Jet-Kingfisher Merger-Competition Issues

Page created by Allan Rodriguez
 
CONTINUE READING
A-380                        Competition Law Reports                       [Vol. 1

Jet-Kingfisher Merger—Competition Issues
                                                  Comdt. (Retd.) M.M. Sharma*

Blatant or sensational promotion associated with Jet-Kingfisher merger has
left market with innumerable doubts be it be the stakeholders or consumers
regarding the possible effects of this alliance. What this means to the
competition regime when the alliance has been made to shed costs and improve
efficiency and when the Competition Commission is non-functional. The author
Comdt. M.M. Sharma tend to analyse the deal in the light of the various
competition issues primarily the issue of merger and as to whether the deal
is anti-competitive.

Now that the soon to be defunct           better choice and lower prices for the
regulator, the MRTP Commission has        consumers and since the consumers,
ordered its investigative wing, the DG    i.e. the air travelers in India had just
(I&R) to commence inquiry into the        begun to enjoy the fruits of this
most talked about Merger of Jet Air       competition due to the open sky policy
Ways and Kingfisher Airlines, India’s     of the government in the post-
two largest airlines with a post-         liberalization era leading to the
merger combined market share of           emergence of the so-called low-cost
60 per cent, it is just the time to       carriers, which made the common
understand the finer competition          man’s dream of flying a reality though
issues involved in this “Merger” and      for a short period, as in the absence
its likely impact on consumers. The       of a fully functional and real
“Merger” will, of course, be justified    competition regulator, the competition
on the ground of achieving efficiency,    commission of India, no agency of the
which in economic terms, means            government (including the MR TP
lowering of marginal costs of operation   Commission) was really competent to
of both airlines, coupled with the        examine the “appreciable adverse
global economic crisis leading to         effect on competition in the relevant
difficulty in raising the capital, the    market” (for which the competition
rising aviation fuel bill and their       commission is created and mandated
outstanding dues to oil companies         for) due to the Merger of Air-Deccan
et al.                                    with Kingfisher and Jet-Sahara
While the operational constraints of      which not only reduced the number
the airlines may not be doubted, it is    of players but also led to a rise in air
imperative to understand the impact       fares of select city pairs.
of the Merger on competition in the       But does every Merger which reduces
relevant market. Let us not forget the    number of players in the market anti-
obvious that competition means            competitive? Not really so. For

92                                   A-380                       Oct. 08 - Dec. 08
2008]                 Jet-Kingfisher Merger—Competition Issues               A-381

instance, a Merger among small             rather not hesitate in calling this
players to give competition to a large     delay in making the competition
sized player is always pro-competitive     commission fully functional as a
and efficiency enhancing for such          carefully planned marriage of
marginal players. But a Merger             convenience between the political
between a large and a small player,        powers that be and the already large
as happened in the airlines sector in      business      houses      to   avoid
India, does raise competition              “unnecessary” scrutiny of their anti-
concerns as it makes an already big        competition business practices, like
player bigger and such merged entity       in the developed world, in view of the
is likely to have a tendency to abuse      obvious advantage to both in view of
its dominance for increasing its           the forth coming general elections in
profits by indulging in any of the anti-   India. This can happen only in India!
competitive practices, such as,            So what are the competition issues
imposing unfair or discriminatory          involved in a Merger of two airline
conditions, limiting or restricting        companies offering almost identical
services to the selected few, denying      products and services? The answer
market access to other players or to       is to be found in the competition
even enter into other product or           economics, which is now the essential
services markets through their             tool for the ant-trust regulators the
dominant position in one product or        world over. Such mergers between
services market. For example, if           direct competitors are known as
permitted, the business class              horizontal mergers in the competition
travelers in Kingfisher airlines will be   economic parlance and such mergers
routinely served only kingfisher           are known to give rise to two types of
beers! All these business practices,       competitive harms – unilateral effects
which may be better known in the           and coordinated effects.
Corporate world as “tricks of trade”
are prohibited under the Competition       Unilateral effects arise where the
Act, 2002, and are against the spirit      mergers create an incentive for the
of competition, which is the backbone      merged entity to increase prices and
of a free market economy. There have       where the profitability of that price
been many cases in the developed           does     not     depend      on     the
world where the competition (or, as        accommodating response by other
some still prefer to call it as “anti-     firms in the market. The basic theory
trust”) regulators have imposed heavy      of unilateral effects is that the “lost”
fines on companies indulging in such       competition due to merger between
practices, which resulted in lessening     two direct competitors gives rise to an
of competition in the relevant market.     incentive to increased prices that did
The recent example of Microsoft, which     not exist prior to that merger due to
was fined heavily both in US as well       the “internalisation” of lost sales.
as in the EU, after a prolonged legal      Apart from increase by the new
battle should serve as a forewarning       merged entity, there is another round
and can reasonably be cited as a           of increase of prices by other firms in
precedent by the competition               the market to keep pace with the new
commission in any future verdict           found competitive equilibrium in
against such practices, which are          what is called “second round” effect
routinely used in India in the absence     thus, consumers stand to lose in all
of the competition regulator. I would      situations post-merger because it is

