Back in June, the Commerce Commission ruled on the case of a proposed merger between three commercial rafting operators in Rotorua. As the New Zealand Herald reported (in August):
The Commerce Commission has approved the merger of Rotorua’s three commercial rafting operators, much to the pleasant surprise of those behind the bid.
The ruling, finalised in June, came after months of investigation, during which Rotorua Rafting director Sam Sutton became so resigned to defeat that he and his fellow applicants came close to ditching the proposal.
After two decision extensions amid the commission’s concerns that the merger might lessen competition, Sutton was prepared for bad news.
I briefly covered the economics of antitrust law in my ECONS102 class today. My view still remains that the Commerce Commission's criterion for determining merger applications is deeply flawed. As I noted in this 2021 post, the Commerce Commission exists to enforce the Commerce Act, and section 47 of the Act says prohibits acquiring "assets of a business or shares" if that acquisition would have the effect of "substantially lessening competition".
Now, any merger between competing firms by its very nature removes some direct competition between them. So, the Commerce Commission's decision always hinges on whether a proposed merger meets the threshold of 'substantially' lessening competition. The Commerce Act defines 'substantial' only as "real or of substance", and the case law on this makes it clear that whether competition is substantially lessened is ultimately a matter of degree. So the exercise is inherently imprecise and subjective.
The US Federal Trade Commission (FTC) has a more objective approach, which is to compute the Herfindahl-Hirschman Index (HHI) before and after the proposed merger, and to presume that any merger that increases the HHI by 100 points in an industry that is already classed as 'concentrated' or 'highly concentrated' is substantially lessening competition.[*] The FTC may then choose to contest the proposed merger (in court). That at least provides a much transparent threshold against which mergers can initially be assessed. In my view, a more economically coherent approach would be for antitrust authorities to decide on the basis of economic welfare, as I discussed in this 2021 post.
Interestingly, the Commerce Commission's decision itself illustrates the difficulty of applying the test. Only two of the three Commissioners were satisfied that the merger was unlikely to substantially lessen competition, and all three agreed that it was a "finely balanced decision". Seven months after lodging their application, though, the rafting operators finally have their answer. And now they can get on with their business, safe in the knowledge that they are not 'substantially lessening competition'.
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[*] The Herfindahl-Hirschman Index can be calculated by squaring the market share of each firm in the market, and adding up the resulting numbers. An industry with an HHI of under 1000 is classed as 'competitive', an industry with an HHI of between 1000 and 1800 is classed as 'concentrated', and an industry with an HHI of over 1800 is classed as 'highly concentrated'. For example, an industry with just four firms, with market shares of 40 percent, 27 percent, 19 percent, and 14 percent, would have an HHI of 40^2+27^2+19^2+14^2 = 2886, and would be classed as 'highly concentrated'.
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