while others meet their
own requirements. The Authorities will consider whether production of the
input used for self-supply by the merger firms should be included in the
relevant market for assessing any effects on input prices. The Authorities
will generally follow the principle that captive production by the firms will be
included in the relevant market only if it can be demonstrated that it would be
profitable for the supplier to forgo its use and sell into the merchant market in
response to a SSNIP. The Authorities will also consider whether self-supply
by potential customers of the merger firms should be included in the relevant
market. The Authorities will generally include self-supply if the ability of
customers to choose this option affects the profitability of a price rise by the
hypothetical monopolist.
• Asymmetric constraints. The boundaries of the relevant product market may

depend on the identity of the products in the candidate market. In particular,
where products are differentiated, the competitive constraints they impose on
each other need not be symmetric. In other words, a hypothetical product A
may constrain product B’s prices while product B’s prices have no effect on
product A. An example of this is grocery retailing, where larger stores might
Page 35
constrain the prices of smaller stores while the reverse may not be true.61 One
consequence of this is that the relevant product market in different merger
cases in the same sector may not coincide, so a merger of small grocery
stores may take place in a market that includes large grocery stores but a
merger of large grocery stores may take place in a market that does not
include small grocery stores.
Defining the geographic market

5.2.21 The Authorities will also define the relevant geographic market. There are
similarities between their approaches to defining the relevant geographic
market and to defining the relevant product market. Both use the hypothetical
monopolist test (see paragraphs 5.2.9 to 5.2.16) as a tool to check that the
relevant market is not too narrowly defined (see paragraph 5.2.8). Relevant
geographic markets may be based on the location of suppliers or customers.
5.2.22 In cases where prices (and sometimes delivery costs) are listed, rather than
being subject to negotiation, a relevant geographic market may be based on
the location of suppliers and if so would be defined as an area covering a set of
suppliers or outlets that customers consider to be substitutes for the supplier
or outlet of interest. Such a supplier-based geographic market may often be
appropriate when customers travel to a supplier’s location to purchase products.
5.2.23 Where available, similar information to that used to identify demand-side

substitution between products can be used to assess the geographic
boundaries of the relevant market.62 In particular, the Authorities may consider
the following:
• product characteristics such as perishability;
• information on differences in pricing, sales, advertising and marketing

strategies by area;
• information enabling the estimation of ‘switching costs’ (which can include

additional delivery costs) that customers might incur in changing to products
that are currently supplied in other geographic areas relative to the value of
the products and the length of time taken to make the switch;
• responses from customers, competitors and interested and informed

third parties to questions—sometimes posed in surveys—on consumer
preferences by geographic area; and
• information on flows of goods between regions or into the UK and any

barriers to entry, whether legislative, natural or strategically created.
61 See, for example, Somerfield plc/Wm Morrison Supermarkets plc, CC, September 2005, and Anticipated
acquisition by Co‑operative Group Limited of Somerfield Limited, OFT, October 2008, and Tesco/Co-op Store
acquisition in Slough, CC, November 2007.
62 For an analysis of some of these types of information in the context of national (ie UK-wide) geographic market
definition, see for example, Arcelor SA and Corus Group plc, CC, February 2005 and Greif Inc and Blagden
Packaging Group, CC, August 2007. For an analysis of some of these types of information in the context of a
regional geographic market definition, see, for example, Stericycle International LLC and Sterile Technologies
Group Ltd, CC, December 2006 and Wienerberger Finance Service BV and Baggeridge Brick plc, CC, May 2007.

5.2.24 The Authorities may aggregate several narrow relevant geographic markets
into a single broader one on the basis of the expected response of suppliers
to changes in price. When determining whether there is scope to do so, the
Authorities may consider similar information to that used to identify supply-side
substitution between products, with particular focus on the transport costs
incurred by suppliers.
5.2.25 When assessing mergers involving a large number of local geographic markets—
for example, mergers of grocery retailers operating over multiple localities—the
Authorities may examine the geographic catchment area within which the
great majority of a store’s custom is located. Catchment areas are a pragmatic
approximation for a candidate market to which the hypothetical monopolist test
can be applied; the use of catchment areas is not an alternative conceptual
approach. However, the geographic market identified using the hypothetical
monopolist test will typically be wider than a catchment area. Consequently, if
the impact of the merger on concentration in this catchment area appears un
problematic, then the Authorities may exclude the local area from further analysis
without concluding on the boundaries of that particular relevant geographic
market.
5.2.26 The Authorities will also consider whether customers would increase their
purchases from overseas suppliers if domestic producers’ prices were increased
(perhaps suggesting that the relevant market was wider than the UK). Even when
imports account for a small proportion of UK consumption, it might be relatively
easy for customers to switch. However, there can be obstacles facing customers
wanting to purchase more from overseas or overseas producers wanting to
increase their UK supply, for example transport costs, capacity constraints, trade
barriers and national standards or regulations.
5.2.27 In cases where delivered prices are negotiated individually with customers, the
geographic scope of a relevant market will be one aspect of the definition of
the relevant customer market. This may mean that, when suppliers can price
discriminate on the basis of customer location, the Authorities may define
separate relevant geographic markets by customer location and not by supplier
location. Such a customer-based geographic market may often be appropriate
when suppliers deliver products to a customer’s location where:
• demand or supply conditions differ between those locations; and
• arbitrage between those locations is difficult.
Defining customer markets

5.2.28 The Authorities may sometimes define relevant markets for separate customer
groups if the effects of the merger on competition to supply a targeted group
of customers may differ from its effects on other groups of customers, and
require a separate analysis. This may happen when, for example, suppliers can
target higher prices at customers willing to pay more, or when competition for
customers differs significantly between different customer groups. Intermediate
Page 37
goods markets where suppliers negotiate individually with customers provide

some examples of markets where suppliers may be able to target higher prices
at customers willing to pay more, although price discrimination can occur in final
markets too. In some cases the prices customers pay will vary because they are
buying different products.
5.2.29 In determining whether there are separate customer groups, the key question
is whether some customers could get better terms for the same requirements.
In such instances, depending on the circumstances of the case, the Authorities
may decide to define two or more relevant markets, or they may decide to define
only one relevant market and note the scope for price discrimination within it.
5.2.30 In assessing the breadth of relevant markets defined by customer groups, the
Authorities may consider a range of factors. For example, the Authorities may
define narrow relevant markets by customer group when:
• customers who pay a low price cannot resell to those who would otherwise
pay a high price;
• suppliers can identify those with a high willingness to pay, or those in a weak
bargaining position, and therefore can adopt a different negotiating stance
towards them; and
• customers have different preferences, or have access to different sets of

suppliers.
5.2.31 Customer markets may also be defined on the basis of temporal markets, for
example where customers are not able to substitute products between time
periods (eg due to the seasonality of product supply or the different prices for
peak and off-peak services).
Section 5.3: Measures of concentration

5.3.1 As part of their assessment of the effects of a merger on competition, the
Authorities may use market shares and measures of concentration, assessed on
the relevant market or some other market (in particular the narrowest market that
satisfies the hypothetical monopolist test). Where such measures are considered
for the purpose of applying thresholds, the narrowest market defined by the
hypothetical monopolist test must be employed (see paragraph 5.3.5).
5.3.2 When interpreting information on market shares and concentration the

Authorities may have regard to the following factors:
• The extent to which products are differentiated (ie similar but not perfect
substitutes for one another) and some products are closer competitors
to each other than to others in terms of, for example, branding, quality,
characteristics or geographical location.63
63 An over-reliance on concentration measures to indicate changes in market power, in particular where products are
differentiated, has been termed the ‘binary fallacy’: the assumption that all firms in the market exercise competitive
constraints upon one another in proportion to their market shares, but that firms outside the market exercise no
constraint at all.

• Whether there is evidence of turbulence in concentration (eg movements in

market shares over time), which may indicate intense dynamic competition,
regardless of the static level of concentration in a market.
• How widely the market is drawn. A low combined market share on the
narrowest market that satisfies the hypothetical monopolist test will be a
better indicator of an absence of potential competition concerns than the
same share on a market that is drawn more widely.
• The level of variable profit margins. If margins are high the same market
shares can indicate greater potential price effects from the merger than
otherwise (see paragraph 5.2.15 (b)).
5.3.3 Concentration can be measured using such data as sales revenue, production
volume, capacity or reserves. The measure the Authorities will use will depend
on the facts of the case and the availability of information. For example, when
products differ in quality it may be appropriate to use sales revenue as the
basis. If different suppliers make the same, or similar, products capacity may
be a significant determinant of a firm’s competitive strength and may be a more
appropriate basis of assessment.
5.3.4 There are several ways in which concentration can be measured.
• Market shares of firms in the market, both in absolute terms and relative to
each other, can give an indication of the potential extent of a firm’s market
power. The combined market shares of the merger firms, when compared
with their respective pre-merger market shares, can provide an indication of
the change in market power resulting from a merger. In horizontal mergers in
markets involving undifferentiated products, unilateral effects are more likely
where the merger results in a firm with a large market share.
• Number of firms. A straightforward count of the firms in a market is a basic

measure of concentration. The Authorities may attach greater weight to the
number of firms when considering coordinated effects. When assessing
unilateral effects from local markets of mergers involving retailers, a count of
the number of different fascias in a local area also conveys some information
about concentration (see paragraph 5.2.25). However, counting firms or
fascias does not take into account differences in market shares and the size
distribution of firms.
• Concentration ratios measure the aggregate market share of a small number

(three or four generally) of the leading firms in a market (eg the three-firm
concentration ratio, or C3, shows the proportion of the market supplied by the
three leading firms). The ratios are absolute in value and take no account of
differences in the relative size of the firms that make up the leading group.
• The Herfindahl-Hirschman Index (HHI) is a measure of market concentration

that takes account of the differences in the sizes of market participants, as
well as their number. The HHI is calculated by adding together the squared
values of the percentage market shares of all firms in the market. The change
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in the HHI (known as the ‘delta’) can be calculated by subtracting the market’s
pre-merger HHI from its expected post-merger HHI.64 The absolute level of
the HHI post-merger and the delta arising from the merger can provide an
indication of the change in market structure resulting from the merger.
5.3.5 Thresholds. Given its role as a Phase 1 body, the OFT may have regard to
market share and concentration thresholds. However, to the extent that the OFT
uses and relies on them, it does not do so mechanistically and will normally not
have regard to market share and concentration thresholds on anything other
than the narrowest market that satisfies the hypothetical monopolist test. Past
OFT decisions illustrate circumstances in which the OFT is less likely to identify
competition concerns on the basis of these thresholds.
• In relation to market shares, previous OFT decisions in mergers in markets

where products are undifferentiated suggest that combined market shares
of less than 40 per cent will not often give the OFT cause for concern
over unilateral effects. At the time of writing there have been too few OFT
decisions in non-horizontal mergers to suggest a threshold in these cases.
For such mergers, therefore, the OFT may have regard to the thresholds in
the European Commission’s guidelines on the assessment of non-horizontal
mergers. In particular, a market share for the merged firm of less than 30 per
cent will not often give the OFT cause for concern over input foreclosure (see
discussion in paragraphs 5.6.9 to 5.6.12).
• In relation to the number of firms, previous OFT decisions in mergers involving

retailers suggest that the OFT has not usually been concerned about mergers
that reduce the number of firms in the market from five to four (or above).
• As regards the HHI, the OFT may have regard to the following thresholds:65
any market with a post-merger HHI exceeding 1,000 may be regarded as
concentrated and any market with a post-merger HHI exceeding 2,000 as
highly concentrated. In a concentrated market, a horizontal merger generating
a delta of less than 250 is not likely to give cause for concern. In a highly
concentrated market, a horizontal merger generating a delta of less than
150 is not likely to give cause for concern. These thresholds may be most
informative for mergers in a market where the product is undifferentiated
and where competition between firms involves firms choosing what volume
to supply to the market. In other cases the significance of these thresholds
will be less.
5.3.6 In cases where capacity is key to assessing concentration, the Authorities will
pay particular attention to two issues.
64 A market of four firms with market shares a, b, c and d will have an HHI of a2+ b2+c2+ d2. The delta in the HHI in
this market arising from a merger between the two firms with market shares a and b can be shown to be equal to
2ab.
65 These thresholds are in line with those in the European Commission’s guidelines on the assessment of horizontal
mergers under the Council Regulation on the control of concentrations between undertakings—Commission notice
(2004/C31/03).

(a) Whether firms may use some of their capacity to make alternative products.
If so, the Authorities will include only the capacity that they expect would
be made available to supply the product in question in response to a
SSNIP within a short period of time (normally within a year). In making their
assessment of this capacity, the Authorities may consider the commercial
incentives on the firms to shift capacity in this way, as well as any evidence
about their response in the past to changes in the price of the product in
question (see paragraphs 5.2.17 to 5.2.19).
(b) Whether there are particular firms with the capacity to make the product
in question within a short period of time (normally within a year), but which
currently do not do so. If there are such firms (sometimes termed ‘rapid
entrants’) their capacity may be included. The Authorities will make an
assessment of which firms they expect would participate in the market, and
the capacity that would be attributed to each firm, based upon an assess
ment of the capacity that each firm would make available to supply the
product in question in response to a SSNIP.
Current measures may also be adjusted to reflect imminent changes that are
expected, such as the addition of extra capacity.
Section 5.4: Horizontal mergers—unilateral effects

5.4.1 Unilateral effects can arise in a horizontal merger when one firm merges
with a competitor that previously provided a competitive constraint, allowing
the merged firm profitably to raise prices on its own and without needing to
coordinate with its rivals. Unilateral effects can be horizontal or vertical.
Horizontal unilateral effects

5.4.2 A theory of harm relevant to the consideration of horizontal unilateral effects is
the loss of existing competition. Other theories of harm consider the unilateral
effects arising from the elimination of potential competition (see paragraphs
5.4.13 to 5.4.18) and from increased buyer power (see paragraphs 5.4.19
to 5.4.21).
5.4.3 Paragraphs 5.4.4 to 5.4.12 explain the theory relating to the loss of an existing
competitor through a merger, for undifferentiated and differentiated products
respectively.
Loss of existing competition

Undifferentiated products
5.4.4 Where products are undifferentiated, unilateral effects are more likely where: the
market is concentrated; there are few firms in the affected market post-merger;
the merger results in a firm with a large market share (see paragraph 5.3.4); and
there is no strong competitive fringe of firms.
5.4.5 Unilateral effects resulting from the merger are more likely where the merger
eliminates a significant competitive force in the market. For example, the
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merger may involve a recent entrant or a firm which was expected to grow into
a significant competitive force or otherwise to provide a significant competitive
threat to other firms in the market (eg by virtue of having a novel business model
or a reputation for aggressive price cutting). Unilateral effects are more likely
where customers have little choice of alternative supplier, for example because
of the level of ‘switching costs’66 or network effects (see paragraph 5.2.20 on
two-sided products).
Differentiated products
5.4.6 Where products are differentiated, for example by branding or quality, unilateral
effects are more likely where the merger firms’ products compete closely. To
assess whether the merger results in unilateral effects, the Authorities may
analyse the change in the pricing incentives of the merger firms created by
bringing their differentiated products under common ownership or control.
5.4.7 Unilateral effects may arise because a price increase becomes less costly when
the products of the two firms are brought under common ownership or control.
Without the merger, it is costly for one of the merger firms to raise its prices
because it will lose the profit on diverted sales as a result. The cost is composed
of two elements:
(a) the profit on lost sales from customers who switch to the products of the
other merger firm; and
(b) the profit on lost sales from customers who switch to the products of firms
other than the other merger firm.
5.4.8 After the merger it is no longer as costly for the merged firm to raise the price
of any of the products: it will recoup the profit on recaptured sales from those
customers who would have switched to the products of the other merger firm.
5.4.9 The factors taken into account for the assessment of horizontal unilateral effects
fall under the headings below (see paragraphs 5.2.9 to 5.2.20 on the hypothetical
monopolist test).
(a) Closeness of substitution. If the products of the merger firms are close
substitutes, unilateral effects are more likely because the merged firm
will recapture a significant share of the sales lost in response to the price
increase, making the price rise less costly. The diversion ratio from the
product of one of the merger firms to the other is a useful indicator of the
ability of the second product to constrain the prices of the first product (see
paragraph 5.2.15 (a)).
(b) Variable profit margins (see paragraph 5.2.15 (b)). If the variable profit margins
of the products of the merger firms are high, unilateral effects are more likely
because the value of sales recaptured by the merged firm will be greater,
making the price rise less costly.
66 See, for example, FMC Corporation/ISP Holdings (U.K.) Limited, OFT, July 2008.

(c) Price sensitivity of customers. If customers are insensitive to changes in the

price of the merger firms’ products, unilateral effects are more likely because
the price rise will not lead to many lost sales, making the price rise less costly.
The own-price elasticity of demand can be an indication of the extent to
which customers switch away from a product when the price increases.
5.4.10 Information gathered on these factors may be supplemented by other

information and by calculations which can help the Authorities judge how likely it
is that a price rise by the merged firm would be profitable.67
5.4.11 The potential response of other suppliers to any attempt by the merged firm
to increase price can also have an effect on pricing incentives. In evaluating
whether the price rise by the merged firm would be profitable, the Authorities
may also therefore take into account the short-term responses of competing
suppliers, and any limitations on such responses. For example:
• competing suppliers may respond to a price rise by the merged firm by

raising their own prices; this response is likely to make the price rise more
profitable than otherwise; and
• competing suppliers may not have the capacity to meet demand from some
customers who would like to switch in response to the price rise; this may
also make the price rise more profitable than otherwise.
5.4.12 As with undifferentiated products, unilateral effects resulting from the merger
are more likely where the merger eliminates a significant competitive force in
the market or where customers have little choice of alternative suppliers (see
paragraph 5.4.5).
Loss of potential competition

5.4.13 Unilateral effects may also arise from the elimination of potential competition.
There are two ways in which the removal of a potential entrant could lessen
competition by weakening the competitive constraint on an incumbent supplier.
5.4.14 The first way is where the merger involves a potential entrant that could have
increased competition. Such ‘actual potential competition’ is a constraint only if
and when entry occurs.
5.4.15 In assessing whether a merger leads to unilateral effects from a loss of ‘actual
potential competition’, the Authorities will consider the following questions:
(a) Would the potential entrant be likely to enter in the absence of the merger (see
discussion regarding the counterfactual, paragraphs 4.3.19 to 4.3.29)?
(b) Would such entry lead to greater competition?
67 See, for example, Somerfield plc/Wm Morrison Supermarkets plc, CC, September 2005; Completed acquisition
by Home Retail Group plc of 27 stores from Focus (DIY) Ltd, OFT, April 2008; Anticipated acquisition by Co-
operative Group Limited of Somerfield Limited, OFT, October 2008.
Page 43
The Authorities will also consider whether there are other potential entrants
before reaching a conclusion on the SLC test (see Section 5.8 of these
guidelines: Barriers to entry and expansion.)
5.4.16 Second, the merger may remove a firm which is not in the market, but which
nevertheless imposes an existing constraint because of the threat that it would
enter if existing firms in the market raised their prices. A constraint from such
‘perceived potential competition’ may arise even though the Authorities do not
believe that entry would actually occur.
5.4.17 A firm is more likely to provide a constraint as a perceived potential competitor if

its entry can take place without incurring any substantial sunk costs, and if it can
happen within a year, though the Authorities’ assessment in any case will take
account of the particular aspects of the market in question.
5.4.18 In assessing whether a merger leads to unilateral effects from a loss of perceived
potential competition, the Authorities will consider whether the presence
of perceived potential competition resulted in the pre-existing prices of the
incumbent firm (or firms) being lower than they would otherwise have been.
Increased buyer power

5.4.19 Where the merger firms purchase the same products, the merged firm may
enjoy greater buyer power (or monopsony power) than the merger firms could
previously exert individually. In many cases, an increase in buyer power is not
likely to give rise to unilateral effects; and some of the benefits to the firm from its
greater buyer power may be passed on to the merged firm’s customers.
5.4.20 One circumstance in which unilateral effects may arise from increased buyer
power is when:
• the merged firm has an incentive to lower the amount it purchases so as to

reduce the purchase price it pays (known as ‘demand withholding’68); and
• the merged firm also has sufficient market power over its customers so that,
as it reduces the quantity sold to them in the market, it can increase the price
at which it sells to them.
5.4.21 Buyer power may also lead to suppliers having lower incentives to invest in new
products and processes.
Vertical effects of horizontal mergers

5.4.22 Mergers which are principally horizontal in character may have vertical effects
if one or more of the merger firms also operate at a different level of the supply
chain for a good or service.69 The merged firm will generally need to have a
significant position in the market for an SLC to arise from vertical effects. If both
68 See, for example, Stonegate Farmers Limited/Deans Food Group Limited, CC, April 2007.
69 See, for example, BOC Limited/Ineos Chlor Limited, CC, December 2008.

merger firms act at more than one level of the supply chain, the merger may be
characterised as a horizontal merger between two vertically-integrated firms.70
5.4.23 In assessing the vertical effects of a horizontal merger, the Authorities will use the
same approach as in assessing a purely vertical merger (see Section 5.6).
Section 5.5: Horizontal mergers—coordinated effects

5.5.1 A merger may give rise to an SLC through coordinated effects. Coordinated
effects may arise when firms operating in the same market recognise that they
are mutually interdependent and that they can reach a more profitable outcome if
they coordinate to limit their rivalry.
5.5.2 Coordination may take different forms. In many instances, it will involve
firms keeping prices higher than they would otherwise have been in a more
competitive market. However, coordination can in principle affect any aspect
of competition, eg by limiting production or innovation. Firms may coordinate
by dividing up the market between them, for example by geographic area
or customer characteristics, or by allocating contracts among themselves in
bidding competitions. However, coordination need not involve all aspects over
which firms compete.
5.5.3 Coordination can be explicit or tacit. Explicit coordination is achieved through

communication and agreement between the parties involved. Tacit coordination
is achieved through implicit understanding between the parties, but without
any formal arrangement. Both can be germane to an assessment of the effects
of a merger.
5.5.4 When assessing coordinated effects, the Authorities will analyse the
characteristics of the market that could be conducive to coordination. They will
examine whether there is evidence that the firms in the market were coordinating
pre-merger. If so, they will examine whether the merger makes coordination more
stable or effective, given the characteristics of the market. If there is no evidence
of pre-merger coordination, they will examine whether the merger makes it more
likely that firms in the market will start to coordinate, given the characteristics of
the market.
Pre-existing coordination
5.5.5 Evidence relating to pre-existing coordination will be considered when assessing
whether the merger gives rise to coordinated effects. The significance of whether
there was or was not pre-existing coordination will depend on the facts of
the case.
5.5.6 There may be evidence to suggest that the market was coordinated before
the merger. For example, prices or market shares pre-merger may be hard to
reconcile with non-coordinated behaviour;71 and there may be evidence (eg
70 See, for example, London Stock Exchange plc, CC, November 2005.
71 Identifying coordinated outcomes on this basis may be difficult. Whilst coordination may result in price parallelism,
intense price competition often also does so.
Page 45
from combining information on demand elasticities and variable profit margins)

that current prices are at collusive levels because firms, if they were acting
unilaterally, would profit if they undercut the current price. If so, this may imply
that the three conditions for coordination (see paragraph 5.5.9) were met pre-
merger.
5.5.7 Past proven or suspected cartel actions in the same relevant product market
may also indicate that the conditions for coordination were met in that market,
although this inference cannot automatically be drawn. In markets which are
not obvious candidates for tacit coordination according to the conditions in
paragraph 5.5.9, past cartel behaviour (ie explicit coordination) may suggest that
tacit coordination is difficult. Conversely, past cartel behaviour may provide an
indicator of the likelihood of tacit coordination where:
• the operation of the cartel establishes or strengthens one of the conditions for
coordination; and
• the type of cartel behaviour observed is the same as the type of tacit
coordination anticipated.72
5.5.8 If in their view the pre-merger market showed (tacitly or explicitly) coordinated
outcomes, the Authorities will consider whether the conditions for coordination
have been strengthened or weakened as a result of the merger. In general, a
merger in a market already showing coordinated outcomes would be likely to
make coordination more sustainable or more effective, unless the structure and
scale of the merged firm is so different from those of its predecessors that the
incentive to coordinate has been removed.
Market characteristics conducive to coordination

5.5.9 As well as considering whether or not there is evidence of pre-existing co
ordination, the Authorities will analyse the characteristics of the market for
evidence of the ability to coordinate. All three of the following conditions must be
satisfied for coordination to be possible:
(a) Firms need to be able to reach and monitor the terms of coordination.
(b) Coordination needs to be internally sustainable among the coordinating

group—ie firms have to find it in their individual interests to adhere to the
coordinated outcome.
(c) Coordination needs to be externally sustainable, in that there is little

likelihood of coordination being undermined by competition from outside the
coordinating group.
(a) Ability to reach and monitor the terms of coordination

5.5.10 For coordination to emerge, the firms involved need to be able to reach a
common understanding about their objectives (for example, a price below
72 For example, an explicit agreement to share local markets geographically may lay down ground rules for tacit
coordination in the future over, say, subsequent store openings.

which they would not sell). Such an understanding need not involve explicit
communication; for example, the terms of coordination might emerge over time
through repeated interaction.
5.5.11 In assessing whether the firms in a market would be able to reach an

understanding on the terms of coordination, the Authorities may consider, for
example:
• the number of firms in the market—the fewer firms, the easier it will be to
reach an understanding; and
• the degree of complexity in the environment in which firms interact—the

more complex this environment, the more difficult it will be for firms to reach
a common understanding (in particular for tacit coordination). The degree
of complexity will depend on the number and type of products sold and the
number of aspects of competition over which firms compete (eg price or non-
price factors), as well as the extent to which firms differ in their capabilities,
product portfolios, customer mix and strategies. Where there are fewer
products and the aspects of competition over which the firms compete are
simpler, it may be easier for the firms in the market to identify a focal point
around which to coordinate.
5.5.12 To sustain coordination, firms will generally need to be able to monitor each
other’s behaviour sufficiently to ensure that deviation from the coordinated
outcome can be detected. Price transparency will typically assist such
monitoring, but is not a necessary factor for coordination to be sustained.
5.5.13 In assessing whether firms are likely to be able to monitor an understanding

post-merger, the Authorities may consider:
• evidence on the ease with which firms can detect the choices of their rivals.
The analysis will depend on the particular theory of coordinated effects being
investigated. For example, an understanding in relation to the allocation of
customers may be feasible even if the firms in the market cannot observe
each other’s prices. The Authorities may also consider whether firms can infer
their rivals’ actions from market outcomes even if they cannot observe them
directly. For example, a firm’s knowledge of its own or competitors’ sales
volumes and capacities might, in some contexts, provide enough information
to determine whether or not deviation from coordination is taking place; and
• the number of firms; it will generally be easier for a firm to know what its rivals
are doing when there are fewer of them.
5.5.14 The existence of significant structural links between firms in the market (such
as being each other’s customers or suppliers, holding cross-shareholdings or
belonging to trade associations) may also assist in reaching and monitoring the
terms of coordination.
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(b) Internal sustainability

