Sainsburys-Asda Merger Flashcards
What activities were the firms involved in? (What goods were they selling?) (5)
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
What are the main differences between the stores? (2)
Sains mostly located in the south, and provide higher quality goods
When was this publicly announced?
April 2018
What were the positive aspects of the merger? (2)
Claim to have £500m in efficiencies
Lower prices by 10% for many products
When did the CMA formally launch its investigation?
Aug 2018
Why is there a difference between the firms’ announcement and the CMA’s?
Because the initial merger announcement is usually meant for the shareholders
What are the 2 phases of the CMA investigation?
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)
Why did Sains/Asda ask for the investigation to be fast tracked to phase 2?
They knew there would be competition issues and wanted to resolve it quicker
How long did Phase 1 last?
About 2-3 weeks
When did the CMA announce its initial findings?
Feb 2019
What were Sains/Asda’s proposed remedies to the lessening of competition found by the CMA?
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
When did the CMA prohibit the merger?
April 2019
What conclusions did the CMA come to post-investigation?
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
Why did the CMA argue that competition occurred both nationally and locally in supermarkets?
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
What was the CR3 of the online groceries market?
70-80% (Tesco, Sains, Asda - Tesco had double the share of Sains + Asda)
The only other competitor is Ocado
What Unilateral effects did the CMA find from this merger?
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
What coordinated effects did the CMA argue would occur?
Online delivered groceries had increased likelihood of collusion (the delivery prices)
What is GUPPI?
Gross Upward Pricing Pressure Index
An indicator to assess the incentives for firms to raise prices as a result of a merger
What is the formula for GUPPI(i)?
-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
What were the National GUPPIs for Sainos and Asda?
2.5% for Sainos and 3.3% for Asda
How do we calculate the GUPPI?
We need to consider the Lerner index pre and post-merger
Pre-merger profits are π(p(i),p(j)) = (pi-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
What is the Lerner index?
p(i)-c(i)/p(i) = 1/ε
What is the profit of the firms post merger?
Add the two profit functions together for products i and j
ji.e.: π(i)+π(j) = (p(i)-c(i))qi + (p(j)-c(j))qj
How do we find the FOC of this merged firm function?
Differentiate with respect to p(i) (if its a small increase in p(i))
This looks like: δ(π(i)+π(j))/δp(i) = qi(pi,pj)+(pi-ci)[δqi(pi,pj)/δpi] + (pj-cj)[δqj(pi,pj)/δpi]
REMEMBER NOT TO INCLUDE THE qj
What is the post merger Lerner index?
It is the own price elasticity of demand (i.e. 1/ε) plus the GUPPI(i) (see notebook for the formula)
What are the properties of the GUPPI? (2)
It is increasing in diversion ratio
It is increasing in firm j’s price-cost ratio
How did the CMA calculate the GUPPI for Sains/Asda?
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?”
Why did using the GUPPI raise concerns for the CMA investigation?
It’s not normally used as an indicator for market problems
Which features of the Sainsbury’s/Asda merger were consistent with it raising the likelihood of tacit collusion post-merger and which were not?
How does the CMA assess Coordination?
What was the result for the in-store investigation for coordination?
What was the CMA’s result for the investigation of online coordination?
