Citation(2015) 27 SAcLJ 369
Published date01 December 2015
Date01 December 2015

Most jurisdictions with new competition policies adopt the competition laws and policies modelled on those of the European Union (“EU”). However, this article argues that optimal merger control design should accommodate the features unique to small market economies. Merger control laws are accordingly not “one-size fits all”, and laws transplanted from large market economies, such as the EU, require adaptation to the conditions of small market economies. This article suggests some methods and tools that small market economies can employ to achieve optimal benefits from merger control laws.

I. Introduction

1 There have been concerns expressed that if one should accept that “size does matter”, this could imply a less stringent application of competition law. As stated by the European Commission, it sees:1

… no reason to modify competition laws or their application according to the size of the relevant geographic market, and consider[s] as counter-productive and dangerous arguments that competition laws should be diluted or [misapplied] in order to allow ‘national champions’ to develop, regardless of the size of the jurisdiction or market.

2 This article argues that for small market economies to achieve optimal benefits from merger control laws, merger control design should accommodate the unique features of small market economies. As will be discussed in this article, it is important to remain aware of the implications of “smallness”. “Smallness” leads to a tendency for high concentration and high entry barriers in many industries, so that small market economies face different welfare maximisation issues, amongst other regulatory challenges, compared with large market economies. In particular, competition authorities in small market economies more

regularly face the challenge of achieving a right balance between allowing firms to be large and integrated enough to achieve scale economies, and at the same time, numerous enough to ensure effective rivalry in the market.2 Thus, merger control laws are not “one-size fits all”, and laws transplanted from large market economies such as the European Union (“EU”) require adaptation to the conditions of small market economies. This is an issue that competition authorities of small market economies should not take lightly, as it determines the extent to which their economic goals can be achieved through the adoption of competition laws.

3 A separate but related issue on merger control is whether small market economies should even have merger control laws at all. Indeed, merger control laws are relevant to all economies. Firstly, mergers leading to consolidation within an industry can result in allocative and productive inefficiencies, due to weakened competition and hence incentives for cost control. Although “national champions” may be beneficial to the economy in limited circumstances, such as in economies highly dependent on exports for revenue, monopolies can enjoy “monopoly rent” without becoming more competitive abroad or passing on any benefits, at the expense of domestic consumers and eventually of the development of the economy as a whole. Secondly, merger control laws enable economies to challenge foreign mergers that might have adverse effects on local markets. Thirdly, sole reliance on ex-ante provisions akin to Arts 101 and 102 of the Treaty on the Functioning of the European Union will be limited in scope and effectiveness. The prohibition of cartels, while having no enforcement powers against cartel members if they merge, is unwarranted. Investigations into abuses of dominance are often lengthy, cumbersome and complex, and competition authorities in small market economies may lack the resources to police every alleged infringement.

4 For small market economies looking at implementing new merger control laws, this article suggests some methods and tools that can be considered to ensure that optimal benefits are derived from the adoption of a merger control regime.

5 Part II of this article will set out the definition and essential characteristics of a small market economy.3 Part III will describe issues faced by small market economies in the application of merger control laws.4 Part IV will consider aspects of EU merger control laws that may

be adapted and in some respects followed for optimal merger control design in small market economies.5
II. Definition of a small market economy

6 Before delving into the main issues, it is essential to first define the concept of a “small market economy” which forms the focus of this article's analysis. Small market economies, as the name suggests, are states, countries or political units where domestic demand is small relative to the minimum efficient scale of production or distribution, ie, the scale at which average cost is minimised.6 According to Michal Gal, three main economic characteristics arise from the large size of minimum efficient scales relative to demand: high industrial concentration levels, high entry barriers and suboptimal levels of production.7 Such economies can support only a small number of competitors in most of their industries when catering to demand.8 This can be attributed to some or all of the following elements that are generally present in small market economies — limited natural resource endowments; insularity and transport costs; small population pool, which determines the number of firms that can efficiently serve the market; population dispersion, which may create market regionalisation through several small local markets within a larger jurisdiction; small domestic markets; high reliance on import and export markets; high government participation in many sectors, with public undertakings advocating for exclusion from competition law provisions due to the “social role” of such entities; and the presence of state aid to permit some form of level playing field.9

7 Therefore, it is based on the above characteristics underlying a “small market economy” that this article will carry out its analysis. Examples of small market economies would include Australia, New Zealand, Israel, Singapore, Sweden, the Hong Kong Special Administrative Region (“Hong Kong”), Malta and the Baltic states.

8 However, some qualifications to this definition must be made.10 Firstly, not all industries in the economy will be highly concentrated even where an economy is considered to be small. Some industries such as the retail industry are highly competitive even in small economies. These are industries where scale economies are of less importance, as costs do not decrease significantly as output expands. Secondly, where firms located in small economies compete in international markets, the size of the domestic market may not constrain the scale and scope of production. Nonetheless, such firms tend to form the exception rather than the rule in small market economies. Thirdly, some independent sovereign economies can be classified as small market economies based on the relative concentration of market structures within most of their industries rather than on geographic size. Australia, in particular, is much larger geographically but can still qualify as a small economy because of market regionalisation where the population is dispersed over large geographic areas but concentrated around several urban centres. Therefore, although the above definition suffices to sketch out the basic elements of a “small market economy”, it is important to note that these are not immutable characteristics.

9 A further objection to this definition also needs to be addressed. While this concept of a “small market economy” has been widely accepted, it has been criticised in an Organisation for Economic Co-operation and Development (“OECD”) background paper for not addressing the concerns of other economies that may be “small” in other senses, such as (a) population and GDP; and (b) level of development.11 Whether recommendations made on the premise of Michal Gal's interpretation of a small market economy would be useful is therefore questioned, as it is observed that policy recommendations derived from this approach did not appear to differ significantly from best practices of developed economies.12 Nevertheless, the importance of defining a small market economy lies primarily in its function of distinguishing its qualities from large economies rather than in its descriptive principles. Crucially, Michal Gal's interpretation serves to highlight that economies falling within the definition possess characteristics that justify a need for systematic differences in “rules of thumb” being applied in large market economies. This is exemplified by criticisms of the European Commission's decision in the Volvo/Scania merger,13 where the application of EU merger control laws has been viewed as placing

merging parties located within small Member States at a disadvantage.14 The Volvo/Scania merger showed that asymmetry in the application of EU merger control laws stemmed from the use of market definition as an easily available proxy for the measurement of the market power enjoyed by firms, which in turn was dependent on the size of the relevant markets within each Member State. Potential discrepancies in developmental or GDP levels of the EU Member States in question were not seen as relevant to the issue of market definition. Accordingly, a similarly sized company active in either a small or large Member State would thus find its possibilities to merge in a small Member State more limited, as a dominance finding would be more likely in a smaller than larger Member State. This therefore serves to illustrate the abiding value of Michal Gal's conception of a “small market economy” in competition law analysis, which OECD's objection fails to diminish.

10 Based on this definition, the next part of this article will turn to describing the issues faced by small market economies in the application of merger control laws.

III. Issues...

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