5.5.15 Coordination will be sustainable only where the additional profit from
coordination is sufficiently high, and there is an effective mechanism to punish
deviation. If coordination is not sufficiently profitable, or the punishment is not
sufficiently swift and painful, a firm may prefer to deviate. It might do so if the
short-term gain that the firm makes from having a more competitive offer than
the coordinating firms outweighs the costs to it of future punishment. Such
punishment may take the form of a reversion to more intense competition by the
other firms rather than a deliberate punitive strategy on their part.
5.5.16 In assessing whether the coordination would be internally sustainable, the

Authorities will consider, for example:
• how swiftly punishment would follow on from deviation, and whether

customers can encourage deviation by offering long-term contracts (which
prevent immediate punishment by fixing the terms of firms’ competitive offers
during the period of the contract);
• the extent to which punishing the deviating firm is, or would be, costly to other
coordinating firms;
• the number of firms—all else being equal, the greater the number of firms, the
larger the profit that deviation produces and the less sustainable coordination
becomes. Additionally, the cost to the deviating firm of punishment (ie forgone
profits from coordination) is lower when those profits are shared between
more firms; and
• whether there are significant asymmetries between firms—where this is the

case, firms which are dissimilar to each other have weaker incentives to
coordinate. For example, it may not be in the interests of larger coordinating
firms to retaliate when faced with a small deviating rival, if this would eliminate
profits from coordination in the market as a whole. This lack of an incentive to
retaliate can undermine coordination.
(c) External sustainability

5.5.17 Coordination will be sustainable only if the outside competitive constraints on the
firms involved in coordination are relatively limited. It is not necessary for all firms
in the market to be involved in coordination but those firms which coordinate
need to be able collectively to exercise a degree of market power.
5.5.18 In assessing whether coordination would be externally sustainable the

Authorities may consider:
• whether existing competitors outside the coordinating group (the competitive

‘fringe’) can take significant business from the coordinating group. External
sustainability will typically be easier where the competitive fringe does not
impose a strong competitive constraint and is unlikely to be able to expand;

• whether there are barriers to entry. If barriers to entry are high, coordination is
more likely to be sustainable;
• whether customers have buyer power. Coordination is more likely to be

sustainable if customers have little or no countervailing buyer power; and
• whether there is a maverick. Coordination will be harder to sustain where

there is a firm with substantially different incentives to coordinate than
its rivals, and with the capacity to take significant share from any group
of firms that tried to coordinate without its participation. Such a firm is
sometimes termed a ‘maverick’. For example, a firm might value having a
reputation for offering the lowest price in the market, and might consider
itself likely to sacrifice profits in the long term if it were to lose that reputation
by coordination. Whatever the cause of its behaviour, a maverick may be
particularly disruptive to coordination.
Effect of the merger

5.5.19 The Authorities will consider the impact of the merger on the likelihood and
effectiveness of coordination. In doing so, the Authorities will consider the
effect of the merger of any or all of the three conditions in paragraph 5.5.9. For
example, as the number of firms in the market falls, it becomes easier to reach
agreement and monitor compliance. The incentives to sustain coordination will
also be higher in markets with few firms since any deviation will be relatively
easily detectable. Similarly, where a merger results in greater symmetry in a
market, this can make it easier to reach and monitor the terms of coordination.
The incentives to sustain coordination will also be higher in a symmetric
market, as the costs of punishing deviation are borne more evenly across the
coordinating group.
Section 5.6: Non-horizontal mergers

5.6.1 Non-horizontal mergers (see paragraph 4.1.4) bring products together that do
not themselves compete but may be related. They include vertical mergers
(including diagonal mergers) and conglomerate mergers. Non-horizontal mergers
do not involve a direct loss of competition between firms in the same market,
and it is a well-established principle that most are benign and do not raise
competition concerns. Nevertheless, some can weaken competition and may
result in an SLC.
5.6.2 Examples of situations in which products are related so that the Authorities may
assess whether a merger gives rise to an SLC on the basis of non-horizontal
effects include where there is a:
• vertical merger between an upstream supplier and a downstream customer

which purchases the supplier’s goods, either as an input into its own
production or for resale;
• diagonal merger between an upstream supplier and a downstream

competitor of the customers that purchase the supplier’s goods; and
Page 49
• conglomerate merger of two suppliers of goods which do not lie within

the same market, but which are nevertheless related in some way; for
example because they are complements (so that a fall in the price of
one good increases the customer’s demand for another); or because
there are economies of scale in purchasing them (so that customers buy
them together).
5.6.3 Any given merger can have aspects of more than one of the above. For example,
a merger may be characterised as part vertical and part diagonal in terms of its
effects on competition.
5.6.4 Non-horizontal mergers can lead to efficiencies (see section 5.7, in particular
paragraphs 5.7.10 and 5.7.11), and this may result in the merged firm having
increased incentives to compete to take business from rivals. This greater
incentive to compete can result in an increase in rivalry.
5.6.5 However, under certain conditions, non-horizontal mergers can weaken rivalry.
The theories of harm raised by such mergers typically involve the merged firm
harming the ability of its rivals to compete post-merger, for example by raising
effective prices to its rivals, or by refusing to supply them completely. Such
actions may harm the ability of the merged firm’s rivals to provide a competitive
constraint into the future.
5.6.6 Despite differences in detail between cases, the Authorities will typically frame
their analysis of non-horizontal mergers by reference to the following three
questions:
(a) Ability: Would the merged firm have the ability to harm rivals, for example
through raising prices or refusing to supply them?
(b) Incentive: Would it find it profitable to do so?
(c) Effect: Would the effect of any action by the merged firm be sufficient to
reduce competition in the affected market to the extent that, in the context of
the market in question, it gives rise to an SLC?
5.6.7 In practice, the analysis of these questions may overlap and many of the factors
may affect more than one question. Therefore, the Authorities’ analysis of ability,
incentive and effect may not be in distinct chronological stages but rather as
overlapping analyses. So as to reach an SLC finding, all three questions must be
answered in the affirmative.
5.6.8 The following paragraphs, 5.6.9 to 5.6.12, illustrate how the Authorities might
consider these questions in relation to a vertical merger where the theory of
harm relates to the consideration of partial input foreclosure. The subsequent
paragraphs, 5.6.13 and 5.6.14, outline the approach the Authorities might take to
some other theories of harm arising from non-horizontal mergers.

Analysing partial input foreclosure

5.6.9 By way of illustration, this section considers how the Authorities would approach
a vertical merger between an upstream input provider and a downstream
manufacturer of a final product. The theory of harm to be assessed is that
the merged firm could increase the price it charges for the input to rival
manufacturers. This in turn would make it harder for rival manufacturers to
compete by increasing their costs, making them less competitive. Competition in
manufacturing may thus be lessened.
Ability
5.6.10 In assessing the ability of the merged firm to engage in partial input foreclosure,
the Authorities may consider evidence on the following factors:
(a) The cost of the input relative to all costs of the final product. All else being
equal, if the input accounts for only a small part of the total costs incurred,
the merged firm will be less able to harm its rival manufacturers’ ability to
compete than if the input accounts for a greater part of the total costs.
(b) The extent to which rival manufacturers can avoid a price increase by
switching away from this input. If downstream rivals can turn to many good
substitutes for the input, the merged firm will be less able to impose a price
increase than if there were few alternative providers of the input.
(c) Pass-through of cost increases. The Authorities will consider the extent to
which any increases in the costs of the input to rival manufacturers would be
passed on to customers of the final product.
Incentive
5.6.11 To assess whether the merged firm would have an incentive to increase the
prices charged for the input to its rival manufacturers, the Authorities will
consider the factors affecting the profitability of such an increase in the input
price, and the extent to which these factors change as a result of the merger. In
particular, the Authorities may assess the following:
(a) Loss of profits in the input market. The merged firm increases the input price
but loses sales of the input as rival manufacturers switch to alternatives for
the input. This switching will be more costly to the merged firm if competition
in the input market is intense.
(b) Gain in profits in the market for the final product. The merged firm gains from
partial input foreclosure if it forces rival manufacturers to raise their prices
for the final product, and, as a result, customers in the market for the final
product switch to the merged firm’s own final product. This benefit will be
reduced if:
—— customers in general do not react strongly to changes in prices for the

final product (for a discussion on types of evidence on the closeness of
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substitution and the price sensitivity of demand, see paragraph 5.2.15);

and
—— the merged firm’s final product is a poor substitute for those made by rival
manufacturers, so that the diversion ratio to the merged firm is low (for a
discussion of evidence on the diversion ratio, see paragraph 5.2.15).
(c) The relative level of variable profit margins on the input and the final product.
If variable profit margins are higher in absolute terms for the input than for
the final product, the negative impact on profitability of lost sales in the input
market may outweigh the positive impact on profitability of additional sales in
the market for the final product.
Effect
5.6.12 To the extent that the merged firm has both the ability and incentive to increase
prices so as to foreclose to some extent its rival manufacturers, the Authorities
will consider the impact of such foreclosure on competition in the downstream
market. The Authorities may also need to take account of any stimulus to rivalry
in the downstream market that may arise as a result of efficiencies from the
merger.
Analysing other situations and theories of harm

5.6.13 The Authorities will adapt the approach described in paragraphs 5.6.9 to 5.6.12
when considering other situations and theories of harm. The following are
examples:
• Total input foreclosure. In some cases, the merged firm may stop supplying
its rivals altogether. This has the effect of reducing the set of suppliers
available to rival manufacturers, which might in turn effectively reduce
competition in the input market leading to higher input prices for rivals and
potentially other harmful effects. In evaluating the ability of the merged firm
to engage in total input foreclosure, the Authorities may consider how easily
the merged firm can commit not to re-enter the input market, for example by
adopting an input technology that is incompatible with the production tech
niques of rival manufacturers of the final product.
• Customer foreclosure. In mergers involving a manufacturer and a distributor,

the merged firm might increase retail prices when selling rivals’ products
(partial customer foreclosure), or stop stocking rivals’ products altogether
(total customer foreclosure), thereby diverting customers to its own products.
The Authorities’ approach to analysing the ability, the incentive and the
effect of customer foreclosure is analogous to that for input foreclosure. In
particular, an SLC arising from customer foreclosure will only be possible
where:
—— it affects an important route to market, and the merged firm has a

significant position in the distribution market;

—— the merged firm has the incentive to engage in customer foreclosure

because the profit gained by the merged firm from selling more of its
manufactured goods exceeds the profit lost from customers who switch to
a different distributor; and
—— the impact of such customer foreclosure on the upstream market would

be significant in terms of rivalry, taking due account of any efficiencies that
enhanced the merged firm’s own incentives to compete
• Conglomerate mergers. Such mergers can raise concerns that the merged
firm might increase the selling price of one of its products when sold on a
stand-alone basis, but might not do so if customers buy both the merged
firm’s products; this would give customers an incentive to buy the second
product from the merged firm as well, putting rivals in the second product
market at a disadvantage. The Authorities’ approach involves analysing the
ability, incentive and the effect of this strategy. This takes into account the
following factors: (i) whether customers have a demand for more than one
of the products, and whether the products are complements; (ii) customer
preferences for variety and one-stop shopping; and (iii) the costs to rivals
of providing variety and one-stop shopping at a scale to enable them to
compete effectively with the merged firm.
• Diagonal mergers. A diagonal merger could, for example, arise where there
are two competing manufacturers in the market for the final product, which
use two different technologies, and where the merger is between a supplier
of the input for use in one technology and the manufacturer that uses the
competing technology. The merged firm could harm rivals of its downstream
manufacturing arm by raising the prices it charges for the input to the rival
manufacturer. The Authorities’ approach to analysing the ability, incentive
and effect of this strategy may take into account: (i) whether the input is an
important component of the final product; (ii) whether the merged firm has
a significant position in the input market; and (iii) how closely rivals’ final
products compete with the merged firm’s final product. In this type of non-
horizontal merger there is less scope for pricing efficiencies than in standard
vertical mergers.
• Commercially sensitive information. Vertical mergers may allow the merged

firm to gain access to commercially sensitive information about the activities
of non-integrated rivals in the input market or the market for the final product,
allowing it unilaterally to compete less aggressively in the market for the final
product or otherwise to put rivals at a competitive disadvantage.73
5.6.14 In certain situations, foreclosure may involve behaviour that is unlawful under
competition law. In assessing how this might impact on the incentive to carry
out the behaviour in question, the Authorities may take into account whether the
behaviour would be clearly, or highly probably, unlawful; whether the behaviour
73 See, for example, Anticipated acquisition by Boots Group plc of Alliance UniChem plc, OFT, May 2006. See also
BSkyB/ITV, CC, December 2007, where such a theory of harm was raised but not relied upon, and subsequently
dismissed.
Page 53
would be likely to be detected; and the potential consequences of such

behaviour (eg enforcement action taken by the OFT).
Coordinated effects arising from non-horizontal mergers

5.6.15 Non-horizontal mergers, like horizontal mergers, may create or strengthen co
ordinated effects. In assessing the potential for coordinated effects arising from
a non-horizontal merger, the Authorities will adopt the same general framework
as for horizontal mergers, ie they will consider whether the conditions for
coordination are met following the merger, and the effect of the merger on the
likelihood and effectiveness of coordination (see section 5.4 of these Guidelines
on Horizontal mergers—coordinated effects). However, the details of the analysis
of the impact of the merger may differ. The following are some examples of the
ways that non-horizontal mergers could affect coordination:
Vertical mergers
• A vertical merger may allow the merged firm to gain access to commercially
sensitive information about the activities of non-integrated rivals; this can
facilitate coordination.
• Furthermore, a vertical merger that results in foreclosure could reduce

the number of players in the affected market, making it easier for the
remaining players to coordinate. A vertical merger may also increase the
level of symmetry (eg in costs, if other firms in the market also are vertically
integrated) and/or transparency in the market (eg by giving input producers
control of the prices of final products), making it easier to reach and monitor a
coordinated outcome.
• In addition, a vertical merger may better align the incentives of firms in the
market to maintain coordination (eg by enabling the vertically integrated firm
to punish deviation more effectively if it becomes an important supplier to,
or customer of, other firms in the market after the merger). A vertical merger
may also increase barriers to entry, which can reduce the scope for entry to
disrupt coordination, or it may reduce buyer power if it involves the acquisition
of a customer who would otherwise disrupt coordination (see Section 5.9 of
these guidelines).
Conglomerate mergers
• A conglomerate merger may also create or strengthen coordinated effects
in several ways. For example, it may strengthen the incentives to coordinate
by enhancing the ability to agree on the collusive outcome, by increasing
the scope of punishment and by increasing the ability to detect deviations.
Foreclosed rivals may choose not to contest the situation of coordination, but
may prefer instead to benefit from the increased price level.
• In addition, conglomerate firms may compete against each other in multiple

markets. Where firms interact frequently, across multiple markets, they
may be more likely to be able to develop coordinating strategies. Deviation

from the coordinated outcome in one market can be punished in another

market, where the punishment hurts more, or in all markets. As the number of
markets affected by the merger increases, the information available on market
conditions also increases and detection of deviation may become easier.
A conglomerate merger that increases contact between rivals in multiple
markets may therefore enhance the likelihood of coordination.
Section 5.7: Efficiencies

5.7.1 While mergers can harm competition, they can also give rise to efficiencies.
5.7.2 Efficiencies arising from the merger may enhance rivalry, with the result that the
merger does not give rise to an SLC. For example, a merger of two of the smaller
firms in a market resulting in efficiency gains might allow the merged entity to
compete more effectively with the larger firms.
5.7.3 The Act also enables efficiencies to be taken into account in the form of relevant
customer benefits.74 These benefits are defined in section 30(1), and are not
limited to efficiencies affecting rivalry. In addition, the statutory definition enables
the Authorities to take into account benefits to customers arising in markets
other than where the SLC is found, and benefits to future customers.
5.7.4 It is not uncommon for merger firms to make efficiency claims. To form a view
that the claimed efficiencies will enhance rivalry so that the merger does not
result in an SLC, the OFT must be satisfied, on the basis of compelling evidence,
and the CC must expect, that the following criteria will be met:
(a) the efficiencies must be timely, likely and sufficient to prevent an SLC from
arising (having regard to the effect on rivalry that would otherwise result from
the merger); and
(b) the efficiencies must be merger specific, ie a direct consequence of the

merger, judged relative to what would happen without it.75
5.7.5 Efficiency claims can be difficult for the Authorities to verify because most of the
information concerning efficiencies is held by the merger firms. The Authorities
therefore encourage the merger firms to provide evidence to support any
efficiency claims whether as part of the SLC analysis or the consideration of
relevant customer benefits.
Types of efficiencies
5.7.6 The types of efficiencies may broadly be characterised as supply-side
efficiencies, such as cost savings, or demand-side efficiencies, such as
increased network size. Examples are provided below. In general, whether an
74 The statutory framework for the treatment of relevant customer benefits by the Authorities differs, and each
Authority has guidance explaining this treatment. See the OFT publication Mergers—exceptions to the duty to refer
and undertakings in lieu of reference(OFT1122) (to be published), and paragraphs 1.14 to 1.20 of CC8, Merger
Remedies: Competition Commission Guidelines.
75 The criteria of timeliness, likelihood and sufficiency, on the one hand, and merger specificity, on the other hand, are
also germane to a consideration of efficiencies in the context of relevant customer benefits; see OFT publication
Mergers—exceptions to the duty to refer and undertakings in lieu of reference (OFT1122) (to be published), and
paragraphs 1.16 to 1.17 of CC8, Merger Remedies: Competition Commission Guidelines.
Page 55
efficiency is considered as part of the assessment of the SLC or as a relevant

customer benefit will depend on the facts of the case.
Supply-side efficiencies
5.7.7 Supply-side efficiencies arise if the merged firm can supply its products at lower
cost as a result of the merger. Common examples of supply-side efficiencies are:
• cost reductions;
• the removal of double marginalization in vertical mergers;
• solving the ‘investment hold-up’ problem; and
• product repositioning.
Cost reductions
5.7.8 There are several ways in which horizontal, vertical and conglomerate mergers
may give rise to efficiencies in the form of cost savings. For example:
• The merged firm may benefit from economies of scale (from having a larger
scale of operations) or economies of scope (eg from the joint supply of
different products). Either of these can also produce reductions in fixed costs.
• The merged firm may be able to benefit, across its portfolio of products, from
the more efficient production processes or working methods of one of the
merger firms.
• Vertical mergers may improve the coordination of upstream production and

downstream distribution, leading to lower transaction and inventory costs.
5.7.9 The Authorities are more likely to take cost savings into account where
efficiencies reduce marginal (or short-run variable) costs as these tend to
stimulate competition and are more likely to be passed on to customers in the
form of lower prices. The Authorities will not in general give as much weight to
savings in fixed costs because they may often represent private gains to firms
and are less important in short-run price formation, although reductions in fixed
costs may play an important role in longer-term price formation.
Removal of double marginalization

5.7.10 Vertical mergers may allow the merged firm to remove (‘internalise’) any pre-
existing double mark-ups. These arise when, pre-merger, firms supplying the
input and producing the final product set their prices independently and both
charge a mark-up, resulting in prices to customers for the final product being
higher than would suit the joint interests of both firms. A vertical merger may
enable, and provide incentives for, the merged firm to internalise this double
mark-up resulting in a decrease in the price of the final product.

5.7.11 In some cases double marginalisation may not be significant pre-merger. This
may be the case, for example, if existing vertical supply agreements include a
price mechanism which eliminates the mark-up on the input.
Solving the ‘investment hold-up’ problem

5.7.12 A supply-side efficiency that may arise in vertical mergers results from aligning
the incentives within the merged firm to invest in, for example, new products,
new processes or marketing. For instance, a distributor of the manufactured
products of a firm further up the supply chain may be reluctant to invest in
promoting those products because its investment may also benefit competing
distributors/retailers. A vertical merger can alleviate this ‘investment hold-up’
problem.
Product repositioning
5.7.13 Some mergers of producers of differentiated products may result in the merged
firm and its rivals repositioning (or ‘rebranding’) their products after the merger.76
The merger firms may seek to reduce the cannibalisation between the merger
firms’ products by increasing the differentiation between them. Their rivals may
then reposition their products between those of the merger firms. If so, post-
merger product repositioning increases variety.
5.7.14 The overall effect of product repositioning on rivalry is particularly difficult to

establish because it will be determined by increased variety plus the net effect of
product repositioning on prices. The net effect of product repositioning on prices
may be positive or negative.77
Demand-side efficiencies
5.7.15 Demand-side efficiencies arise if the attractiveness to customers of the merged
firm’s products increases as a result of the merger. Common examples of
demand-side efficiencies include:
• network effects;
• pricing effects; and
• ‘one-stop shopping’.
Network effects
5.7.16 As noted in paragraphs 5.2.20 and 5.8.6, network effects, whether direct or
indirect, arise when services are provided over a network or through a platform,
where customers value the network or platform more highly when it is used by
a greater number of other customers. Where there are direct network effects (ie
within one group of customers), a merger may improve the competitive offering
to all customers. Where network effects are indirect and involve two distinct
76 See, for example, Completed acquisition by Global Radio UK Limited of GCap Media plc, OFT, August 2008.
77 Product repositioning may reduce the substitutability between the merging products, mitigating post-merger price
increases; but it may also soften price competition generally if product varieties ‘spread out’.
Page 57
groups of customers, a merger may improve the competitive offering to some

customers but make it worse for others.
Pricing effects
5.7.17 Demand-side efficiencies may arise in a conglomerate merger when the merger
firms’ products are complements, so that lowering the price of one product
increases demand for it and for other products that are used with it. Bringing
products that are complements under common ownership may allow the merged
firm to obtain the positive effect of a fall in the price of one on sales of the others.
Achieving this effect through a merger may result in lower prices for all products
in the bundle, because it may become profit-enhancing for the firm which sells all
the complements to sell them at a lower combined price than the sum the cus
tomer would have paid to assemble the same package from different suppliers
before the merger.78
‘One-stop shopping’
5.7.18 An additional demand-side efficiency may arise when the merger firms’
products are not substitutes and customers may have a stronger incentive
to buy a range of products from a single supplier. This could be, for example,
because purchasing from a single supplier reduces transaction costs or, where
products are complementary, ensures improved product compatibility or quality
assurance. Sometimes called ‘one-stop shopping’, this is an economy of scope
in the purchase rather than in the production of goods.
Section 5.8: Barriers to entry and expansion

5.8.1 Any analysis of a possible SLC includes consideration of the responses of
others (eg rivals, potential rivals and customers) to the merger. In the longer
term competition in the market may also be affected as new firms enter, or the
merged firm’s rivals take actions enhancing their ability to compete against the
merged firm. Examples include:
• investment in new capacity, or conversion of existing capacity to a new use;
• entry using new technology enabling new production methods;
• investments in marketing and product design to reposition existing brands so
that they compete more with those of the merged firm;
• sponsorship by customers of a new entrant with guarantees of business; and
• investment in capacity by customers to make their own input so that they no
longer need to buy from the merged firm.
All of these actions can mitigate the initial effect of the merger on competition,
and in some cases may mean that there is no SLC.
5.8.2 Most of this section deals with the consideration of actual entry, or of some other
action by rivals that affects their ability to compete against the merged firm (for
78 These efficiencies are known as Cournot effects.

convenience referred to as entry or expansion). But, in some cases, the fear of

entry might deter the merged firm from exploiting any market power resulting
from the merger. In such cases the Authorities need not expect that entry would
actually take place. However, the Authorities consider this circumstance to be
rare; it is discussed in paragraphs 5.8.14 and 5.8.15.
5.8.3 In assessing whether entry or expansion might prevent an SLC, the Authorities
will consider whether such entry or expansion would be:
(a) timely;
(b) likely; and
(c) sufficient.
5.8.4 Potential (or actual) competitors may encounter barriers which adversely affect
the timeliness, likelihood and sufficiency of their ability to enter (or expand in)
the market. Barriers to entry are thus specific features of the market that give
incumbent firms advantages over potential competitors. Where entry barriers are
low, the merged firm is more likely to be constrained by entry; conversely, this
is less likely where barriers are high. The strength of any given set of barriers to
entry or expansion will to some extent depend on conditions in the market, such
as a growing level of demand.
Types of barriers to entry and expansion

5.8.5 The four broad categories of barriers to entry or expansion are:
• Absolute advantages for current market players—including:
—— legal advantages, such as government regulations that limit the number

of market participants (eg restrictions on the number of licences granted),
and tariff and non-tariff trade barriers; and
—— technical advantages, such as preferential access to essential facilities or

intellectual property rights,79 which make it difficult for any new entrant to
compete effectively.
• Intrinsic/structural advantages—arising from the technology, production

methods or other factors necessary to establish an effective presence in the
market (eg initial set-up costs, costs associated with investment in specific
assets, research and advertising). Such costs are more likely to deter entry
or expansion where a significant proportion of them are sunk, ie the costs
cannot be recovered when exiting from the market.
• Economies of scale—which arise where average costs fall as the level of

output rises.80 They may prevent small-scale entry from acting as an effective
competitive constraint in the market. Further, in the presence of economies
79 For a case in which access to protected data was cited as a barrier to entry, see Nufarm/A H Marks, CC, February
2009, paragraph 6.83.
80 The Authorities note that economies of scale may exist only over a limited range of output, and may be exhausted
past a certain level of output.
Page 59
of scale large-scale entry or expansion will generally be successful only if it

expands the total market significantly, or substantially replaces one or more
existing firm; and if the entrant can afford the risk that such investment will
involve, especially in terms of sunk costs.
• Strategic advantages—which arise where incumbent firms have advantages

over new entrants because of their established position (sometimes called
‘first-mover advantages’). These advantages can flow, for example, from the
experience and reputation which incumbents have built up, or from the loyalty
which they have attracted from customers and suppliers. Incumbent firms
may sometimes behave strategically in responding to the threat of entry, for
example by lowering prices or by investing in additional capacity or additional
brands to deter entry.
5.8.6 Strategic advantages may be particularly acute in markets with direct or indirect
network effects (see paragraphs 5.2.20 and 5.7.16). Direct or indirect network
effects can make the market prone to ‘tipping’. Tipping arises where one firm,
or technology, gains an advantage in the market and the balance of power in
the market moves in its direction, leaving it as the unassailable leader. Tipping
may create switching costs for existing customers, and often means that in the
presence of one network it may not be possible for a network configured in a
different way to be viable. In markets characterised by network effects, a likely
entrant will need to take the risk of developing new infrastructure but may not
succeed in creating the necessary demand to make this profitable.
5.8.7 In assessing tipping, the Authorities will consider whether or not customers
would be willing to switch to a new supplier. Customers’ willingness will depend
on the costs and benefits to them of switching. To assess these, the Authorities
may take into account: the (actual or perceived) cost of switching, brand loyalty,
the length of existing contracts and the closeness of relationships between
suppliers and customers. In addition, customers may be willing to sponsor and/
or facilitate new entry.
Likelihood of entry or expansion

5.8.8 The Authorities will consider not only the scale of any barriers to entry and/
or expansion that may impact on the likelihood of entry or expansion but also
whether firms have the ability and incentive to enter the market (or the intent to
do so). For example, in a market characterised by low barriers to entry and/or
expansion, entrants may nevertheless be discouraged from entry by the small
size of the market, or the credible threat of retaliation by incumbents (whether
in the same market as the merged firm or another where that new entrant is
already present).
5.8.9 In assessing the likelihood of post-merger entry or expansion, the Authorities will
consider whether entry or expansion is likely to take place if the entrant expects
post-entry prices to be at pre-merger levels. This is because, if prices were to
rise post-merger, only an entrant (or an incumbent) who would find it profitable to

operate (or add capacity) in the market at pre-merger prices is likely to enter (or
expand) and return prices to pre-merger levels.
Scope of entry or expansion