Oct. 08 - Dec. 08                                                               93
A-382                          Competition Law Reports                       [Vol. 1

                                            interest. In this unilateral effects
      The degree of closeness               theory of competitive harm, the ability
      of competition between                of the merged entity to increase prices
     the merging firms decides              does not depend upon a cooperative
       the extent of harm to                response from the remaining
         competition due to                 competing firms and hence, it is so
          unilateral effects.               called as unilateral effects or non-
                                            coordinated effects. According to this
not only the merged entities which          theory, such a horizontal merger
would be an incentive to increased          gives rise to a situation of a “single
price but in the post-merger                firm dominance” which also has a
equilibrium, the other firms will           direct relation to market shares held
increase price as well. However, the        by the merging parties prior and
only positive aspect or Defence for the     subsequent to the merger. In some
unilateral effects theory of harm is the    western jurisdictions where the some
likely efficiency gains for the merged      of parties’ market share is less than
entity that is where the merger gives       a certain threshold, the merger is not
rise to reductions in marginal costs        likely to be viewed as harmful.
for one or both of the merging firms,       The Herfindahl-Hirschman Index
this can offset the incentive to            (HHI) is usually applied throughout
increase price. But, in order to be able    the world to measure the level of
to Act as such, the reduction in            concentration in the market and is
marginal costs or the efficiency must       the sum of the square of each firm’s
be relatively very large. The               market share in the relevant market.
competitive harms due to unilateral         In the EU as well as in the US, safe
effects are likely to be more prominent     harbours for permitting maximum
in case of merger between firms             mergers are prescribed in terms of the
selling homogenous products or              value of HHI. For instance, in terms
services or even between firms selling      of HHI, the safe harbours in EU, is if
close substitutable products or             the HHI is between 1,000 to 2,000 and
services. In fact, the degree of            the delta (i.e., the change in HHI) is
closeness of competition between the        less than 250; or if the HHI exceeds
merging firms decides the extent of         2,000 and the delta is below 1501,
harm to competition due to unilateral       whereas in the US, if the delta is less
effects. A merger between firms that        than 100, merger is unlikely to raise
are each other’s close competitors or       concern if the post-merger HHI is in
whose products are close substitutes        the range of 1,000 to1,800 and if the
is more harmful than merger between         delta is less than 50, the merger is
firms whose products are distant            unlikely to raise concern if the
substitutes. As it eliminates the           post-merger HHI is above 1,800.2
competitive constraint which exists         In terms of the market shares, the
between the parties prior to the            safe harbours employed in EC is
merger thereby reducing the effective       that where firms have a combined
competition in the market which is          market share below 25 per cent, a
always detrimental to the consumers’        merger between them is unlikely to

  1    EC Commission guidelines on horizontal mergers, 2004[ECMR] (paragraph 20)
  2    US Horizontal Merger Guidelines (revised 1997)

