While mergers can have positive effects, such as increased efficiency and lower costs, they can also limit market competition and harm consumer interests. To prevent this, governments review mergers for illegality and ensure fair competition through legal regulation.
When two or more companies combine their capital, organization, etc. to form a single economic entity, it is called a business combination. This is one of the strategic choices that companies make, and it plays an increasingly important role in the modern economy as globalization accelerates. It allows companies to realize economies of scale, share research and development (R&D) costs, or maximize marketing efficiency, among other benefits. For example, in industries with rapid technological innovation, it can be overwhelming for individual companies to conduct all of their own research and development. In such cases, combining companies can be an advantageous way to speed up innovation through technological collaboration and stay competitive in the market.
However, business combinations are not always positive. They can sometimes have dysfunctional effects, such as limiting competition in the market or harming the interests of consumers. For example, if two competing companies with 30% and 40% market share, respectively, combine to create a 70% market share, competition is restricted and they can abuse their position or raise prices unfairly. This reduces consumer choice and increases the likelihood of harm from higher prices. For this reason, governments are taking legal measures to protect the purpose and net function of mergers, while identifying and preventing harm to markets and consumers. These legal regulations are more than just a formality; they are an important means of maintaining a level playing field in the marketplace and promoting the healthy development of the economy as a whole.
The process of determining the illegality of a merger involves several steps. The first step is to determine whether a business combination has been established. The question is whether a single control relationship has been established between the entities. For example, in the case of a merger through the acquisition of shares, if the acquiring company does not acquire enough shares to economically control the acquired company, the merger is not recognized and the review is terminated. In addition to the flow of capital, the actual distribution of control of the business operations is also an important consideration in this process.
If, on the other hand, the merger is approved, the next step is for the government to define the scope of the market it will affect. The most important thing is to determine whether the combination is a horizontal combination between competitors in the same market, a vertical combination between companies at different stages of trading, or a hybrid combination between companies that are neither of these two types of combinations and are not particularly related. For example, vertical combinations cover all stages from production to distribution, giving a company effective control over the entire supply chain. However, there is also a risk that this could severely limit competition in certain markets.
The question is, how do you define a market? Usually, it’s based on how sensitive consumers are to an increase in the price of one product and switch to another. The higher the sensitivity, the closer the products are to being substitutes for each other, i.e., products that can provide the same utility to the consumer. This sensitivity analysis plays an important role in understanding the nature of the market and predicting the likelihood that a merger will actually restrict competition.
Once the market has been scoped based on these analyses, the next step is to determine whether the merger will restrict competition in the market. However, even if it is found to be likely, it is not immediately illegal. This is because a combination is not evaluated solely on the basis of market share, but also on the basis of the actual economic effects of the combination. The government will give the parties an opportunity to argue the merits or inevitability of the merger and review its validity before making a final decision on whether to impose remedial measures. This process ensures that the merger is tailored to maximize its intended purpose while minimizing any adverse social effects.