5.8.10 To be considered a competitive constraint, entry or expansion should be of
sufficient scope to deter or defeat any attempt by the merged firm to exploit any
lessening of competition resulting from the merger. Small-scale entry, when the
market share of the entrant is small compared with that of the merged firm, may
nonetheless be sufficient to prevent an SLC for undifferentiated goods where
there are no barriers to further expansion. By contrast, small-scale entry by a
producer of differentiated goods may be insufficient, even when the entry may
be the basis for later expansion. For example, entry into some market niche
may be possible, but the niche product may not necessarily compete strongly
with other products in the overall market and so may not constrain incumbents
effectively.
Timeliness of entry or expansion

5.8.11 Entry and/or expansion must also be expected to be sufficiently timely and
sustained to constrain the merged firm. The Authorities may consider entry or
expansion within less than two years as timely, but this is assessed on a case-
by-case basis, depending on the characteristics and dynamics of the market, as
well as on the specific capabilities of potential entrants.
Assessment of entry or expansion

5.8.12 In assessing whether entry and/or expansion might act as an effective
competitive constraint on the merged firm, the Authorities will typically gather
information on several relevant factors:
• the history of past entry or expansion; this will include a consideration of

the costs of such entry, how long any entrants traded in the market and
the effects that entry or expansion had on competition in the market—in
particular, whether past entry or expansion modified the pattern of behaviour
and competition;81
• evidence of planned entry or expansion by third parties;
• direct observations, or statistical information, on barriers to entry, expansion

and exit;
• the costs involved in entry or expansion and in operating at the minimum

efficient scale necessary to achieve a reasonably competitive level of costs
(and consequently to avoid any cost disadvantage from operating below the
minimum efficient scale);
81 See Nufarm/A H Marks, CC, February 2009, paragraph 6.84
Page 61
• the period of time over which costs of entry or expansion might be recovered
so as to assess whether entry or expansion will be profitable (at pre-merger
prices);
• the existence of long-term contracts;
• the cost of exiting from the market (so as to establish if the costs of entering
the market are so large and sunk that they cannot be recovered upon exit);
• the potential effect of technological change and innovation on barriers to

entry or expansion;
• the ability and incentive of customers to sponsor entry or expansion in the

relevant market(s);
• the possibility of imports or supply-side reactions to the extent that these have
not already been taken into account in market definition, for example because
they would not occur quickly enough to affect the market definition; and
• the likely response to entry or expansion by incumbent firms.
5.8.13 The Authorities will also consider how the merger may affect the likelihood
of new entry or expansion. The merger may increase barriers to entry and/or
expansion by, for example, allowing the merged firm to benefit from positive
network effects, strengthening its incumbency advantage in a network market
(see paragraphs 5.2.20, 5.8.6 and 5.7.16). A larger merged firm might also be
perceived to increase the risk involved in entry or expansion by potential new
entrants or existing competitors since the larger the firm, the more it might be
expected to defend its position in the market.
Constraints from potential entry

5.8.14 In some cases, the merged firm may not be able to exploit any loss of
competition arising from the merger because of the threat of potential entry.
Potential entry may be a constraint on the merged firm if entry would be so quick
and costless that an entrant could profitably come into the market to exploit an
opportunity afforded by high prices even if the merged firm quickly responded
to the entry by lowering its prices. (For a discussion in the context of unilateral
effects, see paragraphs 5.4.13 to 5.4.18.)
5.8.15 A constraint from potential entry is more likely when entry can take place
without the entrant incurring any substantial sunk costs, and if it can happen
within a year, although the Authorities’ assessment in any particular case will
take account of the particular features of the market in question (see paragraph
5.8.11). A constraint from potential entry may arise even though there may be no
expectation on the part of the Authorities that entry would actually occur.
Section 5.9: Countervailing buyer power

5.9.1 In some circumstances, an individual customer may be able to use its
negotiating strength to limit the ability of a merged firm to raise prices. The

Authorities refer to this as countervailing buyer power. The existence of counter

vailing buyer power will be a factor in making an SLC finding less likely, in
contrast to the scenarios discussed in paragraphs 5.4.19 and 5.4.21, where
buyer power might contribute to an SLC finding. If all customers of the merged
firm possess countervailing buyer power post-merger, then an SLC is unlikely to
arise. However, often only some—not all—customers of the merged firm possess
countervailing buyer power. In such cases, the Authorities assess the extent to
which the countervailing buyer power of these customers may be relied upon to
protect all customers.82
5.9.2 Buyer power can be generated by different factors. An individual customer’s

negotiating position will be stronger if it can easily switch its demand away from
the supplier, or where it can otherwise constrain the behaviour of the supplier.
5.9.3 Typically the ability to switch away from a supplier will be stronger if there are
several alternative suppliers to which the customer can credibly switch, or the
customer has the ability to sponsor new entry or enter the supplier’s market itself
by vertical integration. Where customers have no choice but to take a supplier’s
products, they may nonetheless be able to constrain prices by imposing costs
on the supplier. For example, customers may be able to refuse to buy other
products produced by the supplier, or, in the case of a retailer, position the
supplier’s products in less eye-catching parts of the store.
5.9.4 Even where the market is characterised by customers who are larger than the
suppliers, it does not necessarily follow that there will be countervailing buyer
power. The Authorities will assess whether and to what extent the merger is
likely to reduce the customer’s ability and incentive to pursue credibly any of the
strategies set out above. It is possible, for example, that a merger may reduce a
customer’s ability to switch or even to sponsor new entry and, if this reduction
adversely affects the negotiating position of a customer significantly, that
customer’s buyer power will not be sufficient to be countervailing.
5.9.5 Where a supplier is engaged in bilateral negotiations with each of its customers,
the relative bargaining strength of the supplier and each of its customers is
determined by their mutual dependency. In such situations it may be easier for
large customers to threaten to sponsor new entry or vertically integrate than it
would be for smaller customers who could not commit a sufficiently large volume
of purchases to make either viable. Conversely, small buyers may be in a better
position to switch suppliers because of the lower volume of their purchases.
5.9.6 The extent to which the buyer power of one customer, or group of customers,
can constrain the merged firm’s prices to all its customers (sometimes referred to
as the ‘umbrella effect’) will depend on the market concerned. Where individual
negotiations are prevalent, the buyer power possessed by any one customer will
82 See, for example, Heinz/HP Foods Group, CC, March 2006, Macaw (Holdings) Ltd/Cott Beverages Ltd, CC, April
2006, and Nufarm/A H Marks, CC, February 2009.
Page 63
not typically protect other customers from any adverse effect that might arise
from the merger.83
5.9.7 In cases where there are no bilateral negotiations between suppliers and
customers, and the market price of the input is transparent to all suppliers and
customers, buyer power may arise simply because of a buyer’s size. In these
cases, the buyer power of one or more customers may act to protect other
customers with less or no buyer power by preventing a rise in the price ultimately
paid by all customers.
5.9.8 For countervailing buyer power to prevent an SLC, it is not sufficient that it
merely existed before the merger. It must also remain effective following the
merger. To assess this, the Authorities will consider the impact of the merger on
any countervailing buyer power.
83 But there may be occasions when it does so, for example if increases in productive capacity in the market through
buyer-sponsored entry benefit all customers.

Part 6 Public interest cases

In mergers raising certain public interest considerations, the Secretary of State
for Business, Innovation and Skills may intervene. Such intervention enables the
Secretary of State to assume responsibility for determining whether or not to
refer a merger to the CC and to take the ultimate decision in respect of mergers
when defined public interest considerations are potentially relevant. Part 6 of
the guidelines outlines the three types of public interest cases, describes how
such cases are conducted and discusses the decisions falling to the CC and the
Secretary of State.84
Section 6.1: Types of cases

6.1.1 There are three categories of public interest cases:
• public interest;
• special public interest; and
• in respect of mergers with a ‘Community’ dimension, cases raising legitimate

interests.
6.1.2 These categories have in common the involvement of the Secretary of State
for Business, Innovation and Skills, who initiates them by the service of an
intervention notice. However, the procedures and issues are distinct and the
roles of the Authorities also vary compared with merger cases that do not raise
public interest issues (general mergers). The effects on competition of the merger
(ie the SLC test) are only considered by the Authorities in the first category of
cases listed above (ie public interest cases). In the second category, competition
issues are not considered. In the third category, the competition issues are
considered by the European Commission, with the Authorities and Secretary of
State considering only the public interest considerations.
Public interest cases

6.1.3 The Act enables the Secretary of State to intervene when he or she considers
that one or more of the public interest considerations specified in the Act
84 See OFT, Mergers—Jurisdictional and procedural guidance (Part 9) and DTI, Enterprise Act 2002: Public Interest
Intervention in Media Mergers.
Page 65
is or may be relevant to the consideration of a merger. The public interest

consideration may be specified at the time of intervention or may be one which
the Secretary of State considers ought to be specified (and if so, the Secretary
of State must then take appropriate action for it to become specified—see
paragraph 6.1.5).
6.1.4 Presently, the specified public interest considerations are:85
• national security (including public security);86
• the interests of maintaining the stability of the UK financial system;87 and
• the need for:
—— accurate presentation of news in newspapers;88
—— free expression of opinion in newspapers;89
—— a sufficient plurality of views in newspapers in each market for

newspapers in the UK or a part of the UK to the extent that it is reasonable
and practicable;90
—— there to be a sufficient plurality of persons with control of the media enter

prises serving every different audience in the UK, or in a particular area or
locality of the UK (the ‘plurality test’—see paragraph 6.1.14);91
—— the availability throughout the UK of a wide range of broadcasting which

(taken as a whole) is both of high quality and calculated to appeal to a
wide variety of tastes and interests;92 and
—— persons carrying on media enterprises, and for those with control of such
enterprises, to have a genuine commitment to the attainment in relation to
broadcasting of the standards and objectives set out in section 319 of the
Communications Act 2003.93
6.1.5 The Act permits the Secretary of State to modify this list of public interest
considerations, to specify a new consideration or to remove or amend an
existing consideration.
85 Section 58. The first public interest case relating to the media under the Act arose in May 2007 when the Secretary
of State referred to the CC BSkyB’s acquisition of a 17.9 per cent stake in ITV, BSkyB/ITV, CC, December 2007.
86 Section 58(1) and (2).
87 Section 58(2D). On 18 September 2008, the Secretary of State had issued an intervention notice specifying this
consideration in the context of the proposed merger between Lloyds TSB Group plc and HBOS plc. On 31 October
2008, the Secretary of State exercised his discretion not to refer the merger to the CC on the basis that the merger
would result in significant benefits to the public interest as it related to ensuring the stability of the UK financial
system and that these benefits outweighed the potential for the merger to result in anti-competitive outcomes
identified by the OFT. For the text of the decision, see www.berr.gov.uk/files/file48745.pdf.
88 Section 58(2A)(a).
89 Section 58(2A)(b).
90 Section 58(2B).
91 Section 58(2C)(a).
92 Section 58(2C)(b).
93 Section 58(2C)(c).

Special public interest cases

6.1.6 This category of cases concerns mergers which may be referred to the CC on
public interest grounds when the normal jurisdictional thresholds relating to
turnover or share of supply in the Act are not satisfied. The category comprises:
• certain media mergers (see paragraph 6.1.8); and
• mergers involving government contractors (see paragraph 6.1.9).
6.1.7 To qualify as a ‘special merger situation’, the merger, although not meeting either
the turnover or the share of supply thresholds (see paragraphs 3.3.1 and 3.3.2
and 3.3.3 to 3.3.5, respectively), falls within the meaning of a relevant merger
situation but for it not satisfying either threshold.94
6.1.8 In respect of media mergers, a special merger situation is created if either:95
(a) in relation to the supply of newspapers of any description, at least one-

quarter of all the newspapers of that description which were supplied in the
UK, or in a substantial part of it, were supplied by the person or persons by
whom one of the enterprises concerned was carried on; or
(b) in relation to the provision of broadcasting of any description, at least one-

quarter of all broadcasting of that description provided in the UK, or in a
substantial part of it, was provided by the person or persons by whom one of
the enterprises concerned was carried on.
6.1.9 In respect of mergers involving a government contractor, a special merger

situation is created if:96
(a) at least one of the enterprises concerned was carried on in the UK or

in a substantial part of it, by, or under the control of, a body corporate
incorporated in the UK; and
(b) a person carrying on one or more of the enterprises concerned was a relevant
government contractor.
6.1.10 If either of these types of special merger situation exists, and the Secretary of
State intervenes, the national security or media merger considerations as they
apply to public interest cases may be considered.97 Neither type of case involves
a competition assessment, the assessment made being confined to the relevant
public interest consideration.
94 Section 59(3)(a). Section 59(5) applies sections 23 to 32 with adjustments.

95 See section 59(3C) and (3D) and section 59A.
96 See section 59(3B) and (8).
97 Section 60. See paragraph 6.1.4.
Page 67
Mergers with a ‘Community dimension’ (‘legitimate interest’

cases)
6.1.11 In cases where a merger falls to be examined under the ECMR,98 the Act makes
provision for the Secretary of State to intervene when the Secretary of State
believes that one or more public interest considerations is relevant99 (since the
ECMR permits member states to take action to protect ‘legitimate interests’).100
The public interest grounds on which the Secretary of State may intervene are
limited to those listed in section 58 (other than the interest of maintaining the
stability of the UK financial system, which is expressly stated not to be a con
sideration for the purposes of intervention under the ECMR101).
6.1.12 Notwithstanding that the Secretary of State has intervened, the competition
assessment of the merger in this category of case remains the responsibility of
the European Commission.
Media mergers
6.1.13 Detailed guidance on the process and the Secretary of State’s approach in
media merger public interest intervention cases is available on the BIS website
(see Part 7).
6.1.14 The CC has set out its approach to the ‘plurality test’ (see paragraph 6.1.4).102
It does not regard the test as simply an exercise in counting the number of
controllers. The CC will have regard to both the range and the number of persons
with control of media enterprises. The CC will also have regard to the degree of
control exercised by one enterprise over another, including whether the extent
and level of control are increased as a result of the merger. Where control is
less than complete, the CC will consider whether in practice it would enable the
controlling enterprise to dominate the policy and the output of the controlled
enterprise. Where appropriate, the CC may distinguish between the plurality of
persons with control of media enterprises and the implications of that plurality for
the range of information and views made available to audiences.103
Section 6.2: The conduct of public interest cases

6.2.1 The three categories of public interest cases are the exceptions in the UK merger
regime that involve the Secretary of State. They have in common the issuing of
a notice by the Secretary of State.104 The effect of such a notice is to require the
OFT to investigate the merger and provide a report. Further information about the
role of the OFT and the content of the OFT’s report, and the Secretary of State’s
consideration of the OFT’s advice, including whether or not to make a reference
98 Articles 1(2) and 1(3) ECMR. See also footnote 8: the ECMR remains the official title of the regulation and its
terminology is used throughout this publication.
99 Sections 67 and 68.
100 Article 21(4) ECMR.
101 Article 2 SI 2008/2645.
102 BSkyB/ITV, CC, December 2007.
103 The CC’s approach to the ‘plurality test’ was upheld in January 2010 by the Court of Appeal in its judgment
in BSkyB and Virgin Media v. Competition Commission and BERR, http://www.bailii.org/ew/cases/EWCA/
Civ/2010/2.html.
104 Public Interest Intervention Notice (PIIN) in public interest cases, Special Public Interest Intervention Notice (SPIIN)
in special public interest cases and European Intervention Notice in cases raising legitimate interests (EIN).

to the CC, can be found in the OFT’s Mergers—jurisdictional and procedural

guidance (OFT527).
6.2.2 In cases in which the Secretary of State has intervened on media public
interest grounds, Ofcom, the regulator and competition authority for the UK
communication industries, will advise the Secretary of State on the public
interest aspects of the case.105
Reference decisions by the Secretary of State

6.2.3 In all three cases, a reference may be made by the Secretary of State to the
CC after he or she has received a report from the OFT. The Secretary of State
is required to accept the OFT’s findings on whether there is a ‘relevant merger
situation’ and, where appropriate, competition matters including the description
of undertakings the OFT considers are appropriate in lieu of a reference.106
6.2.4 Not all public interest cases in which the Secretary of State has served an
intervention notice will result in a reference to the CC being made under the
public interest provisions. This may be because the Secretary of State has
accepted undertakings in lieu of a reference,107 or other circumstances.108
Additionally, when a public interest intervention notice has been served, if the
Secretary of State decides that there is no relevant public interest consideration,
the OFT is required to deal with the matter as if it is a general merger (this may
entail making a reference to the CC under sections 22 or 33).109

6.2.5 There are several circumstances in which a reference is possible in public
interest cases, but in all of them the Secretary of State must believe that it is
or may be the case that a relevant merger situation has been created or will be
created and that the merger operates, or may be expected to operate, against
the public interest.110 The belief that the merger is against the public interest can
be formed taking into account only the relevant public interest consideration
or taking into account both that consideration and any belief that the merger
situation results or is expected to result in an SLC.

6.2.6 The Secretary of State may make a reference if he or she believes that it is
or may be the case that a special merger situation has been created or that
arrangements are in progress or contemplation that will result in such a situation,
and that one or more of the relevant public interest considerations is relevant
105 Section 44A (public interest), section 61A (special public interest) and Article 4A SI 2003/1592 (legitimate interest),
as amended by SI 2003/3180.
106 Section 46(2) (public interest), section 62(5) (special public interest) and Article 5(5) SI 2003/1592 (legitimate
interest).
107 Schedule 7, paragraph 3 (public interest and special public interest) and Schedule 2 SI 2003/1592 (legitimate
interest).
108 Section 46 (public interest), section 62 (special public interest) and Article 5 SI 2003/1592 (legitimate interest).
109 Section 56.
110 Section 45.
Page 69
to the merger and operates, or may be expected to operate, against the public
interest.111
Mergers with a ‘Community dimension’ (‘legitimate interest’ cases)

6.2.7 The Secretary of State may make a reference if he or she believes that it is or
may be the case that a ‘European relevant merger situation’ has been created
or that arrangements are in progress or contemplation that will result in such a
situation and that one or more of the relevant public interest considerations is
relevant to the merger and operates or may be expected to operate against the
public interest.112
Section 6.3: Decisions for the CC and the Secretary of State

Questions for the CC
6.3.1 The circumstances in which a case is referred and which raise public interest
considerations can vary and, depending upon the circumstances, the questions
that the CC must answer similarly vary.113 In all circumstances the CC will
consider whether:
(a) a relevant merger situation has been created or arrangements are in progress
or contemplation that will lead to a relevant merger situation; and, if so,
(b) whether the creation of the relevant merger situation operates, or may be
expected to operate, against the public interest (the public interest test).
6.3.2 However, the factors that the CC must take into account when answering the
public interest test vary according to the reference. Some references require
the CC to consider the separate question of whether the creation of the relevant
merger situation may be expected to result in an SLC. In these cases, the CC
must answer the public interest test taking account of any SLC and the relevant
public interest consideration. In other circumstances, the reference will not
require the CC to apply the SLC test and the public interest test is answered
taking account only of the relevant public interest consideration.
6.3.3 If the CC decides that the merger is against the public interest, it must then
answer questions relating to remedies:
(a) whether action should be taken by the Secretary of State under the Act to
remedy the adverse public interest effects;
(b) whether the CC should recommend the taking of other action by the
Secretary of State or others for such purposes; and, in either case,
(c) what the action should be.
111 Section 62.

112 Article 5, SI 2003/1592.
113 Section 47.

6.3.4 Additionally, if the CC has decided that there is or will be an SLC resulting from
the merger, it must answer the same remedies questions that it answers in
general mergers (assuming that the CC will be required to take action). The CC is
required to proceed as if the case was a general merger if the Secretary of State,
upon receipt of the CC’s report, decides not to make a finding.114
6.3.5 In deciding the questions mentioned in paragraphs 6.3.3 and 6.3.4, the CC must
have, in particular, regard to the need to achieve as comprehensive a solution
as is reasonable and practicable to the adverse effects to the public interest;
or, if appropriate, to the SLC and any adverse effects resulting from it.115 If it has
decided that there is or will be an SLC, the CC may also have regard to the effect
of any action on any relevant customer benefits.116
6.3.6 In these references, when considering whether there is a relevant merger

situation and, if appropriate, applying the SLC test, the CC will have regard to the
various factors explained in Parts 2 to 5 of these guidelines.
6.3.7 When reporting on both the SLC question and a relevant public interest question,
the CC will deal with each question separately. The CC will then consider
whether, overall, the merger may be expected to operate against the public
interest. Any anti-competitive outcome shall be treated as being adverse to
the public interest unless it is justified by one or more than one public interest
consideration which is relevant.117

6.3.8 In special merger cases raising public interest considerations, the CC must
answer the following questions:
(a) whether a special merger situation has been created (or arrangements for
such a situation are in progress or contemplation); and, if so,
(b) whether the creation of that situation operates (or may be expected to
operate) against the public interest.118
6.3.9 If the CC concludes that the merger operates against the public interest, it must
also consider whether remedial action is appropriate (see paragraph 6.3.3).
6.3.10 In this case, the CC will not apply the SLC test but will decide the public interest
question taking into account only the consideration mentioned in the reference.
Mergers with a ‘Community dimension’ (‘legitimate interest’ cases)

6.3.11 In these references, the CC must decide:119
114 Section 56(6).

115 Section 47(9).
116 Section 47(10). For the meaning of ‘relevant customer benefits’, see paragraph 5.7.3 and the CC’s Merger
Remedies: Competition Commission Guidelines, CC8 November 2008, paragraphs 1.14 to 1.20.
117 Section 45(6).
118 Section 63.
119 Article 6, SI 2003/1592.
Page 71
(a) whether a ‘European relevant merger situation’ is created or whether arrange

ments are in progress or contemplation; and, if so,
(b) whether the creation of the ‘European relevant merger situation’ operates, or
may be expected to operate, against the public interest, taking into account
only the public interest consideration mentioned in the reference.
6.3.12 If the CC decides that the merger situation is expected to operate against the
public interest, it must also answer remedy questions similar to those applying to
public interest and special public interest cases (see paragraph 6.3.3).
Decisions for the Secretary of State

6.3.13 On receipt of the CC’s report, the Secretary of State has 30 working days in
which to make a decision on the questions the CC had to decide. In public
interest cases, the Secretary of State must accept the CC’s decision on whether
there is a relevant merger situation and whether that merger results in an SLC.120
In special public interest cases, the Secretary of State must accept the CC’s
decision on whether there is a special merger situation.121 In mergers with a
‘Community dimension’, the Secretary of State must accept the CC’s decision on
whether there is a ‘European relevant merger situation’.122
6.3.14 In all three categories of cases, when deciding whether the merger is against
the public interest, the Secretary of State is not bound by the CC’s views
on the public interest test, having discretion in relation to the public interest
consideration. The Secretary of State also has discretion when considering
whether and which remedies are necessary to address the adverse public
interest effects.123 If the Secretary of State decides that the merger is against
the public interest, he or she has the power to take remedial action.124 In public
interest cases, if the Secretary of State decides that the public interest issue
is not relevant, the CC then decides how to remedy any competition issue
identified.125
120 Section 54(7).

121 Section 66(4).
122 Article 12, SI 2003/1592.
123 Section 54 (public interest), section 66 (special public interest) and Article 12 SI 2003/1592
(legitimate interest).
124 Section 55 (public interest), section 66 (special public interest) and Article 12 SI 2003/1592
(legitimate interest).
125 Section 56.