94                                                                  Oct. 08 - Dec. 08
2008]                 Jet-Kingfisher Merger—Competition Issues              A-383

lead to unilateral anti-competitive
effects. (Recital 32 of ECMR.) 1
                                            The “merger” between JET-
Whereas in the US, merger                      Airways and Kingfisher
guidelines indicate that unilateral              Airlines, both with a
effect would not normally be a concern     combined pre-merger market
where the combined market share            share of 60 per cent, the two
of the merging parties is less than         largest domestic airlines in
35 per cent.2                                India, is almost certainly,
Coordinated effects theory of                 likely to be blocked for a
competitive harm, on the other hand,       detailed investigation under
is based on “tacit” collusions between         Section 6(2A) read with
firms who do not actually merge but               Section 29 of the
behave almost like a cartel in an              Competition Act as this
oligopolistic market. This type of
                                           merger is, prima-facie, likely
coordination between firms in the
                                             to raise unilateral effects
same relevant market is arrived
without any formal contact between                     concerns
the colluding parties and is most
difficult to detect unlike cartels, eve   able to “detect” the cheating and
in the most advance jurisdiction and      “punish” such a firm by reverting back
depends heavenly on economic              to competitive prices for certain period
analysis. Symmetry in cost structures     in the selected territories of
and/or capacities, some degree in         distribution of the said firm as a
transparency either in prices,            punishment.
outputs and homogeneity of products       Applying the above economics
are some of the factors that facilitate   principles to the “merger” between
such tacit coordination. In this theory   JET-Airways and Kingfisher Airlines,
of competitive harm, the situation of     both with a combined pre-merger
collective dominance is achieved due      market share of 60 per cent, the two
to “coordination between firms”           largest domestic airlines in India, is
without actually entering into a          almost certainly, likely to be blocked
formal merger but resulting to the        for a detailed investigation under
same harm to the competition, i.e.        Section 6(2A) read with Section 29 of
reducing effective competition in the     the Competition Act as this merger is,
market. The effect of such dominance      prima-facie, likely to raise unilateral
is also the same, i.e. increase in        effects concerns, as stated above. It
prices. This type of collusion is more    may be noticed that although the
akin to a cartel though it lacks a        Competition Act, 2002 or the draft
formal understanding or meeting of        Competition Commission of India
minds between the parties as              (Combination) Regulations, available
happens in the case of a cartel. Like     on the official website of the said
a cartel, the participants in the         Commission does not prescribe any
market identify certain “terms of         safe harbours in terms of either pre-
coordination”, e.g. the posted prices     merger combined market shares or
and if any firm in this tacit             HHI (like the ECMR or the US
coordination deviates from the terms      horizontal merger guidelines), yet the
of the coordination or in other words     Commission will be bound to take into
cheats, the other participants are        account the “market share of each of

Oct. 08 - Dec. 08                                                              95
A-384                             Competition Law Reports                          [Vol. 1

the merging parties” and the                    “nature and extent of innovation”,
“likelihood that the combination                which are also listed as mitigating
would result in the merging parties             factors under the said provisions of
being able to significantly and                 the Act, as their main defense against
sustainable increased prices or profit          such a notice from the commission.
margins”, say, in selected city pairs,
e.g. Delhi-Mumbai, Delhi-Chennai                Caveat
and Delhi-Kolkata, etc., which are              The above view is subject to the
listed amongst the 14 factors to                alliance, as being reported in the
determine whether the combination               Press, qualifying as a “Combination”
(as the merger is defined under the             in terms of Section 5(c) of the
said Act) is likely to cause appreciable        Competition Act, 2002. However, in
adverse effect on competition in the            case the alliance is not a “merger” but
relevant market under Section 20(4)             an agreement by way of a joint
of the said Act.                                venture to enhance efficiencies by
Of course, in case such an inquiry is           reducing the operational costs, then
initiated by the Commission (as and             such agreement, though between
when the enforcement provisions of              direct competitors, will be not be
the Competition Act, 2002 are notified          presumed to have an adverse effect
by the Central Government and the               on competition in view of the
full Commission is constituted in               exemption granted to such
terms of the amended Act), the                  agreements under the proviso to Sub-
merging parties would have the                  section (3) of Section 3 of the said Act.
“possibility of failing business” or the
so-called “failing firm ” and, as stated               Copyright © Comdt. (Retd.)
above, increase in efficiency or                                    M.M. Sharma

     *   The author, a former Additional Registrar, Competition Commission of India, is now
         a freelance writer on competition matters and legal practitioner. Comments may be
         shared on mmsharmacg@rediffmail.com

96                                                                       Oct. 08 - Dec. 08
You can also read