Sainsburys-Asda Merger

Question 1

What activities were the firms involved in? (What goods were they selling?) (5)

Answer 1

Grocery Stores (Sains: just under 1500, Asda: just under 650)
Petrol Filling Stations (Both had around 320, Asda had a few more)
Both had an online presence
Both sold general merchandise
Sains runs Argos and Habitat, Asda has 33 living stores

Question 2

What are the main differences between the stores? (2)

Answer 2

Sains mostly located in the south, and provide higher quality goods

Question 3

When was this publicly announced?

Answer 3

April 2018

Question 4

What were the positive aspects of the merger? (2)

Answer 4

Claim to have £500m in efficiencies
Lower prices by 10% for many products

Question 5

When did the CMA formally launch its investigation?

Answer 5

Aug 2018

Question 6

Why is there a difference between the firms’ announcement and the CMA’s?

Answer 6

Because the initial merger announcement is usually meant for the shareholders

Question 7

What are the 2 phases of the CMA investigation?

Answer 7

Phase 1: A quick at the merger and decides if there are problems arising from the merger or not - usually takes about 6 weeks Phase 2: Brought in if competitive issues cannot be resolved in phase 1. This is a much longer look into the merger, and can last up to 6 months (sometimes more)

Question 8

Why did Sains/Asda ask for the investigation to be fast tracked to phase 2?

Answer 8

They knew there would be competition issues and wanted to resolve it quicker

Question 9

How long did Phase 1 last?

Answer 9

About 2-3 weeks

Question 10

When did the CMA announce its initial findings?

Answer 10

Feb 2019

Question 11

What were Sains/Asda’s proposed remedies to the lessening of competition found by the CMA?

Answer 11

Structural: Divest around 125-150 supermarkets, potentially, a number of conv. stores, and a number of petrol stations
Behavioural: Reduce prices; Cap on Saino’s fuel margins and maintain Asda’s pricing strategy; Sains to pay suppliers promptly

Question 12

When did the CMA prohibit the merger?

Answer 12

April 2019

Question 13

What conclusions did the CMA come to post-investigation?

Answer 13

The efficiencies were greater than they had at first given them credit for
Some of the problems they thought the merger would create are unlikely to materialise
BUT they said huge problems still remained with the merger and so prohibition was still the way forward

Question 14

Why did the CMA argue that competition occurred both nationally and locally in supermarkets?

Answer 14

Because although the prices across the UK of supermarkets was the same (i.e. a chocolate bar from Tesco would cost the same in Kent as it did in Scotland), the choice of products would vary locally, and the extent of queueing varied - affecting the quality of the service consumers would experience

Question 15

What was the CR3 of the online groceries market?

Answer 15

70-80% (Tesco, Sains, Asda - Tesco had double the share of Sains + Asda)
The only other competitor is Ocado

Question 16

What Unilateral effects did the CMA find from this merger?

Answer 16

Nationally: In-store prices would increase (or quality decrease) - this would knock onto every local market as well
Locally: Competition harmed at 40% of Sains supermarkets and 50% of Asda’s
Market power concerns in convenience stores for 18 local areas
Market power concerns in 127 local areas for fuel

Question 17

What coordinated effects did the CMA argue would occur?

Answer 17

Online delivered groceries had increased likelihood of collusion (the delivery prices)

Question 18

What is GUPPI?

Answer 18

Gross Upward Pricing Pressure Index
An indicator to assess the incentives for firms to raise prices as a result of a merger

Question 19

What is the formula for GUPPI(i)?

Answer 19

-Diversion(i→j)*price-cost ratio(j)*(price(j)/price(i))
This estimates the increase in i’s price-cost ratio (i.e. Lerner index) due to a merger (i.e. if the GUPPI(i) = 1.5%, i’s price-cost ratio will increase by 1.5 percentage points due to a merger)
-Diversion(i→j) is the proportion of sales captured by j when i raises its prices
–if 100 customers leave i and 10 go to j, Diversion(i→j) = 10%
–closer substitutes have higher diversion ratios

Question 20

What were the National GUPPIs for Sainos and Asda?

Answer 20

2.5% for Sainos and 3.3% for Asda

Question 21

How do we calculate the GUPPI?

Answer 21

We need to consider the Lerner index pre and post-merger

Pre-merger profits are π(p_(i),p_(j)) = (p_i-c_(i))q(p_(i),p_(j))

We want to find the FOC of this function to find the profit maximising output

This function can now be changed to the Lerner index

Question 22

What is the Lerner index?

Answer 22

p_(i)-c_(i)/p_(i) = 1/ε

Question 23

What is the profit of the firms post merger?

Answer 23

Add the two profit functions together for products i and j

_ji.e.: π_(i)+π_(j) = (p_(i)-c_(i))q_i + (p_(j)-c_(j))q_j

Question 24

How do we find the FOC of this merged firm function?

Answer 24

Differentiate with respect to p_(i) (if its a small increase in p_(i))

This looks like: δ(π_(i)+π_(j))/δp_(i) = q_i(p_i,p_j)+(p_i-c_i)[δq_i(p_i,p_j)/δp_i] + (p_j-c_j)[δq_j(p_i,p_j)/δp_i]

REMEMBER NOT TO INCLUDE THE q_j

Question 25

What is the post merger Lerner index?

Answer 25

It is the own price elasticity of demand (i.e. 1/ε) plus the GUPPI(i) (see notebook for the formula)

Question 26

What are the properties of the GUPPI? (2)

Answer 26

It is increasing in diversion ratio

It is increasing in firm j’s price-cost ratio

Question 27

How did the CMA calculate the GUPPI for Sains/Asda?

Answer 27

For prices they would have used the cost of a similar basket of goods in both stores (pj/pi)

Price-cost ratio of firm j would have been the Lerner index of firm j pre merger

Diversion ratio was calculated through a survey

• “If prices rose by 5-10%, what would you do?”

Question 28

Why did using the GUPPI raise concerns for the CMA investigation?

Answer 28

It’s not normally used as an indicator for market problems

Question 29

Which features of the Sainsbury’s/Asda merger were consistent with it raising the likelihood of tacit collusion post-merger and which were not?

Answer 29

Question 30

How does the CMA assess Coordination?

Answer 30

Question 31

What was the result for the in-store investigation for coordination?

Answer 31

Question 32

What was the CMA’s result for the investigation of online coordination?

Answer 32