Publications
relevant to the UK
Part 7 merger regime
Competition Commission publications
www.competition-commission.org.uk
CC1 Competition Commission Rules of Procedure
CC4 General Advice and Information
CC5 Statement of Policy on Penalties
CC6 Chairman’s Guidance to Groups
CC7 Chairman’s Guidance on Disclosure of Information in

Merger and Market Inquiries
CC8 Merger Remedies: Competition Commission Guidelines
CC9 Water Merger References: Competition Commission Guidelines
CC12 Disclosure of Information by the Competition Commission

to other public bodies
Competition Commission Annual Report and Accounts
Forthcoming: Mergers—procedural guidance
OFT publications
www.oft.gov.uk
OFT527 Mergers—jurisdictional and procedural guidance
OFT1122 Mergers—exceptions to the duty to refer and undertakings in lieu of

reference (to be published)
Competition Appeal Tribunal publications

www.catribunal.org.uk
Competition Appeal Tribunal Rules
Department for Business, Innovation and Skills publications

http://www.bis.gov.uk/policies/business-law/competition-matters/mergers
DTI, Enterprise Act 2002: Public Interest Intervention in Media Mergers
Page 73
CC2 (Revised) OFT1254
CC publications are available at:
www.competition-commission.org.uk/rep_pub
OFT publications are available at:

www.oft.gov.uk/publications
Published by the Competition Commission and the Office of Fair Trading

© Crown copyright 2010
CORNERSTONE RESEARCH
ANTITRUST CAPABILITIES
F
Among the Antitrust Cases or more than two decades Cornerstone Cornerstone Research works with affili-
Discussed Inside… Research staff have provided sophisti- ated faculty and industry experts in a
cated economic analysis and expert distinctive “partnership” that combines the
Aguilar v. Atlantic Richfield testimony in antitrust litigation and regula- strengths of the business and academic
Cingular–AT&T Wireless Merger tory matters. During that time we have been worlds. Several of our senior staff also serve as
internationally recognized as one of the lead- testifying experts. Our staff consultants have
Clorox v. Reckitt & Colman
ing firms involved in complex antitrust advanced degrees in economics, finance,
Collins v. International Dairy Queen litigation and regulation. accounting, and business, are familiar with
EchoStar–DirecTV Merger Our experience and expertise span a the litigation process, and are committed to
broad spectrum of antitrust issues, including producing outstanding results.
Glaxo–Burroughs Wellcome Merger
price fixing and other horizontal practices, Over the years we have applied our exper-
HFCS Antitrust Litigation monopolization, bundling, predation, tying, tise in hundreds of antitrust matters, many
In re Cigarette Antitrust Litigation exclusionary practices, class certification, requiring contributions from multiple
mergers, and antitrust issues associated with experts, extensive written reports, trial prepa-
In re Vitamins Antitrust Litigation
intellectual property. ration, demonstrative exhibits, and testimony.
Polyester Staple Antitrust Litigation We have worked on some of the most Cornerstone Research has the experience to
S&M Farm Supply v. Pharmacia
prominent antitrust cases in recent decades, address complex economic problems and to
including private litigation, Department of communicate findings effectively to those
Spirit Airlines v. Northwest Airlines Justice and Federal Trade Commission mat- involved in the litigation process. We provide
Thales Avionics v. Matsushita ters, and matters before other regulatory the dedication to accuracy and reliability that
Avionics Systems agencies such as the Federal Communica- such litigation requires.
Union Pacific–Southern Pacific tions Commission.
Railroad Merger
Verdin v. R&B Falcon Drilling
MONOPOLIZATION AND EXCLUSIONARY PRACTICES
Recent court decisions in Microsoft, Spirit Airlines, Inc. v. Thales Avionics, Inc. v. Matsushita
LePage’s, Dentsply, and Spirit Airlines, Northwest Airlines, Inc. Avionics Systems Corp., et al.
among others, have focused attention Retained by Kenny Nachwalter Retained by Dewey Ballantine
on monopolization claims. As a result, Spirit Airlines alleged that Northwest Air- Thales Avionics, Inc. alleged that Pana-
certain pricing practices, such as loyalty lines engaged in predatory conduct on two sonic Avionics Corp., formerly Matsushita
discounts, special pricing, and bundled domestic routes from Northwest’s Detroit hub. Avionics Systems Corp., had engaged in
rebates, are now under scrutiny in These allegations related to Northwest’s deci- predatory pricing with respect to in-flight
numerous industries. Analyzing whether sions to cut prices and raise capacity while entertainment systems.
such practices are potentially anticom- Spirit competed against it, and its later rever- Counsel for Panasonic retained Professor
petitive requires understanding when sal of these actions once Spirit had been Daniel Rubinfeld of the University of Califor-
they may be attributable to healthy forced to exit these routes. nia, Berkeley, and Cornerstone Research to
competition among firms, efficiencies On behalf of Spirit, Cornerstone Research study issues of liability. Professor Rubinfeld
associated with economies of scale or supported Professor Kenneth Elzinga of the analyzed the market for in-flight entertain-
scope, or the natural results of “hard University of Virginia, who presented an ment products and Panasonic’s pricing and
bargaining” between buyers and sellers. overall framework for the liability analysis, costs. He showed, among other things, that
Alternatively, such practices may reflect and Professor David Mills of the University plaintiff’s cost accounting expert had not
an attempt by a dominant firm to fore- of Virginia, who addressed recoupment. properly compared Panasonic’s prices with its
close competition. Dr. Michael Keeley of Cornerstone Research costs, and that when the analysis was cor-
Cornerstone Research has extensive analyzed Spirit’s damages. rected, plaintiff’s contention that Panasonic’s
experience in conducting the economic The district court awarded summary judg- pricing was predatory was not sustainable.
analysis of such monopolization claims, ment to Northwest, but a panel of the Sixth The U.S. District Court for the Central
using approaches rooted in sound eco- Circuit unanimously reversed the district District of California granted defendants’
nomic theory and rigorously supported court’s decision. The panel quoted the work of motions to exclude the testimony of all three
with empirical evidence. our experts at length in its opinion, and stated of Thales’s economic and accounting experts
that “a reasonable trier of fact could find that and granted summary judgment to Pana-
at the time of predation, Northwest’s prices sonic on all of Thales’s claims.
Clorox v. Reckitt & Colman were below its relevant costs for these routes,
Retained by Simpson Thacher & Bartlett the market in the two relevant geographic Collins, et al. v. International
routes was highly concentrated, Northwest Dairy Queen, Inc. and
American Dairy Queen Corp.
When an antitrust counterclaim arose in
possessed overwhelming market share, and
Retained by Gray Plant Mooty
a trademark infringement suit, defending
and by Bondurant, Mixson & Elmore
counsel retained Cornerstone Research to the barriers to entry were high. Accordingly, a
assess the economics of the antitrust allega- reasonable trier of fact could conclude that
Northwest engaged in predatory pricing…in Franchisees of International Dairy Queen
tions. We worked with Professor Kenneth
order to force Spirit out of the business.” The (IDQ) alleged that IDQ illegally tied approved
Elzinga of the University of Virginia to assess
case is pending. products, which franchisees were required to
questions of market definition and monopo-
purchase, to its franchise licenses. They also
lization and with Professor Carol Scott of
claimed that IDQ colluded with distributors
UCLA to examine new product development
to monopolize a purported market for
and brand equity. We helped both experts to
approved products.
prepare affidavits in support of a motion for
Cornerstone Research demonstrated that
summary judgment, which the district court
IDQ did not have the ability or the long-term
granted in favor of our client. The Second
incentives to act as a monopolist. The case
Circuit affirmed this ruling on appeal.
settled favorably for the defendants.
2
MERGERS AND ACQUISITIONS
Cornerstone Research has analyzed the EchoStar–DirecTV Merger Glaxo–Burroughs Wellcome Merger
potential effects of mergers, joint ven- Retained by Department of Justice Retained by Simpson Thacher & Bartlett
tures, and certain types of collaborations and by State Attorneys General
Cornerstone Research assisted counsel
between competitors in conjunction with This case concerned an acquisition that, if during the Glaxo and Burroughs Wellcome
both government regulatory inquiries and completed, would have combined the only merger, which created the largest pharma-
private litigation. Such analysis typically two national, direct broadcast satellite suppli- ceutical firm in the world. As part of the
requires sophisticated techniques to ers of television programming. EchoStar had merger agreement, Glaxo agreed to divest a
define relevant markets, determine agreed to acquire Hughes (the parent com- substantial research project. Working with
competitive interactions, analyze the pany of DirecTV) for $26 billion, and, Professors Michael Gibbons of the Wharton
potential impact on prices, and assess pursuant to Hart-Scott-Rodino, the parties School and Henry Grabowski of Duke Univer-
whether there are efficiencies associated submitted the proposed acquisition to the sity, we analyzed the procompetitive effect of
with the collaboration. Department of Justice (DOJ) for approval. the research project’s divestiture.
Absent the acquisition, these two firms com-
peted with only a single cable television firm Union Pacific–Southern Pacific
Cingular–AT&T Wireless Merger each in most markets, and were the only Railroad Merger
Retained by Axinn, Veltrop & Harkrider distributors of multi-channel video program- Retained by Covington & Burling
and by Arnold & Porter and by Harkins Cunningham
ming in many rural markets.
This $41 billion merger created the The DOJ and participating State Attorneys The Union Pacific and Southern Pacific
largest wireless phone company in the United General retained Professor Robert Porter of railroads completed a $5.4 billion merger
States. Cornerstone Research was retained by Northwestern University and Cornerstone that created the largest railroad network in
counsel for BellSouth and SBC, the parent Research to evaluate the parties’ statistical the United States. The merger was hotly con-
companies of Cingular, to support the parties analysis of how the proposed merger tested by the Department of Justice as well as
during regulatory review by the Department would affect competition. With Cornerstone many states and private parties.
of Justice and the Federal Communications Research’s support, Professor Porter explored Cornerstone Research analyzed how rail
Commission. To assess the effects of the the parties’ highly complex econometric rates paid by shippers related to the level of
merger on prices, quality, and market con- model specification and the robustness of competition in markets for transportation
centration, Cornerstone Research analyzed their results. Professor Porter’s work demon- services in the western United States. This
large, account-level data sets provided by the strated that the merger might result in a analysis included an econometric model that
parties to estimate the relationships among much larger price increase than suggested by captured specific factors affecting rail rates,
these variables at different levels of market the parties. such as length of route and existence of non-
aggregation. Our analysis demonstrated that The DOJ, joined by more than twenty State rail shipping alternatives. We applied the
the prices for wireless service were not affected Attorneys General, filed a complaint in U.S. model to a key commodity at issue in the
by variations in local markets or by common District Court in Washington, D.C., opposing merger transaction, and showed that rail
ownership of wireless and landline services, the acquisition and the parties subsequently rates in markets with only two providers were
suggesting that the merger would not lead to withdrew from the proposed merger. no higher than those in similar markets with
pockets of high-priced service. The merger In its statement the DOJ said, “We wel- three providers. We also showed that merger
and license transfers were approved, with come this decision to abandon the opponents’ analysis, when corrected, yielded
some divestitures, by the regulatory agencies. transaction. Had this merger gone forward, it no finding of anticompetitive effects. The
would have eliminated competition between Surface Transportation Board voted to
the nation’s two most significant direct approve the merger.
broadcast satellite services, Hughes’s DirecTV
and EchoStar’s DISH Network.”
3
PRICE FIXING AND HORIZONTAL COLLUSION
Cornerstone Research has evaluated In re Cigarette Antitrust Litigation On behalf of several large corporate
allegations of price fixing, agreements Retained by Heller Ehrman purchasers of vitamins, counsel retained
to allocate territories or customers, Cornerstone Research to address both liability
Class-action plaintiffs alleged that Philip
group boycotts, and other types of and damages issues. We supported Professor
Morris, Inc., R.J. Reynolds Tobacco Co.,
allegedly anticompetitive horizontal Kenneth Elzinga of the University of Virginia
Brown & Williamson Tobacco Corp., Lorillard
restraints in a variety of industries. on liability and Dr. Michael Keeley of Corner-
Tobacco Co., and Liggett Group, Inc. had ille-
Economic analysis of potential collu- stone Research on damages. Dr. Keeley based
gally conspired to fix the wholesale prices of
sion among competitors typically his damages estimates on an econometric
cigarettes sold in the United States over a
involves examining the relevant data analysis of several large data sets of vitamin
period of several years. Counsel for Philip
to determine whether and to what prices and quantities. The case settled on
Morris retained Cornerstone Research and
extent such alleged conduct resulted favorable terms for our clients.
Professor Kenneth Elzinga of the University of
in any price impact.
Virginia to assess competition in the cigarette
Price-fixing cases tend to involve High Fructose Corn Syrup
industry and to analyze the plaintiffs’ claims
large, complex data sets constructed Antitrust Litigation
regarding the alleged conspiracy.
from the business records of multiple Retained by multiple law firms
In his report, Professor Elzinga explained
defendants. Cornerstone Research has In a class-action antitrust suit, a class of
that the retail promotions did not display a
extensive experience analyzing these purchasers alleged that the five major high
pattern consistent with collusion nor did they
types of data sets, leveraging the pro- fructose corn syrup (HFCS) producers had
move in lockstep or parallel fashion. Rather,
gramming and statistical skills of our conspired to raise the price of HFCS over a
they showed competition at work. His analysis
staff as well as our substantial invest- period of several years. Cornerstone Research,
also showed that changes in the defendants’
ment in information technology. Professor Kenneth Elzinga of the University of
market shares contradicted the claim that
cigarette prices had been rigged. Professor Virginia, and Professor Christopher James of
Elzinga concluded, “Based on my analysis, the University of Florida were retained on
Aguilar, et al. v. Atlantic Richfield behalf of the defendants.
Corporation, et al. the plaintiffs’ cartel hypothesis should be
Professor Elzinga evaluated plaintiffs’
Retained by Munger, Tolles & Olson rejected as unfounded.” Agreeing with Profes-
collusion theory and concluded that the mar-
sor Elzinga’s analysis, U.S. District Court
The defendants, major gasoline refiners in Judge J. Owen Forrester granted summary ket evidence was consistent with competition
California, had been accused of fixing prices, judgment for the defendants. The Eleventh and inconsistent with collusion. Professor
restricting capacity, and limiting production Circuit upheld the finding. James reviewed plaintiffs’ model of damages
when California converted to cleaner-burning and presented an alternative analysis.
CARB gasoline. Shell Oil’s counsel retained U.S. District Court Judge Michael M. Mihm
In re Vitamins Antitrust Litigation
Dr. Michael Keeley of Cornerstone Research granted summary judgment to the defen-
to evaluate plaintiffs’ collusion theory in the In 1999, the world’s major vitamin pro- dants. Judge Mihm agreed with our experts’
underlying litigation. His research showed ducers pled guilty in the United States to analysis and found that the plaintiffs’ experts
that Shell’s pricing, capacity, and production conspiring to fix vitamin prices from 1990 to had based their conclusions on “very weak
decisions were consistent with competition 1999. The producers, including F. Hoffmann- circumstantial evidence” and on “inferences
and contradicted plaintiffs’ claims of collu- LaRoche Ltd., Rhône-Poulenc S.A., BASF AG, that the Court has found to be not reasonably
sion. In 2001, the California Supreme Court Eisai Co., Ltd., Takeda Chemical Industries, supported by the record.” The following year,
affirmed the California Court of Appeal’s Ltd., Lonza AG, Daiichi Pharmaceutical Co., in a controversial opinion, the Seventh Circuit
judgment in this case, awarding all defen- Ltd., and Degussa AG, paid fines of over $870 reversed summary judgment and remanded
dants summary judgment. million in the United States and over $1.6 bil- the case. After a further round of expert
lion worldwide. Civil suits followed the reports, the case settled.
criminal investigation.
4
CLASS CERTIFICATION
Two economic issues are usually con- Polyester Staple Raymond Verdin, et al. v.
sidered in class certification inquiries. Antitrust Litigation R&B Falcon Drilling, U.S.A., et al.
First, would every proposed class Retained by Williams & Connolly Retained by multiple law firms
and by Sidley Austin
member be affected by the allegedly Major firms in the international offshore
wrongful conduct, i.e., “common impact”? A class of direct purchasers accused the drilling industry were accused of fixing wages
Second, to the extent that such common four major polyester staple fiber producers of and other compensation for their offshore
impact can be shown, can one prove the conspiring to raise prices over several years. employees in violation of Section 1 of the
amount of any given class member’s On behalf of two of the defendants, Nan Ya Sherman Act. Plaintiffs, together with their
damages using common evidence? Plastics Corp., America and Wellman, Inc., economics experts, proposed to certify a
Other issues may also arise. For exam- Cornerstone Research assisted Professor broad class of tens of thousands of workers.
ple, there may be potential conflicts of Edward Erickson of North Carolina State In response, the defendants jointly retained
interest among proposed class mem- University in evaluating the validity of the two experts, Professor William Baumol of
bers, or the claims of class representa- plaintiffs’ class certification arguments. New York University and Dr. Michael Keeley
tives may not typify those of the class as Professor Erickson presented an empirical of Cornerstone Research, to analyze class
a whole. analysis of prices, margins, and supply and certification issues.
In antitrust class actions, it can be demand factors to demonstrate that polyester Working closely with Cornerstone Research
particularly important to conduct an staple fiber comprises several differentiated staff, Professor Baumol and Dr. Keeley ana-
economic analysis of class certifica- products that supply separate and distinct lyzed voluminous data on wages and benefits
tion issues. For example, such a study markets. In doing so, he showed that the fact over time, for each type of offshore drilling
may analyze the particulars of the of impact and amount of damages could not job and each defendant firm. Their reports
alleged conduct, the overall structure be established with class-wide proof. Both showed that the impact of the alleged con-
of the industry and the market, and the defendants have settled with the class. spiracy, if any, would need to be analyzed on
price, quality, and other aspects of an individual basis. They also showed that for
individual transactions. S&M Farm Supply v. Pharmacia multiple reasons, many class members would
Cornerstone Research has assisted Retained by Husch & Eppenberger not have sustained any damages even if
counsel in a wide variety of both plaintiffs’ allegations were true.
A putative class of direct purchasers of
direct-purchaser and indirect-purchaser Plaintiffs and all but one of the defen-
glyphosate-based and paraquat-based herbi-
antitrust class actions. We recognize the dants reached a series of settlements prior to
cides alleged a price-fixing conspiracy between
importance of evaluating these issues the hearing on class certification. In total,
the defendant, Monsanto Company (a sub-
through empirical research within a these settlements amounted to only a small
sidiary of Pharmacia at the time of the lawsuit
framework of sound economic concepts. percentage of plaintiffs’ original, multibil-
filing), and one of its competitors, Imperial
Chemical Industries. lion-dollar damages claim.
Monsanto’s counsel retained Dr. Michael
Keeley of Cornerstone Research as Monsanto’s
class certification expert. Following the filing
of expert reports, depositions, legal briefings,
and an oral argument, U.S. District Court Judge
E. Richard Webber denied plaintiffs’ motion for
class certification. The Eighth Circuit denied
plaintiffs’ writ for an interlocutory appeal, let-
ting Judge Webber’s decision stand.
5
Selected Experts
Richard J. Arnould David Card Henry G. Grabowski Matthew R. Lynde Michael Riordan
University of Illinois, University of California, Berkeley Duke University Cornerstone Research Columbia University
Urbana-Champaign
Iain M. Cockburn Robert E. Hall David E. Mills Gregory L. Rosston
Orley C. Ashenfelter Boston University Stanford University University of Virginia Stanford University
Princeton University
Patricia M. Danzon Christopher M. James David C. Mowery Suzanne Scotchmer
William J. Baumol University of Pennsylvania University of Florida University of California, Berkeley University of California, Berkeley
Princeton University
David Dranove Michael C. Keeley Barry Nalebuff John B. Shoven
Severin Borenstein Northwestern University Cornerstone Research Yale University Stanford University
University of California, Berkeley
Aaron Edlin Daniel P. Kessler Almarin Phillips Edward A. Snyder
Timothy F. Bresnahan University of California, Berkeley Stanford University University of Pennsylvania University of Chicago
Stanford University
Kenneth G. Elzinga Allan W. Kleidon Robert H. Porter Valerie Y. Suslow
Jeremy I. Bulow University of Virginia Cornerstone Research Northwestern University University of Michigan
Stanford University
Henry S. Farber John Kwoka John M. Quigley James L. Sweeney
Michelle M. Burtis Princeton University Northeastern University University of California, Berkeley Stanford University
Cornerstone Research
Ronald J. Gilson Tracy R. Lewis Peter C. Reiss Robert B. Wilson
Michael E. Burton Stanford University; Duke University Stanford University Stanford University
Cornerstone Research Columbia University
Frank Wolak
Stanford University
Selected Client Law Firms
Akin Gump Strauss Hauer & Feld Dorsey & Whitney King & Spalding Quinn Emanuel Urquhart Oliver & Hedges
Alston & Bird Drinker Biddle & Reath Kirkland & Ellis Reed Smith
Arnold & Porter Farella Braun + Martel Kirkpatrick & Lockhart Nicholson Graham Richards, Layton & Finger
Axinn, Veltrop & Harkrider Fenwick & West Latham & Watkins Robins, Kaplan, Miller & Ciresi
Baker Botts Finnegan, Henderson, Farabow, Garrett & Dunner LeBoeuf, Lamb, Greene & MacRae Schulte Roth & Zabel
Baker & Hostetler Folger Levin & Kahn Manatt, Phelps & Phillips Shartsis Friese
Baker & McKenzie Fried, Frank, Harris, Shriver & Jacobson Mayer, Brown, Rowe & Maw Shearman & Sterling
Bartlit Beck Herman Palenchar & Scott Fulbright & Jaworski McDermott Will & Emery Sheppard, Mullin, Richter & Hampton
Bingham McCutchen Gardner Carton & Douglas McKenna Long & Aldridge Sidley Austin
Boies, Schiller & Flexner Gibson, Dunn & Crutcher Milbank, Tweed, Hadley & McCloy Simpson Thacher & Bartlett
Cadwalader, Wickersham & Taft Goodwin Procter Mintz Levin Cohn Ferris Glovsky and Popeo Skadden, Arps, Slate, Meagher & Flom
Cahill Gordon & Reindel Harkins Cunningham Mitchell Silberberg & Knupp Snell & Wilmer
Chadbourne & Parke Haynes and Boone Montgomery, McCracken, Walker & Rhoads Sonnenschein Nath & Rosenthal
Choate, Hall & Stewart Heller Ehrman Morgan, Lewis & Bockius Stroock & Stroock & Lavan
Cleary Gottlieb Steen & Hamilton Hogan & Hartson Morris, Nichols, Arsht & Tunnell Sullivan & Cromwell
Clifford Chance Holland & Hart Morrison & Foerster Thompson & Knight
Cooley Godward Howrey Munger, Tolles & Olson Vinson & Elkins
Coudert Brothers Hunton & Williams O’Melveny & Myers Vorys, Sater, Seymour and Pease
Covington & Burling Husch & Eppenberger Orrick, Herrington & Sutcliffe Wachtell, Lipton, Rosen & Katz
Cravath, Swaine & Moore Irell & Manella Patton Boggs Weil, Gotshal & Manges
Davis Polk & Wardwell Jenner & Block Paul, Hastings, Janofsky & Walker Weston Benshoof Rochefort Rubalcava MacCuish
Debevoise & Plimpton Jones Day Paul, Weiss, Rifkind, Wharton & Garrison Wiley Rein & Fielding
Dechert Katten Muchin Zavis Rosenman Pepper Hamilton Williams & Connolly
Dewey Ballantine Kaye Scholer Perkins Coie Willkie Farr & Gallagher
Dickstein Shapiro Morin & Oshinsky Kelley Drye & Warren Pillsbury Winthrop Shaw Pittman Wilmer Cutler Pickering Hale and Dorr
DLA Piper Rudnick Gray Cary Kilpatrick Stockton Powell, Goldstein, Frazer & Murphy Wilson Sonsini Goodrich & Rosati
Proskauer Rose Winston & Strawn
Cornerstone Research
www.cornerstone.com
Boston Los Angeles Menlo Park New York San Francisco Washington
617.927.3000 213.553.2500 650.853.1660 212.605.5000 415.229.8100 202.912.8900
Christine S. Nelson George G. Strong, Jr. Cynthia L. Zollinger James K. Malernee Vandy M. Howell Michael E. Burton
John F. Gould Elaine Harwood Catherine J. Galley Lori Benson Matthew R. Lynde Michelle M. Burtis
Barbara Alexander Carlyn Irwin Michael C. Keeley James C. Meehan Ilene S. Friedland L. Adel Turki
Rahul Guha Allan W. Kleidon Jonathan M. Rozoff Allan L. Kretz Mary A. Woodford
David F. Marcus Daniel M. Garrett Darwin V. Neher Andrea Shepard Greg Eastman
Yesim Richardson Michael D. Topper Sharon B. Johnson
Kristin M. Feitzinger Laura E. Simmons
Joseph T. Schertler
Adam A. Wantz
Cornerstone Research is committed to client confidentiality and does not reveal clients’ names without prior permission.
Cornerstone Research is a registered service mark of Cornerstone Research, Inc. C and design is a registered trademark of Cornerstone Research, Inc. © 2006 by Cornerstone Research. All Rights Reserved.
6
Horizontal
Merger
Guidelines
U.S. Department of Justice
and the
Federal Trade Commission
Issued: August 19, 2010
Table of Contents
1. Overview..................................................................................................................................... 1
2. Evidence of Adverse Competitive Effects .................................................................................. 2
2.1 Types of Evidence................................................................................................................. 3
2.1.1 Actual Effects Observed in Consummated Mergers ....................................................... 3

2.1.2 Direct Comparisons Based on Experience...................................................................... 3
2.1.3 Market Shares and Concentration in a Relevant Market ................................................ 3

2.1.4 Substantial Head-to-Head Competition .......................................................................... 3
2.1.5 Disruptive Role of a Merging Party................................................................................ 3
2.2 Sources of Evidence.............................................................................................................. 4
2.2.1 Merging Parties............................................................................................................... 4
2.2.2 Customers ....................................................................................................................... 5
2.2.3 Other Industry Participants and Observers ..................................................................... 5

3. Targeted Customers and Price Discrimination ........................................................................... 6
4. Market Definition........................................................................................................................ 7
4.1 Product Market Definition .................................................................................................... 8
4.1.1 The Hypothetical Monopolist Test ................................................................................. 8
4.1.2 Benchmark Prices and SSNIP Size ............................................................................... 10
4.1.3 Implementing the Hypothetical Monopolist Test ......................................................... 11
4.1.4 Product Market Definition with Targeted Customers ................................................... 12

4.2 Geographic Market Definition ............................................................................................ 13
4.2.1 Geographic Markets Based on the Locations of Suppliers ........................................... 13
4.2.2 Geographic Markets Based on the Locations of Customers ......................................... 14
5. Market Participants, Market Shares, and Market Concentration .............................................. 15

5.1 Market Participants ............................................................................................................. 15
5.2 Market Shares ..................................................................................................................... 16
5.3 Market Concentration ......................................................................................................... 18
6. Unilateral Effects ...................................................................................................................... 20
6.1 Pricing of Differentiated Products ...................................................................................... 20
6.2 Bargaining and Auctions..................................................................................................... 22
6.3 Capacity and Output for Homogeneous Products............................................................... 22
6.4 Innovation and Product Variety .......................................................................................... 23

7. Coordinated Effects .................................................................................................................. 24
7.1 Impact of Merger on Coordinated Interaction .................................................................... 25
7.2 Evidence a Market is Vulnerable to Coordinated Conduct ................................................ 25

8. Powerful Buyers........................................................................................................................ 27
ii
9. Entry.......................................................................................................................................... 27
9.1 Timeliness ........................................................................................................................... 29
9.2 Likelihood ........................................................................................................................... 29
9.3 Sufficiency .......................................................................................................................... 29
10. Efficiencies ............................................................................................................................... 29
11. Failure and Exiting Assets ........................................................................................................ 32
12. Mergers of Competing Buyers .................................................................................................. 32
13. Partial Acquisitions................................................................................................................... 33
iii
1. Overview
These Guidelines outline the principal analytical techniques, practices, and the enforcement policy of
the Department of Justice and the Federal Trade Commission (the “Agencies”) with respect to
mergers and acquisitions involving actual or potential competitors (“horizontal mergers”) under the
federal antitrust laws.1 The relevant statutory provisions include Section 7 of the Clayton Act, 15
U.S.C. § 18, Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and Section 5 of the Federal
Trade Commission Act, 15 U.S.C. § 45. Most particularly, Section 7 of the Clayton Act prohibits
mergers if “in any line of commerce or in any activity affecting commerce in any section of the
country, the effect of such acquisition may be substantially to lessen competition, or to tend to create
a monopoly.”
The Agencies seek to identify and challenge competitively harmful mergers while avoiding
unnecessary interference with mergers that are either competitively beneficial or neutral. Most
merger analysis is necessarily predictive, requiring an assessment of what will likely happen if a
merger proceeds as compared to what will likely happen if it does not. Given this inherent need for
prediction, these Guidelines reflect the congressional intent that merger enforcement should interdict
competitive problems in their incipiency and that certainty about anticompetitive effect is seldom
possible and not required for a merger to be illegal.
These Guidelines describe the principal analytical techniques and the main types of evidence on
which the Agencies usually rely to predict whether a horizontal merger may substantially lessen
competition. They are not intended to describe how the Agencies analyze cases other than horizontal
mergers. These Guidelines are intended to assist the business community and antitrust practitioners
by increasing the transparency of the analytical process underlying the Agencies’ enforcement
decisions. They may also assist the courts in developing an appropriate framework for interpreting
and applying the antitrust laws in the horizontal merger context.
These Guidelines should be read with the awareness that merger analysis does not consist of uniform
application of a single methodology. Rather, it is a fact-specific process through which the Agencies,
guided by their extensive experience, apply a range of analytical tools to the reasonably available and
reliable evidence to evaluate competitive concerns in a limited period of time. Where these
Guidelines provide examples, they are illustrative and do not exhaust the applications of the relevant
principle.2
1
These Guidelines replace the Horizontal Merger Guidelines issued in 1992, revised in 1997. They reflect the ongoing
accumulation of experience at the Agencies. The Commentary on the Horizontal Merger Guidelines issued by the
Agencies in 2006 remains a valuable supplement to these Guidelines. These Guidelines may be revised from time to
time as necessary to reflect significant changes in enforcement policy, to clarify existing policy, or to reflect new
learning. These Guidelines do not cover vertical or other types of non-horizontal acquisitions.
2
These Guidelines are not intended to describe how the Agencies will conduct the litigation of cases they decide to
bring. Although relevant in that context, these Guidelines neither dictate nor exhaust the range of evidence the
Agencies may introduce in litigation.
The unifying theme of these Guidelines is that mergers should not be permitted to create, enhance, or
entrench market power or to facilitate its exercise. For simplicity of exposition, these Guidelines
generally refer to all of these effects as enhancing market power. A merger enhances market power if
it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or
otherwise harm customers as a result of diminished competitive constraints or incentives. In
evaluating how a merger will likely change a firm’s behavior, the Agencies focus primarily on how
the merger affects conduct that would be most profitable for the firm.
A merger can enhance market power simply by eliminating competition between the merging parties.
This effect can arise even if the merger causes no changes in the way other firms behave. Adverse
competitive effects arising in this manner are referred to as “unilateral effects.” A merger also can
enhance market power by increasing the risk of coordinated, accommodating, or interdependent
behavior among rivals. Adverse competitive effects arising in this manner are referred to as
“coordinated effects.” In any given case, either or both types of effects may be present, and the
distinction between them may be blurred.
These Guidelines principally describe how the Agencies analyze mergers between rival suppliers that
may enhance their market power as sellers. Enhancement of market power by sellers often elevates
the prices charged to customers. For simplicity of exposition, these Guidelines generally discuss the
analysis in terms of such price effects. Enhanced market power can also be manifested in non-price
terms and conditions that adversely affect customers, including reduced product quality, reduced
product variety, reduced service, or diminished innovation. Such non-price effects may coexist with
price effects, or can arise in their absence. When the Agencies investigate whether a merger may lead
to a substantial lessening of non-price competition, they employ an approach analogous to that used
to evaluate price competition. Enhanced market power may also make it more likely that the merged
entity can profitably and effectively engage in exclusionary conduct. Regardless of how enhanced
market power likely would be manifested, the Agencies normally evaluate mergers based on their
impact on customers. The Agencies examine effects on either or both of the direct customers and the
final consumers. The Agencies presume, absent convincing evidence to the contrary, that adverse
effects on direct customers also cause adverse effects on final consumers.
Enhancement of market power by buyers, sometimes called “monopsony power,” has adverse effects
comparable to enhancement of market power by sellers. The Agencies employ an analogous
framework to analyze mergers between rival purchasers that may enhance their market power as
buyers. See Section 12.
2. Evidence of Adverse Competitive Effects
The Agencies consider any reasonably available and reliable evidence to address the central question
of whether a merger may substantially lessen competition. This section discusses several categories
and sources of evidence that the Agencies, in their experience, have found most informative in
predicting the likely competitive effects of mergers. The list provided here is not exhaustive. In any
given case, reliable evidence may be available in only some categories or from some sources. For
each category of evidence, the Agencies consider evidence indicating that the merger may enhance
competition as well as evidence indicating that it may lessen competition.
2.1 Types of Evidence

