Question 1

Background on Sainburys and ASDA?

Accepted Answer

Was going to bring together the 3rd and 2nd largest supermarkets in the UK Sainsbury’s --\> much larger than ASDA 1,428 grocery stores (including 647 supermarkets and 781 convenience stores) 314 petrol filling stations an online grocery business (offering click & collect and home delivery) sells general merchandise (including toys, electricals and clothing) in-store & online operates Argos (general merchandise) and Habitat (furniture) Asda 641 grocery stores (including 582 supermarkets and 59 convenience stores) 321 petrol filling stations an online grocery business (offering click & collect and home delivery) sells general merchandise (including toys, electricals and clothing) in-store & online 33 Asda Living stores (focused on non-grocery products including clothing)

Question 2

Summary of the timeline of the merger?

Accepted Answer

April 2018 Sainbury’s and Asda publicly announce intention to merge Achieve over £500m in efficiencies; lower prices by 10% for many products (Sainsbury’s CEO caught singing “We’re in the money!” before interview) August 2018: CMA formally launches merger investigation Phase 1 investigation started on 23 August and lasted about 2-3 weeks The parties asked for fast-track reference to Phase 2 --\> both knew there was going to be some contention about the merger anyways February 2019: CMA announces provisional findings CMA raises concerns about a substantial lessening of competition The parties question the findings and propose a package of remedies April 2019: final decision CMA prohibits merger After which they admitted that the efficiencies were actually greater than they expected and some of the problems that they thought the merger was going to crease were unlikely to materialise

Question 3

What other parts of the market did the CMA look at?

Accepted Answer

Online delivered groceries Three near-national players: Tesco, Sainsbury’s, and Asda (CR3=[70-80]%) Ocado—focused on the South of England—has a comparable national share Grocery prices same as in-store prices set nationally online-ordering services were same across UK; delivery prices varies locally Convenience stores Sainsbury’s had a much larger group of convenience stores pricing being set at a local level Asda’s convenience stores located at petrol stations (with prices same as in-store) Supply of fuel Sainsbury’s and Asda together operate 7.5% of all UK petrol stations Competitors: Tesco and Morrisons; and oil majors (BP, Esso, Shell, Texaco, and Gulf) Fuel prices set locally

Question 4

What did the CMA think would happen to competition if the merger went through?

Accepted Answer

UNILATERAL EFFECTS ● National: In-store groceries would have higher prices (or lower quality) ( This affects every local area where either party operated a supermarket and online groceries and in Asda’s convenience stores) ● Local: Competition harmed at 40% of Sainsbury’s supermarkets and 50% of Asda’s (500 of their combined stores) Market-power concerns in convenience stores for 18 local areas Market-power concerns in fuel for 127 local areas COORDINATED EFFECTS Online delivered groceries had an increased the likelihood of tacit collusion (In-store groceries was not conducive to increase likelihood of collusion) But they believed that it would the be delivery prices that would be higher due to Tacit collusion

Question 5

So why did the CMA go for prohibition rather than opting for the remedies offered?

Accepted Answer

The CMA considered two potential structural remedies: (a) prohibition of the merger; and (b) divestiture to suitable parties of assets sufficient to address concerns After provisional findings, the parties proposed a package of remedies of ● Structural (sell off asset to change the market structure): divest around 125-150 supermarkets, “potentially” a number of convenience stores, and a number of petrol stations ● Behavioural (restriction of behaviour that would not encourage competition) : reduce prices; cap on S’s fuel margins & maintain A’s pricing strategy; S to pay suppliers promptly The CMA thought this proposal was insufficient and considered its own - although both firms said they would not consider any remedy package but their own : Structural remedies risky due to difficultly of finding a buyer (evidence that the buyer leaving the market after the purchase as they cannot keep up running all of the businesses) Behavioural remedies impractical due to complexity of the parties’ operations CMA try and avoid these as they have to invest their resources and time into making them work

Question 6

Coordinated: Framework for assessing the coordination that could occur?

Accepted Answer

CMA had to took a really formulaic approach to assessing coordination --\> this is because the theory of collusion leads them down this route as, unlike unilateral effects, there is no easier indicator to rely on The framework for assessing coordination is in the merger assessment guidelines The CMA should: ● specify what form of coordination it considers most likely Who is likely to collude, What strategic variable they are likely to be colluding over, what geographic markets they are going to collude and how it is going to arise ● consider whether firms in the market were coordinating pre-merger ● analyse the conduciveness of market to coordination pre-and post-merger Necessary conditions: The CMA should analyse whether the following conditions are met: (a) Firms are able to reach (and monitor) a common understanding How easily would they be able to coordinate and collude Can they monitor changes in prices of each other (b) Coordination is internally sustainable among the coordinating group If firm's were to deviate, is there a sufficiently large enough punishment to deter them from doing that and to collude forever (c) Coordination is externally sustainable Are there firm outside the collusive group that could undermine them

Question 7

Coordinated: What did the CMA have to say about the Coordination of in-store groceries?

Accepted Answer

Hypothetical form of coordination: Most likely coordinating group = Sainsbury’s, Asda, Tesco and Morrisons Focus of coordination = Prices of all products or those not sold by Aldi and Lidl Where? = National How? = Trial and error Pre-existing coordination: evidence more consistent with competition Firms spent a large amount of money monitoring each other stable market shares There had already been collusion 20-30 years ago in the dairy market The Competition Commission in 2004 found the Safeway-Morrison merger would actually create coordinated effects Pre-merger conduciveness: Condition (a) not met (too difficult to create a collusive group) , so others not considered relatively stable, transparent market and the similarity in business models no evidence of pricing alignment; great complexity of coordinating many products The effect of the merger: Condition (a) still not met A reduced number of firms and increased symmetry makes coordination easier But complexity remains! So, coordination not ‘more likely than not’ post-merger

Question 8

Coordinated: What did the CMA have to say about the Coordination of online groceries?

Accepted Answer

Believe that coordinated effects would arise in this market Hypothetical form of coordination: Most likely coordinating group = Sainsbury’s, Asda, and Tesco Focus of coordination = delivery pricing (including slot length, min basket size) Where? = in postcode areas where Ocado not active How? Trial and error Pre-existing coordination: not sufficient evidence of coordination Always monitoring each other Looked at internal documents of the companies --\> found that they all used different pricing strategies for their online business and that there was no pricing alignment Pre-merger conduciveness: Condition (a) not met, but both (b) and (c) met Reaching agreement difficult: pricing deliveries --\> Asda prices nationally, others locally Tesco and Sainbury's raised their prices during peak demand whereas Asda could not Coordination internally/externally sustainable: gain from deviating short-lived externally sustainable as their only other competitor was Ocado but their whole aim was to operate in the market outside where they serviced The effect of the merger: Condition (a) met, (b) increased and (c) not decreased Easier to reach an agreement if Asda prices locally --\> condition a) now met internally sustainable --\> now only two symmetrical players (easier to coordinate) externally sustainable --\> no outside firm to effect them colluding Thus, SLC due to coordinated effects in 20% of UK postcodes

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L9 - Horizontal Mergers Case Studies Flashcards

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