2.1.1 Actual Effects Observed in Consummated Mergers
When evaluating a consummated merger, the ultimate issue is not only whether adverse competitive
effects have already resulted from the merger, but also whether such effects are likely to arise in the
future. Evidence of observed post-merger price increases or other changes adverse to customers is
given substantial weight. The Agencies evaluate whether such changes are anticompetitive effects
resulting from the merger, in which case they can be dispositive. However, a consummated merger
may be anticompetitive even if such effects have not yet been observed, perhaps because the merged
firm may be aware of the possibility of post-merger antitrust review and moderating its conduct.
Consequently, the Agencies also consider the same types of evidence they consider when evaluating
unconsummated mergers.
2.1.2 Direct Comparisons Based on Experience
The Agencies look for historical events, or “natural experiments,” that are informative regarding the
competitive effects of the merger. For example, the Agencies may examine the impact of recent
mergers, entry, expansion, or exit in the relevant market. Effects of analogous events in similar
markets may also be informative.
The Agencies also look for reliable evidence based on variations among similar markets. For
example, if the merging firms compete in some locales but not others, comparisons of prices charged
in regions where they do and do not compete may be informative regarding post-merger prices. In
some cases, however, prices are set on such a broad geographic basis that such comparisons are not
informative. The Agencies also may examine how prices in similar markets vary with the number of
significant competitors in those markets.
2.1.3 Market Shares and Concentration in a Relevant Market
The Agencies give weight to the merging parties’ market shares in a relevant market, the level of
concentration, and the change in concentration caused by the merger. See Sections 4 and 5. Mergers
that cause a significant increase in concentration and result in highly concentrated markets are
presumed to be likely to enhance market power, but this presumption can be rebutted by persuasive
evidence showing that the merger is unlikely to enhance market power.
2.1.4 Substantial Head-to-Head Competition
The Agencies consider whether the merging firms have been, or likely will become absent the
merger, substantial head-to-head competitors. Such evidence can be especially relevant for evaluating
adverse unilateral effects, which result directly from the loss of that competition. See Section 6. This
evidence can also inform market definition. See Section 4.
2.1.5 Disruptive Role of a Merging Party
The Agencies consider whether a merger may lessen competition by eliminating a “maverick” firm,
i.e., a firm that plays a disruptive role in the market to the benefit of customers. For example, if one
of the merging firms has a strong incumbency position and the other merging firm threatens to
disrupt market conditions with a new technology or business model, their merger can involve the loss
of actual or potential competition. Likewise, one of the merging firms may have the incentive to take
the lead in price cutting or other competitive conduct or to resist increases in industry prices. A firm
that may discipline prices based on its ability and incentive to expand production rapidly using
available capacity also can be a maverick, as can a firm that has often resisted otherwise prevailing
industry norms to cooperate on price setting or other terms of competition.
2.2 Sources of Evidence

The Agencies consider many sources of evidence in their merger analysis. The most common sources
of reasonably available and reliable evidence are the merging parties, customers, other industry
participants, and industry observers.
2.2.1 Merging Parties
The Agencies typically obtain substantial information from the merging parties. This information can
take the form of documents, testimony, or data, and can consist of descriptions of competitively
relevant conditions or reflect actual business conduct and decisions. Documents created in the normal
course are more probative than documents created as advocacy materials in merger review.
Documents describing industry conditions can be informative regarding the operation of the market
and how a firm identifies and assesses its rivals, particularly when business decisions are made in
reliance on the accuracy of those descriptions. The business decisions taken by the merging firms
also can be informative about industry conditions. For example, if a firm sets price well above
incremental cost, that normally indicates either that the firm believes its customers are not highly
sensitive to price (not in itself of antitrust concern, see Section 4.1.33) or that the firm and its rivals
are engaged in coordinated interaction (see Section 7). Incremental cost depends on the relevant
increment in output as well as on the time period involved, and in the case of large increments and
sustained changes in output it may include some costs that would be fixed for smaller increments of
output or shorter time periods.
Explicit or implicit evidence that the merging parties intend to raise prices, reduce output or capacity,
reduce product quality or variety, withdraw products or delay their introduction, or curtail research
and development efforts after the merger, or explicit or implicit evidence that the ability to engage in
such conduct motivated the merger, can be highly informative in evaluating the likely effects of a
merger. Likewise, the Agencies look for reliable evidence that the merger is likely to result in
efficiencies. The Agencies give careful consideration to the views of individuals whose
responsibilities, expertise, and experience relating to the issues in question provide particular indicia
of reliability. The financial terms of the transaction may also be informative regarding competitive
effects. For example, a purchase price in excess of the acquired firm’s stand-alone market value may
indicate that the acquiring firm is paying a premium because it expects to be able to reduce
competition or to achieve efficiencies.
3
High margins commonly arise for products that are significantly differentiated. Products involving substantial fixed
costs typically will be developed only if suppliers expect there to be enough differentiation to support margins
sufficient to cover those fixed costs. High margins can be consistent with incumbent firms earning competitive
returns.
2.2.2 Customers
Customers can provide a variety of information to the Agencies, ranging from information about their
own purchasing behavior and choices to their views about the effects of the merger itself.
Information from customers about how they would likely respond to a price increase, and the relative
attractiveness of different products or suppliers, may be highly relevant, especially when
corroborated by other evidence such as historical purchasing patterns and practices. Customers also
can provide valuable information about the impact of historical events such as entry by a new
supplier.
The conclusions of well-informed and sophisticated customers on the likely impact of the merger
itself can also help the Agencies investigate competitive effects, because customers typically feel the
consequences of both competitively beneficial and competitively harmful mergers. In evaluating such
evidence, the Agencies are mindful that customers may oppose, or favor, a merger for reasons
unrelated to the antitrust issues raised by that merger.
When some customers express concerns about the competitive effects of a merger while others view
the merger as beneficial or neutral, the Agencies take account of this divergence in using the
information provided by customers and consider the likely reasons for such divergence of views. For
example, if for regulatory reasons some customers cannot buy imported products, while others can, a
merger between domestic suppliers may harm the former customers even if it leaves the more flexible
customers unharmed. See Section 3.
When direct customers of the merging firms compete against one another in a downstream market,
their interests may not be aligned with the interests of final consumers, especially if the direct
customers expect to pass on any anticompetitive price increase. A customer that is protected from
adverse competitive effects by a long-term contract, or otherwise relatively immune from the
merger’s harmful effects, may even welcome an anticompetitive merger that provides that customer
with a competitive advantage over its downstream rivals.
Example 1: As a result of the merger, Customer C will experience a price increase for an input used in producing
its final product, raising its costs. Customer C’s rivals use this input more intensively than Customer C, and the
same price increase applied to them will raise their costs more than it raises Customer C’s costs. On balance,
Customer C may benefit from the merger even though the merger involves a substantial lessening of
competition.
2.2.3 Other Industry Participants and Observers
Suppliers, indirect customers, distributors, other industry participants, and industry analysts can also
provide information helpful to a merger inquiry. The interests of firms selling products
complementary to those offered by the merging firms often are well aligned with those of customers,
making their informed views valuable.
Information from firms that are rivals to the merging parties can help illuminate how the market
operates. The interests of rival firms often diverge from the interests of customers, since customers
normally lose, but rival firms gain, if the merged entity raises its prices. For that reason, the Agencies
do not routinely rely on the overall views of rival firms regarding the competitive effects of the
merger. However, rival firms may provide relevant facts, and even their overall views may be
instructive, especially in cases where the Agencies are concerned that the merged entity may engage
in exclusionary conduct.
Example 2: Merging Firms A and B operate in a market in which network effects are significant, implying that
any firm’s product is significantly more valuable if it commands a large market share or if it is interconnected
with others that in aggregate command such a share. Prior to the merger, they and their rivals voluntarily
interconnect with one another. The merger would create an entity with a large enough share that a strategy of
ending voluntary interconnection would have a dangerous probability of creating monopoly power in this
market. The interests of rivals and of consumers would be broadly aligned in preventing such a merger.
3. Targeted Customers and Price Discrimination
When examining possible adverse competitive effects from a merger, the Agencies consider whether
those effects vary significantly for different customers purchasing the same or similar products. Such
differential impacts are possible when sellers can discriminate, e.g., by profitably raising price to
certain targeted customers but not to others. The possibility of price discrimination influences market
definition (see Section 4), the measurement of market shares (see Section 5), and the evaluation of
competitive effects (see Sections 6 and 7).
When price discrimination is feasible, adverse competitive effects on targeted customers can arise,
even if such effects will not arise for other customers. A price increase for targeted customers may be
profitable even if a price increase for all customers would not be profitable because too many other
customers would substitute away. When discrimination is reasonably likely, the Agencies may
evaluate competitive effects separately by type of customer. The Agencies may have access to
information unavailable to customers that is relevant to evaluating whether discrimination is
reasonably likely.
For price discrimination to be feasible, two conditions typically must be met: differential pricing and
limited arbitrage.
First, the suppliers engaging in price discrimination must be able to price differently to targeted
customers than to other customers. This may involve identification of individual customers to which
different prices are offered or offering different prices to different types of customers based on
observable characteristics.
Example 3: Suppliers can distinguish large buyers from small buyers. Large buyers are more likely than small
buyers to self-supply in response to a significant price increase. The merger may lead to price discrimination
against small buyers, harming them, even if large buyers are not harmed. Such discrimination can occur even if
there is no discrete gap in size between the classes of large and small buyers.
In other cases, suppliers may be unable to distinguish among different types of customers but can
offer multiple products that sort customers based on their purchase decisions.
Second, the targeted customers must not be able to defeat the price increase of concern by arbitrage,
e.g., by purchasing indirectly from or through other customers. Arbitrage may be difficult if it would
void warranties or make service more difficult or costly for customers. Arbitrage is inherently
impossible for many services. Arbitrage between customers at different geographic locations may be
impractical due to transportation costs. Arbitrage on a modest scale may be possible but sufficiently
costly or limited that it would not deter or defeat a discriminatory pricing strategy.
4. Market Definition
When the Agencies identify a potential competitive concern with a horizontal merger, market
definition plays two roles. First, market definition helps specify the line of commerce and section of
the country in which the competitive concern arises. In any merger enforcement action, the Agencies
will normally identify one or more relevant markets in which the merger may substantially lessen
competition. Second, market definition allows the Agencies to identify market participants and
measure market shares and market concentration. See Section 5. The measurement of market shares
and market concentration is not an end in itself, but is useful to the extent it illuminates the merger’s
likely competitive effects.
The Agencies’ analysis need not start with market definition. Some of the analytical tools used by the
Agencies to assess competitive effects do not rely on market definition, although evaluation of
competitive alternatives available to customers is always necessary at some point in the analysis.
Evidence of competitive effects can inform market definition, just as market definition can be
informative regarding competitive effects. For example, evidence that a reduction in the number of
significant rivals offering a group of products causes prices for those products to rise significantly can
itself establish that those products form a relevant market. Such evidence also may more directly
predict the competitive effects of a merger, reducing the role of inferences from market definition and
market shares.
Where analysis suggests alternative and reasonably plausible candidate markets, and where the
resulting market shares lead to very different inferences regarding competitive effects, it is
particularly valuable to examine more direct forms of evidence concerning those effects.
Market definition focuses solely on demand substitution factors, i.e., on customers’ ability and
willingness to substitute away from one product to another in response to a price increase or a
corresponding non-price change such as a reduction in product quality or service. The responsive
actions of suppliers are also important in competitive analysis. They are considered in these
Guidelines in the sections addressing the identification of market participants, the measurement of
market shares, the analysis of competitive effects, and entry.
Customers often confront a range of possible substitutes for the products of the merging firms. Some
substitutes may be closer, and others more distant, either geographically or in terms of product
attributes and perceptions. Additionally, customers may assess the proximity of different products
differently. When products or suppliers in different geographic areas are substitutes for one another to
varying degrees, defining a market to include some substitutes and exclude others is inevitably a
simplification that cannot capture the full variation in the extent to which different products compete
against each other. The principles of market definition outlined below seek to make this inevitable
simplification as useful and informative as is practically possible. Relevant markets need not have
precise metes and bounds.
Defining a market broadly to include relatively distant product or geographic substitutes can lead to
misleading market shares. This is because the competitive significance of distant substitutes is
unlikely to be commensurate with their shares in a broad market. Although excluding more distant
substitutes from the market inevitably understates their competitive significance to some degree,
doing so often provides a more accurate indicator of the competitive effects of the merger than would
the alternative of including them and overstating their competitive significance as proportional to
their shares in an expanded market.
Example 4: Firms A and B, sellers of two leading brands of motorcycles, propose to merge. If Brand A
motorcycle prices were to rise, some buyers would substitute to Brand B, and some others would substitute to
cars. However, motorcycle buyers see Brand B motorcycles as much more similar to Brand A motorcycles than
are cars. Far more cars are sold than motorcycles. Evaluating shares in a market that includes cars would greatly
underestimate the competitive significance of Brand B motorcycles in constraining Brand A’s prices and greatly
overestimate the significance of cars.
Market shares of different products in narrowly defined markets are more likely to capture the
relative competitive significance of these products, and often more accurately reflect competition
between close substitutes. As a result, properly defined antitrust markets often exclude some
substitutes to which some customers might turn in the face of a price increase even if such substitutes
provide alternatives for those customers. However, a group of products is too narrow to constitute a
relevant market if competition from products outside that group is so ample that even the complete
elimination of competition within the group would not significantly harm either direct customers or
downstream consumers. The hypothetical monopolist test (see Section 4.1.1) is designed to ensure
that candidate markets are not overly narrow in this respect.
The Agencies implement these principles of market definition flexibly when evaluating different
possible candidate markets. Relevant antitrust markets defined according to the hypothetical
monopolist test are not always intuitive and may not align with how industry members use the term
“market.”
Section 4.1 describes the principles that apply to product market definition, and gives guidance on
how the Agencies most often apply those principles. Section 4.2 describes how the same principles
apply to geographic market definition. Although discussed separately for simplicity of exposition, the
principles described in Sections 4.1 and 4.2 are combined to define a relevant market, which has both
a product and a geographic dimension. In particular, the hypothetical monopolist test is applied to a
group of products together with a geographic region to determine a relevant market.
4.1 Product Market Definition

When a product sold by one merging firm (Product A) competes against one or more products sold
by the other merging firm, the Agencies define a relevant product market around Product A to
evaluate the importance of that competition. Such a relevant product market consists of a group of
substitute products including Product A. Multiple relevant product markets may thus be identified.
4.1.1 The Hypothetical Monopolist Test
The Agencies employ the hypothetical monopolist test to evaluate whether groups of products in
candidate markets are sufficiently broad to constitute relevant antitrust markets. The Agencies use the
hypothetical monopolist test to identify a set of products that are reasonably interchangeable with a
product sold by one of the merging firms.
The hypothetical monopolist test requires that a product market contain enough substitute products so
that it could be subject to post-merger exercise of market power significantly exceeding that existing
absent the merger. Specifically, the test requires that a hypothetical profit-maximizing firm, not
subject to price regulation, that was the only present and future seller of those products (“hypothetical
monopolist”) likely would impose at least a small but significant and non-transitory increase in price
(“SSNIP”) on at least one product in the market, including at least one product sold by one of the
merging firms.4 For the purpose of analyzing this issue, the terms of sale of products outside the
candidate market are held constant. The SSNIP is employed solely as a methodological tool for
performing the hypothetical monopolist test; it is not a tolerance level for price increases resulting
from a merger.
Groups of products may satisfy the hypothetical monopolist test without including the full range of
substitutes from which customers choose. The hypothetical monopolist test may identify a group of
products as a relevant market even if customers would substitute significantly to products outside that
group in response to a price increase.
Example 5: Products A and B are being tested as a candidate market. Each sells for $100, has an incremental
cost of $60, and sells 1200 units. For every dollar increase in the price of Product A, for any given price of
Product B, Product A loses twenty units of sales to products outside the candidate market and ten units of sales
to Product B, and likewise for Product B. Under these conditions, economic analysis shows that a hypothetical
profit-maximizing monopolist controlling Products A and B would raise both of their prices by ten percent, to
$110. Therefore, Products A and B satisfy the hypothetical monopolist test using a five percent SSNIP, and
indeed for any SSNIP size up to ten percent. This is true even though two-thirds of the sales lost by one product
when it raises its price are diverted to products outside the relevant market.
When applying the hypothetical monopolist test to define a market around a product offered by one
of the merging firms, if the market includes a second product, the Agencies will normally also
include a third product if that third product is a closer substitute for the first product than is the
second product. The third product is a closer substitute if, in response to a SSNIP on the first product,
greater revenues are diverted to the third product than to the second product.
Example 6: In Example 5, suppose that half of the unit sales lost by Product A when it raises its price are
diverted to Product C, which also has a price of $100, while one-third are diverted to Product B. Product C is a
closer substitute for Product A than is Product B. Thus Product C will normally be included in the relevant
market, even though Products A and B together satisfy the hypothetical monopolist test.
The hypothetical monopolist test ensures that markets are not defined too narrowly, but it does not
lead to a single relevant market. The Agencies may evaluate a merger in any relevant market
4
If the pricing incentives of the firms supplying the products in the candidate market differ substantially from those of
the hypothetical monopolist, for reasons other than the latter’s control over a larger group of substitutes, the Agencies
may instead employ the concept of a hypothetical profit-maximizing cartel comprised of the firms (with all their
products) that sell the products in the candidate market. This approach is most likely to be appropriate if the merging
firms sell products outside the candidate market that significantly affect their pricing incentives for products in the
candidate market. This could occur, for example, if the candidate market is one for durable equipment and the firms
selling that equipment derive substantial net revenues from selling spare parts and service for that equipment.
satisfying the test, guided by the overarching principle that the purpose of defining the market and
measuring market shares is to illuminate the evaluation of competitive effects. Because the relative
competitive significance of more distant substitutes is apt to be overstated by their share of sales,
when the Agencies rely on market shares and concentration, they usually do so in the smallest
relevant market satisfying the hypothetical monopolist test.
Example 7: In Example 4, including cars in the market will lead to misleadingly small market shares for
motorcycle producers. Unless motorcycles fail the hypothetical monopolist test, the Agencies would not include
cars in the market in analyzing this motorcycle merger.
4.1.2 Benchmark Prices and SSNIP Size
The Agencies apply the SSNIP starting from prices that would likely prevail absent the merger. If
prices are not likely to change absent the merger, these benchmark prices can reasonably be taken to
be the prices prevailing prior to the merger.5 If prices are likely to change absent the merger, e.g.,
because of innovation or entry, the Agencies may use anticipated future prices as the benchmark for
the test. If prices might fall absent the merger due to the breakdown of pre-merger coordination, the
Agencies may use those lower prices as the benchmark for the test. In some cases, the techniques
employed by the Agencies to implement the hypothetical monopolist test focus on the difference in
incentives between pre-merger firms and the hypothetical monopolist and do not require specifying
the benchmark prices.
The SSNIP is intended to represent a “small but significant” increase in the prices charged by firms in
the candidate market for the value they contribute to the products or services used by customers. This
properly directs attention to the effects of price changes commensurate with those that might result
from a significant lessening of competition caused by the merger. This methodology is used because
normally it is possible to quantify “small but significant” adverse price effects on customers and
analyze their likely reactions, not because price effects are more important than non-price effects.
The Agencies most often use a SSNIP of five percent of the price paid by customers for the products
or services to which the merging firms contribute value. However, what constitutes a “small but
significant” increase in price, commensurate with a significant loss of competition caused by the
merger, depends upon the nature of the industry and the merging firms’ positions in it, and the
Agencies may accordingly use a price increase that is larger or smaller than five percent. Where
explicit or implicit prices for the firms’ specific contribution to value can be identified with
reasonable clarity, the Agencies may base the SSNIP on those prices.
Example 8: In a merger between two oil pipelines, the SSNIP would be based on the price charged for
transporting the oil, not on the price of the oil itself. If pipelines buy the oil at one end and sell it at the other, the
price charged for transporting the oil is implicit, equal to the difference between the price paid for oil at the input
end and the price charged for oil at the output end. The relevant product sold by the pipelines is better described
as “pipeline transportation of oil from point A to point B” than as “oil at point B.”
5
Market definition for the evaluation of non-merger antitrust concerns such as monopolization or facilitating practices
will differ in this respect if the effects resulting from the conduct of concern are already occurring at the time of
evaluation.
10
Example 9: In a merger between two firms that install computers purchased from third parties, the SSNIP would
be based on their fees, not on the price of installed computers. If these firms purchase the computers and charge
their customers one package price, the implicit installation fee is equal to the package charge to customers less
the price of the computers.
Example 10: In Example 9, suppose that the prices paid by the merging firms to purchase computers are opaque,
but account for at least ninety-five percent of the prices they charge for installed computers, with profits or
implicit fees making up five percent of those prices at most. A five percent SSNIP on the total price paid by
customers would at least double those fees or profits. Even if that would be unprofitable for a hypothetical
monopolist, a significant increase in fees might well be profitable. If the SSNIP is based on the total price paid
by customers, a lower percentage will be used.
4.1.3 Implementing the Hypothetical Monopolist Test
The hypothetical monopolist’s incentive to raise prices depends both on the extent to which
customers would likely substitute away from the products in the candidate market in response to such
a price increase and on the profit margins earned on those products. The profit margin on incremental
units is the difference between price and incremental cost on those units. The Agencies often estimate
incremental costs, for example using merging parties’ documents or data the merging parties use to
make business decisions. Incremental cost is measured over the change in output that would be
caused by the price increase under consideration.
In considering customers’ likely responses to higher prices, the Agencies take into account any
reasonably available and reliable evidence, including, but not limited to:
 how customers have shifted purchases in the past in response to relative changes in price or
other terms and conditions;
 information from buyers, including surveys, concerning how they would respond to price
changes;
 the conduct of industry participants, notably:
o sellers’ business decisions or business documents indicating sellers’ informed beliefs

concerning how customers would substitute among products in response to relative
changes in price;
o industry participants’ behavior in tracking and responding to price changes by some or all
rivals;
 objective information about product characteristics and the costs and delays of switching
products, especially switching from products in the candidate market to products outside the
candidate market;
 the percentage of sales lost by one product in the candidate market, when its price alone rises,
that is recaptured by other products in the candidate market, with a higher recapture
percentage making a price increase more profitable for the hypothetical monopolist;
 evidence from other industry participants, such as sellers of complementary products;
11
 legal or regulatory requirements; and
 the influence of downstream competition faced by customers in their output markets.
When the necessary data are available, the Agencies also may consider a “critical loss analysis” to
assess the extent to which it corroborates inferences drawn from the evidence noted above. Critical
loss analysis asks whether imposing at least a SSNIP on one or more products in a candidate market
would raise or lower the hypothetical monopolist’s profits. While this “breakeven” analysis differs
from the profit-maximizing analysis called for by the hypothetical monopolist test in Section 4.1.1,
merging parties sometimes present this type of analysis to the Agencies. A price increase raises
profits on sales made at the higher price, but this will be offset to the extent customers substitute
away from products in the candidate market. Critical loss analysis compares the magnitude of these
two offsetting effects resulting from the price increase. The “critical loss” is defined as the number of
lost unit sales that would leave profits unchanged. The “predicted loss” is defined as the number of
unit sales that the hypothetical monopolist is predicted to lose due to the price increase. The price
increase raises the hypothetical monopolist’s profits if the predicted loss is less than the critical loss.
The Agencies consider all of the evidence of customer substitution noted above in assessing the
predicted loss. The Agencies require that estimates of the predicted loss be consistent with that
evidence, including the pre-merger margins of products in the candidate market used to calculate the
critical loss. Unless the firms are engaging in coordinated interaction (see Section 7), high pre-merger
margins normally indicate that each firm’s product individually faces demand that is not highly
sensitive to price.6 Higher pre-merger margins thus indicate a smaller predicted loss as well as a
smaller critical loss. The higher the pre-merger margin, the smaller the recapture percentage
necessary for the candidate market to satisfy the hypothetical monopolist test.
Even when the evidence necessary to perform the hypothetical monopolist test quantitatively is not
available, the conceptual framework of the test provides a useful methodological tool for gathering
and analyzing evidence pertinent to customer substitution and to market definition. The Agencies
follow the hypothetical monopolist test to the extent possible given the available evidence, bearing in
mind that the ultimate goal of market definition is to help determine whether the merger may
substantially lessen competition.
4.1.4 Product Market Definition with Targeted Customers
If a hypothetical monopolist could profitably target a subset of customers for price increases, the
Agencies may identify relevant markets defined around those targeted customers, to whom a
hypothetical monopolist would profitably and separately impose at least a SSNIP. Markets to serve
targeted customers are also known as price discrimination markets. In practice, the Agencies identify
price discrimination markets only where they believe there is a realistic prospect of an adverse
competitive effect on a group of targeted customers.
Example 11: Glass containers have many uses. In response to a price increase for glass containers, some users
would substitute substantially to plastic or metal containers, but baby food manufacturers would not. If a
6
While margins are important for implementing the hypothetical monopolist test, high margins are not in themselves
of antitrust concern.
12
hypothetical monopolist could price separately and limit arbitrage, baby food manufacturers would be vulnerable
to a targeted increase in the price of glass containers. The Agencies could define a distinct market for glass
containers used to package baby food.
The Agencies also often consider markets for targeted customers when prices are individually
negotiated and suppliers have information about customers that would allow a hypothetical
monopolist to identify customers that are likely to pay a higher price for the relevant product. If
prices are negotiated individually with customers, the hypothetical monopolist test may suggest
relevant markets that are as narrow as individual customers (see also Section 6.2 on bargaining and
auctions). Nonetheless, the Agencies often define markets for groups of targeted customers, i.e., by
type of customer, rather than by individual customer. By so doing, the Agencies are able to rely on
aggregated market shares that can be more helpful in predicting the competitive effects of the merger.
4.2 Geographic Market Definition

The arena of competition affected by the merger may be geographically bounded if geography limits
some customers’ willingness or ability to substitute to some products, or some suppliers’ willingness
or ability to serve some customers. Both supplier and customer locations can affect this. The
Agencies apply the principles of market definition described here and in Section 4.1 to define a
relevant market with a geographic dimension as well as a product dimension.
The scope of geographic markets often depends on transportation costs. Other factors such as
language, regulation, tariff and non-tariff trade barriers, custom and familiarity, reputation, and
service availability may impede long-distance or international transactions. The competitive
significance of foreign firms may be assessed at various exchange rates, especially if exchange rates
have fluctuated in the recent past.
In the absence of price discrimination based on customer location, the Agencies normally define
geographic markets based on the locations of suppliers, as explained in subsection 4.2.1. In other
cases, notably if price discrimination based on customer location is feasible as is often the case when
delivered pricing is commonly used in the industry, the Agencies may define geographic markets
based on the locations of customers, as explained in subsection 4.2.2.
4.2.1 Geographic Markets Based on the Locations of Suppliers
Geographic markets based on the locations of suppliers encompass the region from which sales are
made. Geographic markets of this type often apply when customers receive goods or services at
suppliers’ locations. Competitors in the market are firms with relevant production, sales, or service
facilities in that region. Some customers who buy from these firms may be located outside the
boundaries of the geographic market.
The hypothetical monopolist test requires that a hypothetical profit-maximizing firm that was the
only present or future producer of the relevant product(s) located in the region would impose at least
a SSNIP from at least one location, including at least one location of one of the merging firms. In this
exercise the terms of sale for all products produced elsewhere are held constant. A single firm may
operate in a number of different geographic markets, even for a single product.
13
Example 12: The merging parties both have manufacturing plants in City X. The relevant product is expensive to
transport and suppliers price their products for pickup at their locations. Rival plants are some distance away in
City Y. A hypothetical monopolist controlling all plants in City X could profitably impose a SSNIP at these
plants. Competition from more distant plants would not defeat the price increase because supplies coming from
more distant plants require expensive transportation. The relevant geographic market is defined around the plants
in City X.
When the geographic market is defined based on supplier locations, sales made by suppliers located
in the geographic market are counted, regardless of the location of the customer making the purchase.
In considering likely reactions of customers to price increases for the relevant product(s) imposed in a
candidate geographic market, the Agencies consider any reasonably available and reliable evidence,
including:
 how customers have shifted purchases in the past between different geographic locations in
response to relative changes in price or other terms and conditions;
 the cost and difficulty of transporting the product (or the cost and difficulty of a customer
traveling to a seller’s location), in relation to its price;
 whether suppliers need a presence near customers to provide service or support;
 evidence on whether sellers base business decisions on the prospect of customers switching
between geographic locations in response to relative changes in price or other competitive
variables;
 the costs and delays of switching from suppliers in the candidate geographic market to
suppliers outside the candidate geographic market; and
 the influence of downstream competition faced by customers in their output markets.
4.2.2 Geographic Markets Based on the Locations of Customers
When the hypothetical monopolist could discriminate based on customer location, the Agencies may
define geographic markets based on the locations of targeted customers.7 Geographic markets of this
type often apply when suppliers deliver their products or services to customers’ locations.
Geographic markets of this type encompass the region into which sales are made. Competitors in the
market are firms that sell to customers in the specified region. Some suppliers that sell into the
relevant market may be located outside the boundaries of the geographic market.
The hypothetical monopolist test requires that a hypothetical profit-maximizing firm that was the
only present or future seller of the relevant product(s) to customers in the region would impose at
least a SSNIP on some customers in that region. A region forms a relevant geographic market if this
price increase would not be defeated by substitution away from the relevant product or by arbitrage,
7
For customers operating in multiple locations, only those customer locations within the targeted zone are included in
the market.
14
e.g., customers in the region travelling outside it to purchase the relevant product. In this exercise, the
terms of sale for products sold to all customers outside the region are held constant.
Example 13: Customers require local sales and support. Suppliers have sales and service operations in many
geographic areas and can discriminate based on customer location. The geographic market can be defined around
the locations of customers.
Example 14: Each merging firm has a single manufacturing plant and delivers the relevant product to customers
in City X and in City Y. The relevant product is expensive to transport. The merging firms’ plants are by far the
closest to City X, but no closer to City Y than are numerous rival plants. This fact pattern suggests that
customers in City X may be harmed by the merger even if customers in City Y are not. For that reason, the
Agencies consider a relevant geographic market defined around customers in City X. Such a market could be
defined even if the region around the merging firms’ plants would not be a relevant geographic market defined
based on the location of sellers because a hypothetical monopolist controlling all plants in that region would find
a SSNIP imposed on all of its customers unprofitable due to the loss of sales to customers in City Y.
When the geographic market is defined based on customer locations, sales made to those customers
are counted, regardless of the location of the supplier making those sales.
Example 15: Customers in the United States must use products approved by U.S. regulators. Foreign customers
use products not approved by U.S. regulators. The relevant product market consists of products approved by U.S.
regulators. The geographic market is defined around U.S. customers. Any sales made to U.S. customers by
foreign suppliers are included in the market, and those foreign suppliers are participants in the U.S. market even
though located outside it.
5. Market Participants, Market Shares, and Market Concentration
The Agencies normally consider measures of market shares and market concentration as part of their
evaluation of competitive effects. The Agencies evaluate market shares and concentration in
conjunction with other reasonably available and reliable evidence for the ultimate purpose of
determining whether a merger may substantially lessen competition.
Market shares can directly influence firms’ competitive incentives. For example, if a price reduction
to gain new customers would also apply to a firm’s existing customers, a firm with a large market
share may be more reluctant to implement a price reduction than one with a small share. Likewise, a
firm with a large market share may not feel pressure to reduce price even if a smaller rival does.
Market shares also can reflect firms’ capabilities. For example, a firm with a large market share may
be able to expand output rapidly by a larger absolute amount than can a small firm. Similarly, a large
market share tends to indicate low costs, an attractive product, or both.
5.1 Market Participants

All firms that currently earn revenues in the relevant market are considered market participants.
Vertically integrated firms are also included to the extent that their inclusion accurately reflects their
competitive significance. Firms not currently earning revenues in the relevant market, but that have
committed to entering the market in the near future, are also considered market participants.
Firms that are not current producers in a relevant market, but that would very likely provide rapid
supply responses with direct competitive impact in the event of a SSNIP, without incurring
15
significant sunk costs, are also considered market participants. These firms are termed “rapid
entrants.” Sunk costs are entry or exit costs that cannot be recovered outside the relevant market.
Entry that would take place more slowly in response to adverse competitive effects, or that requires
firms to incur significant sunk costs, is considered in Section 9.
Firms that produce the relevant product but do not sell it in the relevant geographic market may be
rapid entrants. Other things equal, such firms are most likely to be rapid entrants if they are close to
the geographic market.
Example 16: Farm A grows tomatoes halfway between Cities X and Y. Currently, it ships its tomatoes to City X
because prices there are two percent higher. Previously it has varied the destination of its shipments in response
to small price variations. Farm A would likely be a rapid entrant participant in a market for tomatoes in City Y.
Example 17: Firm B has bid multiple times to supply milk to School District S, and actually supplies milk to
schools in some adjacent areas. It has never won a bid in School District S, but is well qualified to serve that
district and has often nearly won. Firm B would be counted as a rapid entrant in a market for school milk in
School District S.
More generally, if the relevant market is defined around targeted customers, firms that produce
relevant products but do not sell them to those customers may be rapid entrants if they can easily and
rapidly begin selling to the targeted customers.
Firms that clearly possess the necessary assets to supply into the relevant market rapidly may also be
rapid entrants. In markets for relatively homogeneous goods where a supplier’s ability to compete
depends predominantly on its costs and its capacity, and not on other factors such as experience or
reputation in the relevant market, a supplier with efficient idle capacity, or readily available “swing”
capacity currently used in adjacent markets that can easily and profitably be shifted to serve the
relevant market, may be a rapid entrant.8 However, idle capacity may be inefficient, and capacity
used in adjacent markets may not be available, so a firm’s possession of idle or swing capacity alone
does not make that firm a rapid entrant.
5.2 Market Shares

The Agencies normally calculate market shares for all firms that currently produce products in the
relevant market, subject to the availability of data. The Agencies also calculate market shares for
other market participants if this can be done to reliably reflect their competitive significance.
Market concentration and market share data are normally based on historical evidence. However,
recent or ongoing changes in market conditions may indicate that the current market share of a
particular firm either understates or overstates the firm’s future competitive significance. The
Agencies consider reasonably predictable effects of recent or ongoing changes in market conditions
when calculating and interpreting market share data. For example, if a new technology that is
important to long-term competitive viability is available to other firms in the market, but is not
available to a particular firm, the Agencies may conclude that that firm’s historical market share
8
If this type of supply side substitution is nearly universal among the firms selling one or more of a group of products,
the Agencies may use an aggregate description of markets for those products as a matter of convenience.
16
overstates its future competitive significance. The Agencies may project historical market shares into
the foreseeable future when this can be done reliably.
The Agencies measure market shares based on the best available indicator of firms’ future
competitive significance in the relevant market. This may depend upon the type of competitive effect
being considered, and on the availability of data. Typically, annual data are used, but where
individual transactions are large and infrequent so annual data may be unrepresentative, the Agencies
may measure market shares over a longer period of time.
In most contexts, the Agencies measure each firm’s market share based on its actual or projected
revenues in the relevant market. Revenues in the relevant market tend to be the best measure of
attractiveness to customers, since they reflect the real-world ability of firms to surmount all of the
obstacles necessary to offer products on terms and conditions that are attractive to customers. In cases
where one unit of a low-priced product can substitute for one unit of a higher-priced product, unit
sales may measure competitive significance better than revenues. For example, a new, much less
expensive product may have great competitive significance if it substantially erodes the revenues
earned by older, higher-priced products, even if it earns relatively few revenues. In cases where
customers sign long-term contracts, face switching costs, or tend to re-evaluate their suppliers only
occasionally, revenues earned from recently acquired customers may better reflect the competitive
significance of suppliers than do total revenues.
In markets for homogeneous products, a firm’s competitive significance may derive principally from
its ability and incentive to rapidly expand production in the relevant market in response to a price
increase or output reduction by others in that market. As a result, a firm’s competitive significance
may depend upon its level of readily available capacity to serve the relevant market if that capacity is
efficient enough to make such expansion profitable. In such markets, capacities or reserves may
better reflect the future competitive significance of suppliers than revenues, and the Agencies may
calculate market shares using those measures. Market participants that are not current producers may
then be assigned positive market shares, but only if a measure of their competitive significance
properly comparable to that of current producers is available. When market shares are measured
based on firms’ readily available capacities, the Agencies do not include capacity that is committed
or so profitably employed outside the relevant market, or so high-cost, that it would not likely be used
to respond to a SSNIP in the relevant market.
Example 18: The geographic market is defined around customers in the United States. Firm X produces the
relevant product outside the United States, and most of its sales are made to customers outside the United States.
In most contexts, Firm X’s market share will be based on its sales to U.S. customers, not its total sales or total
capacity. However, if the relevant product is homogeneous, and if Firm X would significantly expand sales to
U.S. customers rapidly and without incurring significant sunk costs in response to a SSNIP, the Agencies may
base Firm X’s market share on its readily available capacity to serve U.S. customers.
When the Agencies define markets serving targeted customers, these same principles are used to
measure market shares, as they apply to those customers. In most contexts, each firm’s market share
is based on its actual or projected revenues from the targeted customers. However, the Agencies may
instead measure market shares based on revenues from a broader group of customers if doing so
would more accurately reflect the competitive significance of different suppliers in the relevant
market. Revenues earned from a broader group of customers may also be used when better data are
thereby available.
17
5.3 Market Concentration

Market concentration is often one useful indicator of likely competitive effects of a merger. In
evaluating market concentration, the Agencies consider both the post-merger level of market
concentration and the change in concentration resulting from a merger. Market shares may not fully
reflect the competitive significance of firms in the market or the impact of a merger. They are used in
conjunction with other evidence of competitive effects. See Sections 6 and 7.
In analyzing mergers between an incumbent and a recent or potential entrant, to the extent the
Agencies use the change in concentration to evaluate competitive effects, they will do so using
projected market shares. A merger between an incumbent and a potential entrant can raise significant
competitive concerns. The lessening of competition resulting from such a merger is more likely to be
substantial, the larger is the market share of the incumbent, the greater is the competitive significance
of the potential entrant, and the greater is the competitive threat posed by this potential entrant
relative to others.
The Agencies give more weight to market concentration when market shares have been stable over
time, especially in the face of historical changes in relative prices or costs. If a firm has retained its
market share even after its price has increased relative to those of its rivals, that firm already faces
limited competitive constraints, making it less likely that its remaining rivals will replace the
competition lost if one of that firm’s important rivals is eliminated due to a merger. By contrast, even
a highly concentrated market can be very competitive if market shares fluctuate substantially over
short periods of time in response to changes in competitive offerings. However, if competition by one
of the merging firms has significantly contributed to these fluctuations, perhaps because it has acted
as a maverick, the Agencies will consider whether the merger will enhance market power by
combining that firm with one of its significant rivals.
The Agencies may measure market concentration using the number of significant competitors in the
market. This measure is most useful when there is a gap in market share between significant
competitors and smaller rivals or when it is difficult to measure revenues in the relevant market. The
Agencies also may consider the combined market share of the merging firms as an indicator of the
extent to which others in the market may not be able readily to replace competition between the
merging firms that is lost through the merger.
The Agencies often calculate the Herfindahl-Hirschman Index (“HHI”) of market concentration. The
HHI is calculated by summing the squares of the individual firms’ market shares,9 and thus gives
proportionately greater weight to the larger market shares. When using the HHI, the Agencies
9
For example, a market consisting of four firms with market shares of thirty percent, thirty percent, twenty percent,
and twenty percent has an HHI of 2600 (302 + 302 + 202 + 202 = 2600). The HHI ranges from 10,000 (in the case of a
pure monopoly) to a number approaching zero (in the case of an atomistic market). Although it is desirable to include
all firms in the calculation, lack of information about firms with small shares is not critical because such firms do not
affect the HHI significantly.
18
consider both the post-merger level of the HHI and the increase in the HHI resulting from the merger.
The increase in the HHI is equal to twice the product of the market shares of the merging firms.10
Based on their experience, the Agencies generally classify markets into three types:
 Unconcentrated Markets: HHI below 1500
 Moderately Concentrated Markets: HHI between 1500 and 2500
 Highly Concentrated Markets: HHI above 2500
The Agencies employ the following general standards for the relevant markets they have defined:
 Small Change in Concentration: Mergers involving an increase in the HHI of less than 100
points are unlikely to have adverse competitive effects and ordinarily require no further
analysis.
 Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to have

adverse competitive effects and ordinarily require no further analysis.
 Moderately Concentrated Markets: Mergers resulting in moderately concentrated markets that

involve an increase in the HHI of more than 100 points potentially raise significant
competitive concerns and often warrant scrutiny.
 Highly Concentrated Markets: Mergers resulting in highly concentrated markets that involve
an increase in the HHI of between 100 points and 200 points potentially raise significant
competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated
markets that involve an increase in the HHI of more than 200 points will be presumed to be
likely to enhance market power. The presumption may be rebutted by persuasive evidence
showing that the merger is unlikely to enhance market power.
The purpose of these thresholds is not to provide a rigid screen to separate competitively benign
mergers from anticompetitive ones, although high levels of concentration do raise concerns. Rather,
they provide one way to identify some mergers unlikely to raise competitive concerns and some
others for which it is particularly important to examine whether other competitive factors confirm,
reinforce, or counteract the potentially harmful effects of increased concentration. The higher the
post-merger HHI and the increase in the HHI, the greater are the Agencies’ potential competitive
concerns and the greater is the likelihood that the Agencies will request additional information to
conduct their analysis.
10
For example, the merger of firms with shares of five percent and ten percent of the market would increase the HHI by
100 (5 × 10 × 2 = 100).
19
6. Unilateral Effects
The elimination of competition between two firms that results from their merger may alone constitute
a substantial lessening of competition. Such unilateral effects are most apparent in a merger to
monopoly in a relevant market, but are by no means limited to that case. Whether cognizable
efficiencies resulting from the merger are likely to reduce or reverse adverse unilateral effects is
addressed in Section 10.
Several common types of unilateral effects are discussed in this section. Section 6.1 discusses
unilateral price effects in markets with differentiated products. Section 6.2 discusses unilateral effects
in markets where sellers negotiate with buyers or prices are determined through auctions. Section 6.3
discusses unilateral effects relating to reductions in output or capacity in markets for relatively
homogeneous products. Section 6.4 discusses unilateral effects arising from diminished innovation or
reduced product variety. These effects do not exhaust the types of possible unilateral effects; for
example, exclusionary unilateral effects also can arise.
A merger may result in different unilateral effects along different dimensions of competition. For
example, a merger may increase prices in the short term but not raise longer-term concerns about
innovation, either because rivals will provide sufficient innovation competition or because the merger
will generate cognizable research and development efficiencies. See Section 10.
6.1 Pricing of Differentiated Products

In differentiated product industries, some products can be very close substitutes and compete strongly
with each other, while other products are more distant substitutes and compete less strongly. For
example, one high-end product may compete much more directly with another high-end product than
with any low-end product.
A merger between firms selling differentiated products may diminish competition by enabling the
merged firm to profit by unilaterally raising the price of one or both products above the pre-merger
level. Some of the sales lost due to the price rise will merely be diverted to the product of the merger
partner and, depending on relative margins, capturing such sales loss through merger may make the
price increase profitable even though it would not have been profitable prior to the merger.
The extent of direct competition between the products sold by the merging parties is central to the
evaluation of unilateral price effects. Unilateral price effects are greater, the more the buyers of
products sold by one merging firm consider products sold by the other merging firm to be their next
choice. The Agencies consider any reasonably available and reliable information to evaluate the
extent of direct competition between the products sold by the merging firms. This includes
documentary and testimonial evidence, win/loss reports and evidence from discount approval
processes, customer switching patterns, and customer surveys. The types of evidence relied on often
overlap substantially with the types of evidence of customer substitution relevant to the hypothetical
monopolist test. See Section 4.1.1.
Substantial unilateral price elevation post-merger for a product formerly sold by one of the merging
firms normally requires that a significant fraction of the customers purchasing that product view
20
products formerly sold by the other merging firm as their next-best choice. However, unless pre-
merger margins between price and incremental cost are low, that significant fraction need not
approach a majority. For this purpose, incremental cost is measured over the change in output that
would be caused by the price change considered. A merger may produce significant unilateral effects
for a given product even though many more sales are diverted to products sold by non-merging firms
than to products previously sold by the merger partner.
Example 19: In Example 5, the merged entity controlling Products A and B would raise prices ten percent, given
the product offerings and prices of other firms. In that example, one-third of the sales lost by Product A when its
price alone is raised are diverted to Product B. Further analysis is required to account for repositioning, entry,
and efficiencies.
In some cases, the Agencies may seek to quantify the extent of direct competition between a product
sold by one merging firm and a second product sold by the other merging firm by estimating the
diversion ratio from the first product to the second product. The diversion ratio is the fraction of unit
sales lost by the first product due to an increase in its price that would be diverted to the second
product. Diversion ratios between products sold by one merging firm and products sold by the other
merging firm can be very informative for assessing unilateral price effects, with higher diversion
ratios indicating a greater likelihood of such effects. Diversion ratios between products sold by
merging firms and those sold by non-merging firms have at most secondary predictive value.
Adverse unilateral price effects can arise when the merger gives the merged entity an incentive to
raise the price of a product previously sold by one merging firm and thereby divert sales to products
previously sold by the other merging firm, boosting the profits on the latter products. Taking as given
other prices and product offerings, that boost to profits is equal to the value to the merged firm of the
sales diverted to those products. The value of sales diverted to a product is equal to the number of
units diverted to that product multiplied by the margin between price and incremental cost on that
product. In some cases, where sufficient information is available, the Agencies assess the value of
diverted sales, which can serve as an indicator of the upward pricing pressure on the first product
resulting from the merger. Diagnosing unilateral price effects based on the value of diverted sales
need not rely on market definition or the calculation of market shares and concentration. The
Agencies rely much more on the value of diverted sales than on the level of the HHI for diagnosing
unilateral price effects in markets with differentiated products. If the value of diverted sales is
proportionately small, significant unilateral price effects are unlikely.11
Where sufficient data are available, the Agencies may construct economic models designed to
quantify the unilateral price effects resulting from the merger. These models often include
independent price responses by non-merging firms. They also can incorporate merger-specific
efficiencies. These merger simulation methods need not rely on market definition. The Agencies do
not treat merger simulation evidence as conclusive in itself, and they place more weight on whether
their merger simulations consistently predict substantial price increases than on the precise prediction
of any single simulation.
11
For this purpose, the value of diverted sales is measured in proportion to the lost revenues attributable to the
reduction in unit sales resulting from the price increase. Those lost revenues equal the reduction in the number of
units sold of that product multiplied by that product’s price.
21
A merger is unlikely to generate substantial unilateral price increases if non-merging parties offer
very close substitutes for the products offered by the merging firms. In some cases, non-merging
firms may be able to reposition their products to offer close substitutes for the products offered by the
merging firms. Repositioning is a supply-side response that is evaluated much like entry, with
consideration given to timeliness, likelihood, and sufficiency. See Section 9. The Agencies consider
whether repositioning would be sufficient to deter or counteract what otherwise would be significant
anticompetitive unilateral effects from a differentiated products merger.
6.2 Bargaining and Auctions

In many industries, especially those involving intermediate goods and services, buyers and sellers
negotiate to determine prices and other terms of trade. In that process, buyers commonly negotiate
with more than one seller, and may play sellers off against one another. Some highly structured forms
of such competition are known as auctions. Negotiations often combine aspects of an auction with
aspects of one-on-one negotiation, although pure auctions are sometimes used in government
procurement and elsewhere.
A merger between two competing sellers prevents buyers from playing those sellers off against each
other in negotiations. This alone can significantly enhance the ability and incentive of the merged
entity to obtain a result more favorable to it, and less favorable to the buyer, than the merging firms
would have offered separately absent the merger. The Agencies analyze unilateral effects of this type
using similar approaches to those described in Section 6.1.
Anticompetitive unilateral effects in these settings are likely in proportion to the frequency or
probability with which, prior to the merger, one of the merging sellers had been the runner-up when
the other won the business. These effects also are likely to be greater, the greater advantage the
runner-up merging firm has over other suppliers in meeting customers’ needs. These effects also tend
to be greater, the more profitable were the pre-merger winning bids. All of these factors are likely to
be small if there are many equally placed bidders.
The mechanisms of these anticompetitive unilateral effects, and the indicia of their likelihood, differ
somewhat according to the bargaining practices used, the auction format, and the sellers’ information
about one another’s costs and about buyers’ preferences. For example, when the merging sellers are
likely to know which buyers they are best and second best placed to serve, any anticompetitive
unilateral effects are apt to be targeted at those buyers; when sellers are less well informed, such
effects are more apt to be spread over a broader class of buyers.
6.3 Capacity and Output for Homogeneous Products

In markets involving relatively undifferentiated products, the Agencies may evaluate whether the
merged firm will find it profitable unilaterally to suppress output and elevate the market price. A firm
may leave capacity idle, refrain from building or obtaining capacity that would have been obtained
absent the merger, or eliminate pre-existing production capabilities. A firm may also divert the use of
capacity away from one relevant market and into another so as to raise the price in the former market.
The competitive analyses of these alternative modes of output suppression may differ.
22
A unilateral output suppression strategy is more likely to be profitable when (1) the merged firm’s
market share is relatively high; (2) the share of the merged firm’s output already committed for sale
at prices unaffected by the output suppression is relatively low; (3) the margin on the suppressed
output is relatively low; (4) the supply responses of rivals are relatively small; and (5) the market
elasticity of demand is relatively low.
A merger may provide the merged firm a larger base of sales on which to benefit from the resulting
price rise, or it may eliminate a competitor that otherwise could have expanded its output in response
to the price rise.
Example 20: Firms A and B both produce an industrial commodity and propose to merge. The demand for this
commodity is insensitive to price. Firm A is the market leader. Firm B produces substantial output, but its
operating margins are low because it operates high-cost plants. The other suppliers are operating very near
capacity. The merged firm has an incentive to reduce output at the high-cost plants, perhaps shutting down some
of that capacity, thus driving up the price it receives on the remainder of its output. The merger harms customers,
notwithstanding that the merged firm shifts some output from high-cost plants to low-cost plants.
In some cases, a merger between a firm with a substantial share of the sales in the market and a firm
with significant excess capacity to serve that market can make an output suppression strategy
profitable.12 This can occur even if the firm with the excess capacity has a relatively small share of
sales, if that firm’s ability to expand, and thus keep price from rising, has been making an output
suppression strategy unprofitable for the firm with the larger market share.
6.4 Innovation and Product Variety

Competition often spurs firms to innovate. The Agencies may consider whether a merger is likely to
diminish innovation competition by encouraging the merged firm to curtail its innovative efforts
below the level that would prevail in the absence of the merger. That curtailment of innovation could
take the form of reduced incentive to continue with an existing product-development effort or
reduced incentive to initiate development of new products.
The first of these effects is most likely to occur if at least one of the merging firms is engaging in
efforts to introduce new products that would capture substantial revenues from the other merging
firm. The second, longer-run effect is most likely to occur if at least one of the merging firms has
capabilities that are likely to lead it to develop new products in the future that would capture
substantial revenues from the other merging firm. The Agencies therefore also consider whether a
merger will diminish innovation competition by combining two of a very small number of firms with
the strongest capabilities to successfully innovate in a specific direction.
The Agencies evaluate the extent to which successful innovation by one merging firm is likely to take
sales from the other, and the extent to which post-merger incentives for future innovation will be
lower than those that would prevail in the absence of the merger. The Agencies also consider whether
the merger is likely to enable innovation that would not otherwise take place, by bringing together
12
Such a merger also can cause adverse coordinated effects, especially if the acquired firm with excess capacity was
disrupting effective coordination.
23
complementary capabilities that cannot be otherwise combined or for some other merger-specific
reason. See Section 10.
The Agencies also consider whether a merger is likely to give the merged firm an incentive to cease
offering one of the relevant products sold by the merging parties. Reductions in variety following a
merger may or may not be anticompetitive. Mergers can lead to the efficient consolidation of
products when variety offers little in value to customers. In other cases, a merger may increase
variety by encouraging the merged firm to reposition its products to be more differentiated from one
another.
If the merged firm would withdraw a product that a significant number of customers strongly prefer
to those products that would remain available, this can constitute a harm to customers over and above
any effects on the price or quality of any given product. If there is evidence of such an effect, the
Agencies may inquire whether the reduction in variety is largely due to a loss of competitive
incentives attributable to the merger. An anticompetitive incentive to eliminate a product as a result
of the merger is greater and more likely, the larger is the share of profits from that product coming at
the expense of profits from products sold by the merger partner. Where a merger substantially
reduces competition by bringing two close substitute products under common ownership, and one of
those products is eliminated, the merger will often also lead to a price increase on the remaining
product, but that is not a necessary condition for anticompetitive effect.
Example 21: Firm A sells a high-end product at a premium price. Firm B sells a mid-range product at a lower
price, serving customers who are more price sensitive. Several other firms have low-end products. Firms A and
B together have a large share of the relevant market. Firm A proposes to acquire Firm B and discontinue Firm
B’s product. Firm A expects to retain most of Firm B’s customers. Firm A may not find it profitable to raise the
price of its high-end product after the merger, because doing so would reduce its ability to retain Firm B’s more
price-sensitive customers. The Agencies may conclude that the withdrawal of Firm B’s product results from a
loss of competition and materially harms customers.
7. Coordinated Effects
A merger may diminish competition by enabling or encouraging post-merger coordinated interaction

among firms in the relevant market that harms customers. Coordinated interaction involves conduct
by multiple firms that is profitable for each of them only as a result of the accommodating reactions
of the others. These reactions can blunt a firm’s incentive to offer customers better deals by
undercutting the extent to which such a move would win business away from rivals. They also can
enhance a firm’s incentive to raise prices, by assuaging the fear that such a move would lose
customers to rivals.
Coordinated interaction includes a range of conduct. Coordinated interaction can involve the explicit
negotiation of a common understanding of how firms will compete or refrain from competing. Such
conduct typically would itself violate the antitrust laws. Coordinated interaction also can involve a
similar common understanding that is not explicitly negotiated but would be enforced by the
detection and punishment of deviations that would undermine the coordinated interaction.
Coordinated interaction alternatively can involve parallel accommodating conduct not pursuant to a
prior understanding. Parallel accommodating conduct includes situations in which each rival’s
response to competitive moves made by others is individually rational, and not motivated by
24
retaliation or deterrence nor intended to sustain an agreed-upon market outcome, but nevertheless
emboldens price increases and weakens competitive incentives to reduce prices or offer customers
better terms. Coordinated interaction includes conduct not otherwise condemned by the antitrust
laws.
The ability of rival firms to engage in coordinated conduct depends on the strength and predictability
of rivals’ responses to a price change or other competitive initiative. Under some circumstances, a
merger can result in market concentration sufficient to strengthen such responses or enable multiple
firms in the market to predict them more confidently, thereby affecting the competitive incentives of
multiple firms in the market, not just the merged firm.
7.1 Impact of Merger on Coordinated Interaction

The Agencies examine whether a merger is likely to change the manner in which market participants
interact, inducing substantially more coordinated interaction. The Agencies seek to identify how a
merger might significantly weaken competitive incentives through an increase in the strength, extent,
or likelihood of coordinated conduct. There are, however, numerous forms of coordination, and the
risk that a merger will induce adverse coordinated effects may not be susceptible to quantification or
detailed proof. Therefore, the Agencies evaluate the risk of coordinated effects using measures of
market concentration (see Section 5) in conjunction with an assessment of whether a market is
vulnerable to coordinated conduct. See Section 7.2. The analysis in Section 7.2 applies to moderately
and highly concentrated markets, as unconcentrated markets are unlikely to be vulnerable to
coordinated conduct.
Pursuant to the Clayton Act’s incipiency standard, the Agencies may challenge mergers that in their
judgment pose a real danger of harm through coordinated effects, even without specific evidence
showing precisely how the coordination likely would take place. The Agencies are likely to challenge
a merger if the following three conditions are all met: (1) the merger would significantly increase
concentration and lead to a moderately or highly concentrated market; (2) that market shows signs of
vulnerability to coordinated conduct (see Section 7.2); and (3) the Agencies have a credible basis on
which to conclude that the merger may enhance that vulnerability. An acquisition eliminating a
maverick firm (see Section 2.1.5) in a market vulnerable to coordinated conduct is likely to cause
adverse coordinated effects.
7.2 Evidence a Market is Vulnerable to Coordinated Conduct

The Agencies presume that market conditions are conducive to coordinated interaction if firms
representing a substantial share in the relevant market appear to have previously engaged in express
collusion affecting the relevant market, unless competitive conditions in the market have since
changed significantly. Previous express collusion in another geographic market will have the same
weight if the salient characteristics of that other market at the time of the collusion are comparable to
those in the relevant market. Failed previous attempts at collusion in the relevant market suggest that
successful collusion was difficult pre-merger but not so difficult as to deter attempts, and a merger
may tend to make success more likely. Previous collusion or attempted collusion in another product
market may also be given substantial weight if the salient characteristics of that other market at the
time of the collusion are closely comparable to those in the relevant market.
25
A market typically is more vulnerable to coordinated conduct if each competitively important firm’s
significant competitive initiatives can be promptly and confidently observed by that firm’s rivals.
This is more likely to be the case if the terms offered to customers are relatively transparent. Price
transparency can be greater for relatively homogeneous products. Even if terms of dealing are not
transparent, transparency regarding the identities of the firms serving particular customers can give
rise to coordination, e.g., through customer or territorial allocation. Regular monitoring by suppliers
of one another’s prices or customers can indicate that the terms offered to customers are relatively
transparent.
A market typically is more vulnerable to coordinated conduct if a firm’s prospective competitive

reward from attracting customers away from its rivals will be significantly diminished by likely
responses of those rivals. This is more likely to be the case, the stronger and faster are the responses
the firm anticipates from its rivals. The firm is more likely to anticipate strong responses if there are
few significant competitors, if products in the relevant market are relatively homogeneous, if
customers find it relatively easy to switch between suppliers, or if suppliers use meeting-competition
clauses.
A firm is more likely to be deterred from making competitive initiatives by whatever responses occur
if sales are small and frequent rather than via occasional large and long-term contracts or if relatively
few customers will switch to it before rivals are able to respond. A firm is less likely to be deterred by
whatever responses occur if the firm has little stake in the status quo. For example, a firm with a
small market share that can quickly and dramatically expand, constrained neither by limits on
production nor by customer reluctance to switch providers or to entrust business to a historically
small provider, is unlikely to be deterred. Firms are also less likely to be deterred by whatever
responses occur if competition in the relevant market is marked by leapfrogging technological
innovation, so that responses by competitors leave the gains from successful innovation largely intact.
A market is more apt to be vulnerable to coordinated conduct if the firm initiating a price increase
will lose relatively few customers after rivals respond to the increase. Similarly, a market is more apt
to be vulnerable to coordinated conduct if a firm that first offers a lower price or improved product to
customers will retain relatively few customers thus attracted away from its rivals after those rivals
respond.
The Agencies regard coordinated interaction as more likely, the more the participants stand to gain
from successful coordination. Coordination generally is more profitable, the lower is the market
elasticity of demand.
Coordinated conduct can harm customers even if not all firms in the relevant market engage in the
coordination, but significant harm normally is likely only if a substantial part of the market is subject
to such conduct. The prospect of harm depends on the collective market power, in the relevant
market, of firms whose incentives to compete are substantially weakened by coordinated conduct.
This collective market power is greater, the lower is the market elasticity of demand. This collective
market power is diminished by the presence of other market participants with small market shares
and little stake in the outcome resulting from the coordinated conduct, if these firms can rapidly
expand their sales in the relevant market.
26
Buyer characteristics and the nature of the procurement process can affect coordination. For example,
sellers may have the incentive to bid aggressively for a large contract even if they expect strong
responses by rivals. This is especially the case for sellers with small market shares, if they can
realistically win such large contracts. In some cases, a large buyer may be able to strategically
undermine coordinated conduct, at least as it pertains to that buyer’s needs, by choosing to put up for
bid a few large contracts rather than many smaller ones, and by making its procurement decisions
opaque to suppliers.
8. Powerful Buyers
Powerful buyers are often able to negotiate favorable terms with their suppliers. Such terms may
reflect the lower costs of serving these buyers, but they also can reflect price discrimination in their
favor.
The Agencies consider the possibility that powerful buyers may constrain the ability of the merging
parties to raise prices. This can occur, for example, if powerful buyers have the ability and incentive
to vertically integrate upstream or sponsor entry, or if the conduct or presence of large buyers
undermines coordinated effects. However, the Agencies do not presume that the presence of powerful
buyers alone forestalls adverse competitive effects flowing from the merger. Even buyers that can
negotiate favorable terms may be harmed by an increase in market power. The Agencies examine the
choices available to powerful buyers and how those choices likely would change due to the merger.
Normally, a merger that eliminates a supplier whose presence contributed significantly to a buyer’s
negotiating leverage will harm that buyer.
Example 22: Customer C has been able to negotiate lower pre-merger prices than other customers by threatening
to shift its large volume of purchases from one merging firm to the other. No other suppliers are as well placed to
meet Customer C’s needs for volume and reliability. The merger is likely to harm Customer C. In this situation,
the Agencies could identify a price discrimination market consisting of Customer C and similarly placed
customers. The merger threatens to end previous price discrimination in their favor.
Furthermore, even if some powerful buyers could protect themselves, the Agencies also consider
whether market power can be exercised against other buyers.
Example 23: In Example 22, if Customer C instead obtained the lower pre-merger prices based on a credible
threat to supply its own needs, or to sponsor new entry, Customer C might not be harmed. However, even in this
case, other customers may still be harmed.
9. Entry
The analysis of competitive effects in Sections 6 and 7 focuses on current participants in the relevant
market. That analysis may also include some forms of entry. Firms that would rapidly and easily
enter the market in response to a SSNIP are market participants and may be assigned market shares.
See Sections 5.1 and 5.2. Firms that have, prior to the merger, committed to entering the market also
will normally be treated as market participants. See Section 5.1. This section concerns entry or
adjustments to pre-existing entry plans that are induced by the merger.
27
As part of their full assessment of competitive effects, the Agencies consider entry into the relevant
market. The prospect of entry into the relevant market will alleviate concerns about adverse
competitive effects only if such entry will deter or counteract any competitive effects of concern so
the merger will not substantially harm customers.
The Agencies consider the actual history of entry into the relevant market and give substantial weight
to this evidence. Lack of successful and effective entry in the face of non-transitory increases in the
margins earned on products in the relevant market tends to suggest that successful entry is slow or
difficult. Market values of incumbent firms greatly exceeding the replacement costs of their tangible
assets may indicate that these firms have valuable intangible assets, which may be difficult or time
consuming for an entrant to replicate.
A merger is not likely to enhance market power if entry into the market is so easy that the merged
firm and its remaining rivals in the market, either unilaterally or collectively, could not profitably
raise price or otherwise reduce competition compared to the level that would prevail in the absence of
the merger. Entry is that easy if entry would be timely, likely, and sufficient in its magnitude,
character, and scope to deter or counteract the competitive effects of concern.
The Agencies examine the timeliness, likelihood, and sufficiency of the entry efforts an entrant might
practically employ. An entry effort is defined by the actions the firm must undertake to produce and
sell in the market. Various elements of the entry effort will be considered. These elements can
include: planning, design, and management; permitting, licensing, or other approvals; construction,
debugging, and operation of production facilities; and promotion (including necessary introductory
discounts), marketing, distribution, and satisfaction of customer testing and qualification
requirements. Recent examples of entry, whether successful or unsuccessful, generally provide the
starting point for identifying the elements of practical entry efforts. They also can be informative
regarding the scale necessary for an entrant to be successful, the presence or absence of entry
barriers, the factors that influence the timing of entry, the costs and risk associated with entry, and the
sales opportunities realistically available to entrants.
If the assets necessary for an effective and profitable entry effort are widely available, the Agencies
will not necessarily attempt to identify which firms might enter. Where an identifiable set of firms
appears to have necessary assets that others lack, or to have particularly strong incentives to enter, the
Agencies focus their entry analysis on those firms. Firms operating in adjacent or complementary
markets, or large customers themselves, may be best placed to enter. However, the Agencies will not
presume that a powerful firm in an adjacent market or a large customer will enter the relevant market
unless there is reliable evidence supporting that conclusion.
In assessing whether entry will be timely, likely, and sufficient, the Agencies recognize that precise
and detailed information may be difficult or impossible to obtain. The Agencies consider reasonably
available and reliable evidence bearing on whether entry will satisfy the conditions of timeliness,
likelihood, and sufficiency.
28
9.1 Timeliness
In order to deter the competitive effects of concern, entry must be rapid enough to make unprofitable
overall the actions causing those effects and thus leading to entry, even though those actions would
be profitable until entry takes effect.
Even if the prospect of entry does not deter the competitive effects of concern, post-merger entry may
counteract them. This requires that the impact of entrants in the relevant market be rapid enough that
customers are not significantly harmed by the merger, despite any anticompetitive harm that occurs
prior to the entry.
The Agencies will not presume that an entrant can have a significant impact on prices before that
entrant is ready to provide the relevant product to customers unless there is reliable evidence that
anticipated future entry would have such an effect on prices.
9.2 Likelihood
Entry is likely if it would be profitable, accounting for the assets, capabilities, and capital needed and
the risks involved, including the need for the entrant to incur costs that would not be recovered if the
entrant later exits. Profitability depends upon (a) the output level the entrant is likely to obtain,
accounting for the obstacles facing new entrants; (b) the price the entrant would likely obtain in the
post-merger market, accounting for the impact of that entry itself on prices; and (c) the cost per unit
the entrant would likely incur, which may depend upon the scale at which the entrant would operate.
9.3 Sufficiency
Even where timely and likely, entry may not be sufficient to deter or counteract the competitive
effects of concern. For example, in a differentiated product industry, entry may be insufficient
because the products offered by entrants are not close enough substitutes to the products offered by
the merged firm to render a price increase by the merged firm unprofitable. Entry may also be
insufficient due to constraints that limit entrants’ competitive effectiveness, such as limitations on the
capabilities of the firms best placed to enter or reputational barriers to rapid expansion by new
entrants. Entry by a single firm that will replicate at least the scale and strength of one of the merging
firms is sufficient. Entry by one or more firms operating at a smaller scale may be sufficient if such
firms are not at a significant competitive disadvantage.
10. Efficiencies
Competition usually spurs firms to achieve efficiencies internally. Nevertheless, a primary benefit of
mergers to the economy is their potential to generate significant efficiencies and thus enhance the
merged firm’s ability and incentive to compete, which may result in lower prices, improved quality,
enhanced service, or new products. For example, merger-generated efficiencies may enhance
competition by permitting two ineffective competitors to form a more effective competitor, e.g., by
combining complementary assets. In a unilateral effects context, incremental cost reductions may
reduce or reverse any increases in the merged firm’s incentive to elevate price. Efficiencies also may
lead to new or improved products, even if they do not immediately and directly affect price. In a
29
coordinated effects context, incremental cost reductions may make coordination less likely or
effective by enhancing the incentive of a maverick to lower price or by creating a new maverick firm.
Even when efficiencies generated through a merger enhance a firm’s ability to compete, however, a
merger may have other effects that may lessen competition and make the merger anticompetitive.
The Agencies credit only those efficiencies likely to be accomplished with the proposed merger and
unlikely to be accomplished in the absence of either the proposed merger or another means having
comparable anticompetitive effects. These are termed merger-specific efficiencies.13 Only
alternatives that are practical in the business situation faced by the merging firms are considered in
making this determination. The Agencies do not insist upon a less restrictive alternative that is merely
theoretical.
Efficiencies are difficult to verify and quantify, in part because much of the information relating to
efficiencies is uniquely in the possession of the merging firms. Moreover, efficiencies projected
reasonably and in good faith by the merging firms may not be realized. Therefore, it is incumbent
upon the merging firms to substantiate efficiency claims so that the Agencies can verify by
reasonable means the likelihood and magnitude of each asserted efficiency, how and when each
would be achieved (and any costs of doing so), how each would enhance the merged firm’s ability
and incentive to compete, and why each would be merger-specific.
Efficiency claims will not be considered if they are vague, speculative, or otherwise cannot be
verified by reasonable means. Projections of efficiencies may be viewed with skepticism, particularly
when generated outside of the usual business planning process. By contrast, efficiency claims
substantiated by analogous past experience are those most likely to be credited.
Cognizable efficiencies are merger-specific efficiencies that have been verified and do not arise from
anticompetitive reductions in output or service. Cognizable efficiencies are assessed net of costs
produced by the merger or incurred in achieving those efficiencies.
The Agencies will not challenge a merger if cognizable efficiencies are of a character and magnitude
such that the merger is not likely to be anticompetitive in any relevant market.14 To make the requisite
determination, the Agencies consider whether cognizable efficiencies likely would be sufficient to
reverse the merger’s potential to harm customers in the relevant market, e.g., by preventing price
13
The Agencies will not deem efficiencies to be merger-specific if they could be attained by practical alternatives that
mitigate competitive concerns, such as divestiture or licensing. If a merger affects not whether but only when an
efficiency would be achieved, only the timing advantage is a merger-specific efficiency.
14
The Agencies normally assess competition in each relevant market affected by a merger independently and normally
will challenge the merger if it is likely to be anticompetitive in any relevant market. In some cases, however, the
Agencies in their prosecutorial discretion will consider efficiencies not strictly in the relevant market, but so
inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive
effect in the relevant market without sacrificing the efficiencies in the other market(s). Inextricably linked
efficiencies are most likely to make a difference when they are great and the likely anticompetitive effect in the
relevant market(s) is small so the merger is likely to benefit customers overall.
30
increases in that market.15 In conducting this analysis, the Agencies will not simply compare the
magnitude of the cognizable efficiencies with the magnitude of the likely harm to competition absent
the efficiencies. The greater the potential adverse competitive effect of a merger, the greater must be
the cognizable efficiencies, and the more they must be passed through to customers, for the Agencies
to conclude that the merger will not have an anticompetitive effect in the relevant market. When the
potential adverse competitive effect of a merger is likely to be particularly substantial, extraordinarily
great cognizable efficiencies would be necessary to prevent the merger from being anticompetitive.
In adhering to this approach, the Agencies are mindful that the antitrust laws give competition, not
internal operational efficiency, primacy in protecting customers.
In the Agencies’ experience, efficiencies are most likely to make a difference in merger analysis
when the likely adverse competitive effects, absent the efficiencies, are not great. Efficiencies almost
never justify a merger to monopoly or near-monopoly. Just as adverse competitive effects can arise
along multiple dimensions of conduct, such as pricing and new product development, so too can
efficiencies operate along multiple dimensions. Similarly, purported efficiency claims based on lower
prices can be undermined if they rest on reductions in product quality or variety that customers value.
The Agencies have found that certain types of efficiencies are more likely to be cognizable and
substantial than others. For example, efficiencies resulting from shifting production among facilities
formerly owned separately, which enable the merging firms to reduce the incremental cost of
production, are more likely to be susceptible to verification and are less likely to result from
anticompetitive reductions in output. Other efficiencies, such as those relating to research and
development, are potentially substantial but are generally less susceptible to verification and may be
the result of anticompetitive output reductions. Yet others, such as those relating to procurement,
management, or capital cost, are less likely to be merger-specific or substantial, or may not be
cognizable for other reasons.
When evaluating the effects of a merger on innovation, the Agencies consider the ability of the
merged firm to conduct research or development more effectively. Such efficiencies may spur
innovation but not affect short-term pricing. The Agencies also consider the ability of the merged
firm to appropriate a greater fraction of the benefits resulting from its innovations. Licensing and
intellectual property conditions may be important to this enquiry, as they affect the ability of a firm to
appropriate the benefits of its innovation. Research and development cost savings may be substantial
and yet not be cognizable efficiencies because they are difficult to verify or result from
anticompetitive reductions in innovative activities.
15
The Agencies normally give the most weight to the results of this analysis over the short term. The Agencies also
may consider the effects of cognizable efficiencies with no short-term, direct effect on prices in the relevant market.
Delayed benefits from efficiencies (due to delay in the achievement of, or the realization of customer benefits from,
the efficiencies) will be given less weight because they are less proximate and more difficult to predict. Efficiencies
relating to costs that are fixed in the short term are unlikely to benefit customers in the short term, but can benefit
customers in the longer run, e.g., if they make new product introduction less expensive.
31
11. Failure and Exiting Assets
Notwithstanding the analysis above, a merger is not likely to enhance market power if imminent
failure, as defined below, of one of the merging firms would cause the assets of that firm to exit the
relevant market. This is an extreme instance of the more general circumstance in which the
competitive significance of one of the merging firms is declining: the projected market share and
significance of the exiting firm is zero. If the relevant assets would otherwise exit the market,
customers are not worse off after the merger than they would have been had the merger been
enjoined.
The Agencies do not normally credit claims that the assets of the failing firm would exit the relevant
market unless all of the following circumstances are met: (1) the allegedly failing firm would be
unable to meet its financial obligations in the near future; (2) it would not be able to reorganize
successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made unsuccessful good-faith
efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the
relevant market and pose a less severe danger to competition than does the proposed merger.16
Similarly, a merger is unlikely to cause competitive harm if the risks to competition arise from the
acquisition of a failing division. The Agencies do not normally credit claims that the assets of a
division would exit the relevant market in the near future unless both of the following conditions are
met: (1) applying cost allocation rules that reflect true economic costs, the division has a persistently
negative cash flow on an operating basis, and such negative cash flow is not economically justified
for the firm by benefits such as added sales in complementary markets or enhanced customer
goodwill;17 and (2) the owner of the failing division has made unsuccessful good-faith efforts to elicit
reasonable alternative offers that would keep its tangible and intangible assets in the relevant market
and pose a less severe danger to competition than does the proposed acquisition.
12. Mergers of Competing Buyers
Mergers of competing buyers can enhance market power on the buying side of the market, just as
mergers of competing sellers can enhance market power on the selling side of the market. Buyer
market power is sometimes called “monopsony power.”
To evaluate whether a merger is likely to enhance market power on the buying side of the market, the
Agencies employ essentially the framework described above for evaluating whether a merger is likely
to enhance market power on the selling side of the market. In defining relevant markets, the Agencies
16
Any offer to purchase the assets of the failing firm for a price above the liquidation value of those assets will be
regarded as a reasonable alternative offer. Liquidation value is the highest value the assets could command for use
outside the relevant market.
17
Because the parent firm can allocate costs, revenues, and intra-company transactions among itself and its subsidiaries
and divisions, the Agencies require evidence on these two points that is not solely based on management plans that
could have been prepared for the purpose of demonstrating negative cash flow or the prospect of exit from the
relevant market.
32
focus on the alternatives available to sellers in the face of a decrease in the price paid by a
hypothetical monopsonist.
Market power on the buying side of the market is not a significant concern if suppliers have
numerous attractive outlets for their goods or services. However, when that is not the case, the
Agencies may conclude that the merger of competing buyers is likely to lessen competition in a
manner harmful to sellers.
The Agencies distinguish between effects on sellers arising from a lessening of competition and
effects arising in other ways. A merger that does not enhance market power on the buying side of the
market can nevertheless lead to a reduction in prices paid by the merged firm, for example, by
reducing transactions costs or allowing the merged firm to take advantage of volume-based discounts.
Reduction in prices paid by the merging firms not arising from the enhancement of market power can
be significant in the evaluation of efficiencies from a merger, as discussed in Section 10.
The Agencies do not view a short-run reduction in the quantity purchased as the only, or best,
indicator of whether a merger enhances buyer market power. Nor do the Agencies evaluate the
competitive effects of mergers between competing buyers strictly, or even primarily, on the basis of
effects in the downstream markets in which the merging firms sell.
Example 24: Merging Firms A and B are the only two buyers in the relevant geographic market for an
agricultural product. Their merger will enhance buyer power and depress the price paid to farmers for this
product, causing a transfer of wealth from farmers to the merged firm and inefficiently reducing supply. These
effects can arise even if the merger will not lead to any increase in the price charged by the merged firm for its
output.
13. Partial Acquisitions
In most horizontal mergers, two competitors come under common ownership and control, completely
and permanently eliminating competition between them. This elimination of competition is a basic
element of merger analysis. However, the statutory provisions referenced in Section 1 also apply to
one firm’s partial acquisition of a competitor. The Agencies therefore also review acquisitions of
minority positions involving competing firms, even if such minority positions do not necessarily or
completely eliminate competition between the parties to the transaction.
When the Agencies determine that a partial acquisition results in effective control of the target firm,
or involves substantially all of the relevant assets of the target firm, they analyze the transaction much
as they do a merger. Partial acquisitions that do not result in effective control may nevertheless
present significant competitive concerns and may require a somewhat distinct analysis from that
applied to full mergers or to acquisitions involving effective control. The details of the post-
acquisition relationship between the parties, and how those details are likely to affect competition,
can be important. While the Agencies will consider any way in which a partial acquisition may affect
competition, they generally focus on three principal effects.
First, a partial acquisition can lessen competition by giving the acquiring firm the ability to influence
the competitive conduct of the target firm. A voting interest in the target firm or specific governance
rights, such as the right to appoint members to the board of directors, can permit such influence. Such
33
influence can lessen competition because the acquiring firm can use its influence to induce the target
firm to compete less aggressively or to coordinate its conduct with that of the acquiring firm.
Second, a partial acquisition can lessen competition by reducing the incentive of the acquiring firm to
compete. Acquiring a minority position in a rival might significantly blunt the incentive of the
acquiring firm to compete aggressively because it shares in the losses thereby inflicted on that rival.
This reduction in the incentive of the acquiring firm to compete arises even if cannot influence the
conduct of the target firm. As compared with the unilateral competitive effect of a full merger, this
effect is likely attenuated by the fact that the ownership is only partial.
Third, a partial acquisition can lessen competition by giving the acquiring firm access to non-public,
competitively sensitive information from the target firm. Even absent any ability to influence the
conduct of the target firm, access to competitively sensitive information can lead to adverse unilateral
or coordinated effects. For example, it can enhance the ability of the two firms to coordinate their
behavior, and make other accommodating responses faster and more targeted. The risk of coordinated
effects is greater if the transaction also facilitates the flow of competitively sensitive information
from the acquiring firm to the target firm.
Partial acquisitions, like mergers, vary greatly in their potential for anticompetitive effects.
Accordingly, the specific facts of each case must be examined to assess the likelihood of harm to
competition. While partial acquisitions usually do not enable many of the types of efficiencies
associated with mergers, the Agencies consider whether a partial acquisition is likely to create
cognizable efficiencies.
34
December 21, 2010
ANTITRUST AND COMPETITION NEWSLETTER FALL 2010
Welcome Orrick’s Antitrust and

Competition Group
Dear Friends and Colleagues:
Developments
In today’s high-tech world, patent litigation occurs frequently. Antitrust law has been
playing an increasingly important role in the litigation of patent suits. Understanding Regional Focus – California
how antitrust law fits into the patent litigation landscape has therefore become vital for
firms facing patent claims. In their article in this issue, Bob Freitas and David Goldstein Problems and Solutions
explore the twin topics of using antitrust law to defend against patent infringement
claims and bringing antitrust counterclaims in patent infringement cases. Upcoming and Recent Events
and Articles
I also commend to you the other sections of the newsletter, which cover, among other
topics, recent regional developments in Asia, Europe and the United States. We also Get to Know
have a special regional focus in this issue on recent antitrust developments in
California—warranted by the fact that California’s economy is approximately the eighth
largest in the world.
We hope that you find this issue of our newsletter informative and beneficial. If you 2010 Editors
have suggestions about topics that you would like us to address in the future, please Asia Editor
click the “Comments” button and send us a message with your thoughts. Vena Cheng
Warmly wishing you a healthy and happy New Year.
EU Editors
Best regards, Douglas Lahnborg
Bob Rosenfeld Andrés Martin-Ehlers
Chair, Antitrust and Competition Group Philippe Rincazaux
U.S. Editors
What’s Inside David Goldstein
Developments David Smutny
Global Antitrust and Competition News Howard Ullman
Regional Focus – California
Understanding How Antitrust Laws Are Applied in State and Federal Courts
Problems and Solutions

The Role of Antitrust Law and Analysis in Patent Litigation
Upcoming and Recent Events and Articles

Events and Articles Through February 2011 Manage Subscriptions
Get to Know Feedback

Stephen Bomse, San Francisco Partner
Past Issues
Winter 2010
Spring 2010
Developments Orrick’s Antitrust and

Competition Group
Asia Developments
NDRC Releases Draft Special Provisions on Penalties Against Price Violation Developments
On July 13, 2010, China’s National Development and Reform Commission (NDRC), Regional Focus – California
the agency responsible for price cartel enforcement, released the Draft Special Pro-
visions on Penalties Against Price Violations During the Period of Abnormal Price Problems and Solutions
fluctuation for public consultation. The Special Provisions would give the NDRC the
power to respond quickly to suspected price fixing, but would apply only during Upcoming and Recent Events
“special” circumstances, namely, abnormal price fluctuations in important commodities and Articles
that may significantly affect everyday life or industry production. They would apply only
to a limited range of prohibited conduct—price collusion, false rumors of price Get to Know
increases, malicious withholding of goods and price increases producing excessive
profits. The text of the Special Provisions can be found here.
MOFCOM Addresses Divestiture of Assets or Business During
Implementation of Concentrations Between Undertakings
On July 5, 2010, China’s Ministry of Commerce (MOFCOM) released the Provisional
Provisions on Divestiture of Assets or Business During Implementation of
Concentrations Between Undertakings (the Divestiture Provisions) with immediate
effect. The Divestiture Provisions were enacted to ensure the smooth divestiture of
assets or business by firms with a divestiture obligation pursuant to a MOFCOM
decision. The text of the Divestiture Provisions can be found here.
Hong Kong Publishes New Competition Bill
Hong Kong’s new Competition Bill was published and gazetted on July 2, 2010. The
Bill aims to prohibit and deter anticompetitive conduct that has the object or effect of
preventing, restricting or distorting competition in three major areas: (i) agreements and
concerted practices (including mergers); (ii) abuse of market power; and (iii) separately,
certain telecommunications mergers. The Bill provides an independent Competition
Commission, and a Competition Tribunal (a division of the High Court) will be
established. The Bill was tabled before the Legislative Council on July 14, 2010, but the
Bill’s committee has not yet been formed. The text of the Bill can be found here.
Europe Developments
Horizontal Agreements
On December 14, 2010, the European Commission adopted new rules governing Manage Subscriptions
cooperation agreements between competitors. The main areas of interest are as follows:
Standardisation – The rules aim to promote transparency in the licensing costs for Feedback
intellectual property used in standards. The Commission defines a safe harbor and
provides guidance on standardisation agreements that fall outside the safe harbor. Past Issues
Winter 2010
Spring 2010
2
Information Exchange – Although the Commission recognizes that information
Orrick’s Antitrust and
exchange can be “pro-competitive,” it cautions against exchange of information on Competition Group
future pricing and quantities. The new rules clarify how to assess information
exchanges for statistical or benchmarking purposes, which may not be aimed at Developments
restricting competition.
Research and Development (R&D) – The Commission has widened the scope of the Regional Focus – California
exemption for R&D agreements. The exemption now covers “paid for research”
agreements where one party finances R&D activities carried out by the other. It also Problems and Solutions
gives parties more scope to jointly exploit the R&D results.
The new rules regarding standardisation and information exchange, which can be found Upcoming and Recent Events
here, will come into force as soon they have been published in the Official Journal of and Articles
the EU, which should take place in the coming days. The new rules governing R&D
agreements, found here, will come into force on January 1, 2011. The text of the new Get to Know
rules can be found here.
Air Cargo Cartel (Case COMP/39258, Commission Decision of 9/11/2010)
On November 9, 2010, the European Commission fined 11 airlines €799 million for
participation in a price-fixing cartel from 1999 to 2006, which affected cargo services
within the European Economic area (EEA). In setting the fines, the Commission
considered the sales of the companies in the market, the serious nature of the
infringement and the EEA-wide scope and duration of the cartel. All carriers were
granted a 50% reduction on sales between the EEA and third countries because part of
the harm fell outside the EEA. Further reductions were granted to certain airlines to
reflect their marginal involvement, for cooperating with the Commission and to ensure
that the fine imposed on any airline did not exceed the cap of 10% of turnover.
However, the Commission rejected applications for reductions based on inability to pay
and imposed a 50% increase on SAS, which had previously been fined for participation
in another cartel. There are several pending damages actions before national courts.
The decision has not been published yet. The text of the Commission’s press release
can be found here.
U.S. Developments
Second Circuit Declines to Rehear Cipro Reverse Payment Case
On September 7, 2010, the Second Circuit rejected a petition for rehearing en banc in
Ciprofloxacin Hydrochloride Antitrust Litigation. A panel ruling on April 29 had affirmed
dismissal of the plaintiffs’ antitrust claims and held that a patent settlement between
Bayer (the brand pharmaceutical manufacturer) and Barr (the generic manufacturer) that
contemplated a payment for delayed entry by the generic did not violate the Sherman Manage Subscriptions
Act, but unusually invited a petition for rehearing en banc. In rejecting the petition, the
Second Circuit declined to follow amicus briefs filed by the U.S. DOJ, the FTC and 34 Feedback
state attorneys general, among others. The decision can be found here. A petition for
Supreme Court review was filed in December 2010. Past Issues
Winter 2010
Spring 2010
3
5th Circuit Affirms Dismissal of the Leegin Vertical Price-Fixing Case Orrick’s Antitrust and
On August 17, 2010, three years after the Supreme Court issued its decision in PSKS, Competition Group
Inc. v. Leegin Creative Leather Prods., Inc., overruling Dr. Miles and holding that vertical price
restraints are subject to the “rule of reason” not the per se rule, the 5th Circuit affirmed Developments
the district court’s dismissal of plaintiff’s case on the merits, holding that: (1) PSKS
failed to plausibly define a relevant product market; (2) PSKS’s horizontal restraint Regional Focus – California
claims were barred by the mandate rule, which precludes litigation of newly raised issues
on remand; (3) there was “no wheel” in PSKS’s hub-and-spoke conspiracy theory Problems and Solutions
because there were no plausible allegations of agreement among the individual retailers;
and (4) there was no “economic logic” to PSKS’s argument that defendant’s position as Upcoming and Recent Events
a “dual-distributor” (i.e., a wholesale supplier and a seller at the retail level of the and Articles
market) converted its vertical resale price maintenance agreement into horizontal
Get to Know
conduct. A copy of the opinion can be found here.
FALL 2010
Manage Subscriptions
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Spring 2010
4
Regional Focus Orrick’s Antitrust and

Competition Group
California
In this issue, we focus on California because thousands of companies do business in Developments
California, and California has its own antitrust statutes that are applied in judicial
decisions by both the California state courts and the federal courts. Three recent Regional Focus – California
decisions demonstrate the importance of understanding how the antitrust laws are
applied by state and federal courts in California. Problems and Solutions
The first case is Clayworth v. Pfizer, Inc., in which the California Supreme Court held that Upcoming and Recent Events
the “pass-on” defense is not available to defendants in price-fixing cases brought under and Articles
California’s Cartwright Act, California’s analogue to the U.S. Sherman Act, when a single
level of indirect purchasers sue. Under federal law, indirect purchasers are not allowed to Get to Know
sue, so the “pass-on” defense is not available to defendants. In California, however,
indirect purchasers are allowed to sue. The issue in Clayworth was whether defendants
can invoke the pass-on defense. The California Supreme Court said “no.” However, if
multiple levels of indirect purchasers sue, pass-on issues still may need to be addressed.
A more detailed analysis of this decision can be found in our July 13 client alert, available
here.
The second case is Bay Guardian Co., Inc. v. New Times Media LLC, in which the
California Court of Appeal held that—unlike under federal law—a plaintiff does not
need to demonstrate that a defendant can recoup it losses to prove a predatory pricing
claim under California’s Unfair Practices Act. In Bay Guardian, one alternative weekly
newspaper alleged that its rival had sold below-cost ads. The court concluded that
California law focuses on the purpose of the anticompetitive act, rather than potential
competitive harm, as do the federal antitrust laws. A copy of the decision can be found
here.
Finally, in California ex rel. Brown v. Safeway, Inc., the Ninth Circuit held that a profit-
sharing agreement among a number of California grocery store owners was not
immunized from antitrust review by the nonstatutory labor exemption, because the
agreement was not “needed to make the collective-bargaining process work” and did not
raise questions ordinarily resolved by application of labor law principles. The court
declined to hold the agreement was a per se Sherman Act Section 1 violation, because it
was of short duration and did not involve all the firms in the relevant market. The court
held, however, that the agreement violated Section 1 under a “quick look” analysis. The Manage Subscriptions
court rejected defendants’ argument that driving down compensation to workers is a pro-
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competitive benefit to consumers cognizable under the antitrust laws. A copy of the
decision can be found here. Past Issues
These cases demonstrate the range of state and federal antitrust issues that state and Winter 2010
federal courts in California routinely address. It is critical for businesses operating in Spring 2010
California to recognize that the state has its own set of antitrust laws that are not always
consistent with (and sometimes are contrary to) the federal antitrust laws.
5
Problems and Solutions Orrick’s Antitrust and

Competition Group
The Role of Antitrust Law and Analysis in Patent Litigation
Robert E. Freitas and David M. Goldstein Developments
The past decade has seen an explosion of patent litigation in the United States and an
increased role for antitrust claims and the use of antitrust analysis in patent cases. For
intellectual property lawyers, it is important to anticipate the antitrust issues often
presented by patentees’ licensing or other conduct and their patent enforcement
activities. For antitrust lawyers, it is important to understand the analytical framework Upcoming and Recent Events
for patent misuse and the antitrust counterclaims that may be available. and Articles
Antitrust Analysis for Patent Misuse Defenses
Get to Know
Patent misuse can be a powerful defense to a claim of patent infringement. If the
defendant prevails on a misuse defense, the patent is rendered unenforceable until the
misuse is purged. Senza-Gel Corp. v. Seiffhart, 803 F.2d 661, 668 n.10 (Fed. Cir. 1986).
This is true not only as to the defendant, but also as to all others against whom the
patentee would try to enforce the patent. This makes the patent misuse defense a
potent weapon.
Misuse frequently arises as a result of the patentee’s licensing practices. Several types
of licensing conduct have been held to constitute patent misuse or have been alleged in
reported cases to be misuse, including: tying patents to unpatented goods, tying patents
to patents (package licenses), charging post-expiration royalties, demanding royalties
under U.S. patents based on worldwide sales, anticompetitive grantback clauses and
field-of-use restrictions, and certain horizontal arrangements that often arise in the
context of patent pools and cross-licensing arrangements.
The Federal Circuit has described patent misuse as the patentee’s act of “impermissibly
broaden[ing] the ‘physical or temporal scope’ of the patent grant with anticompetitive
effect.” Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986) (emphasis
added). “To sustain a misuse defense involving a licensing arrangement not held to
have been per se anticompetitive by the Supreme Court, a factual determination must
reveal that the overall effect of the license tends to restrain competition unlawfully in an
appropriately defined relevant market.” Id. at 1001-02 (emphasis added). In August 2010,
the Federal Circuit affirmed that patent misuse requires proof of anticompetitive
effects resulting from the misuse. Princo Corp. v. Int’l Trade Comm’n, 616 F.3d 1318 (Fed.
Cir. 2010). Princo holds, however, that proof of an antitrust violation associated with
the use of a patent is not sufficient to establish misuse. “What patent misuse is about,
in short, is ‘patent leverage,’ i.e., the use of the patent power to impose overbroad
conditions on the use of the patent in suit that are ‘not within the reach of the
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monopoly granted by the Government.’” Id. at 1331 (quoting Zenith Radio Corp. v.
Hazeltine Research, Inc., 395 U.S. 100, 136-38 (1969)). Past Issues
Winter 2010
Spring 2010
6
This emphasis on anticompetitive effects means that the traditional tools used for
antitrust analysis are critical in the evaluation of a patent misuse defense. The only Competition Group
clear exception is when the patentee charges royalties based on post-expiration sales,
which continues to be treated as per se unlawful under Brulotte v. Thys Co., 379 U.S. 29 Developments
(1964). Prevailing on a patent misuse defense typically requires the rule of reason
analysis employed in antitrust cases. Regional Focus – California
Antitrust Counterclaims in Patent Infringement Cases
Defendants in infringement cases also commonly assert antitrust counterclaims in an
effort to level the litigation playing field. The typical claim is a Sherman Act Section 2 Upcoming and Recent Events
claim for monopolization and attempted monopolization. The two main categories of and Articles
antitrust counterclaims are Walker Process and Handgards claims.
A Walker Process claim alleges that the patentee fraudulently procured the patent-in- Get to Know
suit. See Walker Process Equip. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965). A
Walker Process claim is a complement to the inequitable conduct defense to an
infringement claim. Rather than using misconduct before the Patent and Trademark
Office (PTO) to invalidate a patent, the infringement defendant asserts the knowing
enforcement of a fraudulently obtained patent as the predicate anticompetitive
conduct supporting a Section 2 claim. Unlike the inequitable conduct defense, Walker
Process always requires proof of “knowing and willful” fraud in prosecution. Id. at 177.
Prevailing on a Walker Process claim requires not only demonstrating, by clear and
convincing evidence, that the patent holder committed fraud on the PTO, but also
proving, by a preponderance of the evidence, all of the other elements of a Section 2
claim.
A Handgards claim alleges that the patentee is seeking to enforce the patent even
though the patentee learns that the patent is invalid or unenforceable after obtaining
the patent. See Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979). Under
Handgards, if the counterclaimant demonstrates by clear and convincing evidence that
the patentee is enforcing the patent with actual knowledge that it is invalid, the sham
litigation exception to the Noerr-Pennington immunity doctrine is satisfied. Some courts
have applied to Handgards claims the two-part test for sham litigation claims adopted
in Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) (PRE).
Under PRE , the counterclaimant must prove that the infringement suit is “objectively
baseless in the sense that no reasonable litigant could realistically expect success on the
merits” and that by suing the patentee is attempting “‘to interfere directly with the
business relationships of a competitor,’ through the ‘use [of] the governmental process –
as opposed to the outcome of that process – as an anticompetitive weapon.’” 508 Manage Subscriptions
U.S. at 61 (citations omitted). Prevailing on a Hangdards claim also requires proving all
the other elements of a Section 2 claim. Feedback
In addition to Walker Process and Handgards claims, it is becoming common for
defendants in infringement cases to assert Section 2 counterclaims, as well as other Past Issues
claims, based on misconduct before standards-setting organizations (SSO). There are Winter 2010
two main categories of claims. In the first, an alleged infringer asserts that the Spring 2010
patentee engaged in patent holdup by engaging in deceptive conduct in the SSO
7
process so that its patented technology was incorporated into the industry standard, or
competition was otherwise restrained. E.g., Rambus, Inc. v. FTC, 522 F.3d 456 (D.C. Orrick’s Antitrust and
Cir. 2008). In the second, the alleged infringer asserts that the patentee reneged on a Competition Group
commitment to license its patents on reasonable and non-discriminatory (RAND)
terms. E.g., Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007). When Developments
asserted under Section 2, both categories of claims require typical antitrust analysis
and proof. Regional Focus – California
Conclusion Problems and Solutions

The assertion of patent misuses defenses and antitrust counterclaims is now routine in
patent litigation. The antitrust issues associated with these defenses and Upcoming and Recent Events
counterclaims, often seen as subsidiary to the patent claims, are frequently at least as and Articles
complicated and important as the underlying patent litigation. The antitrust-based
Get to Know
claims and defenses require the same level of focus and diligence as the patent claims
and other defenses.
Feedback
Past Issues
Winter 2010
Spring 2010
8
Upcoming and Recent Events and Articles Orrick’s Antitrust and

Competition Group
Upcoming Antitrust and Competition Events
February 2011 Developments
Directors Roundtable Programs
London, UK – February 9, 2011 Regional Focus – California
Paris, France – February 10, 2011
Orrick partners Ted Henneberry and Douglas Lahnborg will discuss recent antitrust Problems and Solutions
and competition issues of importance to directors and officers as part of a panel
Upcoming and Recent Events
featuring Richard Feinstein, Director of Competition at the FTC.
and Articles
Past Events
November 2010 Get to Know
IBA Asia Pacific Forum Antitrust Enforcement
Tokyo, Japan – November 17-19, 2010
Philippe Rincazaux participated in a panel discussion on the growing themes of
antitrust enforcement in the region with a particular focus on abuse of dominance and
cartel enforcement.
Directors Roundtable
Washington, DC – November 12, 2010
Orrick partners Ted Henneberry and Jay Jurata discussed recent antitrust and
competition issues of importance to directors and officers as part of a panel featuring
Richard Feinstein, Director of Competition at the FTC.
ICN Merger Workshop
Rome, Italy – November 3-5, 2010
Orrick partner Ted Henneberry participated in the Italian Competition Authority’s
2010 Merger Workshop, which focused on merger enforcement trends, economic
analysis in merger review and merger investigations.
ABA-IBA Training Program
New Dehli, India – November 1-2, 2010
Orrick partner David Smutny participated in a training program for the Competition
Commission of India staff. Topics discussed included Merger Process, Cross-Border
M&A, Cartels, Transparency/Procedural Fairness, Sectoral Regulations and
Competition, Antitrust and the Internet, and Dominance/Unilateral Conduct.
October 2010
Association Francaise des Juristes d’Entreprise Manage Subscriptions
Paris, France – October 18, 2010
Orrick partner Philippe Rincazaux participated in a panel on “Consequences of the Feedback
Akzo Judgment” at a conference for the French Association of In-House Counsels.
IBA Annual Conference Past Issues
Vancouver, Canada – October 3-8, 2010 Winter 2010
Orrick partner Philippe Rincazaux co-chaired a workshop on “Unilateral Conduct— Spring 2010
The Law of Discounts and Loyalty Rebates in the EU, U.S. and Elsewhere. ”
9
September 2010
State Bar of California Annual Meeting Competition Group
Monterey, CA – September 24, 2010
Orrick partner Robert Rosenfeld was a speaker at the 83rd State Bar of California Developments
Annual Meeting in Monterey.
IBA Antitrust Conference
Florence, Italy – September 17-18, 2010 Problems and Solutions
Orrick partner Philippe Rincazaux moderated a panel discussion on the latest
developments in cartel investigations in Europe and the United States. Upcoming and Recent Events
August 2010 and Articles
Ramifications of American Needle, Inc. v. NFL
San Francisco, CA – August 4, 2010 Get to Know
Orrick partner Stephen Bomse participated on a panel with FTC Commissioner Tom
Rosch and others for the Antitrust Section of the Bar Association of San Francisco. The
panelists discussed the impact of American Needle on joint ventures.
Recent Antitrust and Competition Publications
Key Ruling on Legal and Professional Privilege, Antitrust and Competition Alert,
September 2010, by Douglas Lahnborg and Matthew Rose
California Supreme Court Denies Pass-On Defense in Price-Fixing Cases,
Antitrust and Competition Alert, July 2010, by David Goldstein, Richard Goldstein,
Robert Reznick and Howard Ullman
The European Union General Court rules on AstraZeneca v. Commission,
Antitrust and Competition Alert, July 2010, by Douglas Lahnborg
Threading the American Needle: Is There Still Room for a Unitary Action
Doctrine in Antitrust Cases Involving Joint Ventures?, Competition Policy International,
June 2010, by Stephen Bomse
Private Damages Actions in the EU, 2010 Competition and Antitrust Review, Summer
2010, by Douglas Lahnborg and Wessen Jazrawi
Most Favored Nations Clauses in Health Care: Are They Legal or Not?, The Price
Point, Summer 2010, by Scott Westrich
European Commission Adopts Revised Block Exemption for Vertical
Restraints, The Price Point, Summer 2010, by Douglas Lahnborg and Elizabeth
Turner
Feedback
Past Issues
Winter 2010
Spring 2010
10
Get to Know Orrick’s Antitrust and

Competition Group
Stephen V. Bomse, San Francisco Partner
Stephen Bomse, a partner in Orrick’s San Francisco office, is a member of the Litigation Developments
Group specializing in antitrust litigation. He is widely regarded as one of the nation’s
leading antitrust lawyers, having tried cases throughout
the United States involving multibillion dollar claims while
also maintaining a significant appellate practice, including
his successful representation of Weyerhaeuser Company Upcoming and Recent Events
in a major Section 2 case before the United States and Articles
Supreme Court. Mr. Bomse also represents clients from
around the world in other types of complex commercial Get to Know
litigation, both at the trial and the appellate level.
Mr. Bomse and his partner Larry Popofsky were counsel
for GTE Sylvania in the landmark U.S. Supreme Court
case of GTE Sylvania v. Continental T.V., 433 U.S. 36 (1977),
which is widely credited with changing the direction of
American antitrust law both in the area of vertical restraints and,
Stephen V. Bomse
and, more generally, by reorienting U.S. competition policy Partner
in favor of its current economic-based approach to the San Francisco Office
analysis of competition issues. (415) 773-4145
sbomse@orrick.com
Among the many other companies for whom Mr. Bomse
has handled significant antitrust matters are: Visa U.S.A., Sony Corporation, 3M, Coca-
Cola, Pacific Gas & Electric, Sara Lee Corporation, Levi Strauss & Co., American Home
Foods, SunTrust Banks, Miller Brewing and Weyerhaeuser Company.
Mr. Bomse recently conducted a series of seminars in Taiwan addressing current
antitrust issues of importance to international companies. He is the author of numerous
antitrust and competition articles, including, most recently, Threading the American
Needle: Is There Still Room for a Unitary Action Doctrine in Antitrust Cases
Involving Joint Ventures?, published by Competition Policy International.
Before joining Orrick, Mr. Bomse was a shareholder at Heller Ehrman LLP where he
served for many years as a member of its Management and Policy Committee, and
headed up both the Litigation Department and the firm’s Global Competition Practice.
Feedback
Past Issues
Winter 2010
Spring 2010
11

Trends in U.S. & European Competition Law

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Trends in U.S.

Matthew Bennett Samid Hussain

Richard Feinstein Douglas Lahnborg

Ted Henneberry Paul Muysert

London, 9 February 2011

60 lost to competitor provides

retailer increases P1A

Matthew Bennett Samid Hussain

Richard Feinstein Douglas Lahnborg

Ted Henneberry Paul Muysert

London, 9 February 2011

CC2 (Revised) OFT1254

A joint publication of the

• OFT publications: Mergers—substantive assessment guidance (OFT516),

• CC publication: Merger References: Competition Commission Guidelines, CC2.

• Part 3 explains what is meant by a ‘relevant merger situation’.

• Part 4 explains the Authorities’ approach to the concept of a ‘substantial

Page 4 Competition Commission & Office of Fair Trading

• Part 5 describes the analytical approach and methodologies applied by the

• Part 6 provides guidance on public interest cases.

• Part 7 lists additional guidance relevant to the UK merger control regime.

 Status of the Merger Assessment Guidelines

• situations leading to an SLC are generally described in the future tense,

• the term ‘products’ is used to apply to goods and/or services;

 The UK merger regime

Page 6 Competition Commission & Office of Fair Trading

It has no authority to investigate any merger unless it has been asked to do so

 The European dimension

Page 8 Competition Commission & Office of Fair Trading

2.1 In assessing a merger, both Authorities must consider whether:

(b) whether or not this situation will lead to an SLC.

• a relevant merger situation has been created, or arrangements are in progress

• the creation of that situation has resulted, or may be expected to result, in an

19 Sections 22(2) and 33(2).

Page 10 Competition Commission & Office of Fair Trading

• whether the creation of that situation has resulted, or may be expected

The CC is not required to consider the second question if it decides that no

2.13 In its consideration of remedies, the CC must decide three questions:25

The ‘relevant merger’

 Section 3.1: Introduction

(a) the meaning of ‘enterprises ceasing to be distinct’;

(b) the turnover test;

(c) the share of supply test; and

(d) the time period for referring mergers.

 Criteria for a relevant merger situation

• two or more enterprises must cease to be distinct, or there must be

Page 12 Competition Commission & Office of Fair Trading

• either the value of UK turnover of the enterprise which is being acquired

or the enterprises which cease to be distinct supply or acquire goods or

 Section 3.2: Enterprises ceasing to be distinct

3.2.3 In making a judgement as to whether or not the activities of a business, or part

3.2.4 An enterprise may comprise any number of components, most commonly

physical assets alone may be sufficient to constitute an enterprise, for example

• Company A may acquire the ability to control the policy of Company B

• Company A may acquire a controlling interest in Company B (known as ‘de

Page 14 Competition Commission & Office of Fair Trading

3.2.10 In considering whether material influence may be present by virtue of a

• patterns of attendance and voting at recent shareholders’ meetings based on

• any other special provisions in the constitution of the company conferring an

‘De facto control’

Acquiring control by stages

3.2.16 In principle, therefore, if Company A acquires Company B in stages, this could

Status of the Merger Assessment Guidelines

The UK merger regime

The European dimension

Section 3.1: Introduction

Criteria for a relevant merger situation

Section 3.2: Enterprises ceasing to be distinct

‘Share of supply test’

Time period for investigating mergers

Section 4.1: What is an SLC?

Section 4.2: Theories of harm

Section 4.3: The ‘counterfactual’

The exiting firm scenario

Loss of potential entrant scenario

Competing bids and parallel transactions

Section 5.1: Introduction

Section 5.2: Market definition

(a) Defining the product market

closeness of substitution between products can be indicated by the diversion

(c) Price sensitivity of customers. If customers are insensitive to changes in the