Mergers and acquisitions: did you say “relevant market”? (L’Opinion)

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Emmanuel Combe published on September 23, 2021 a column in L’Opinion on the relevant market.

Mergers and acquisitions: did you say “relevant market”?

At a time when there is a boom in mergers , one concern often comes up in public debates: won’t these wave of industrial concentration have a negative impact on competition and, by ricochet, on prices? To answer this question, we must first have a clear vision of the markets in which these operations take place: this is the famous “delimitation of the relevant market” stage, carried out by all competition authorities in the world.

A relevant market is defined by starting from the substitutability of demand: all products that are substitutable for customers belong to the same market. The question is how consumers will react if one of the merging firms raises its prices after the merger: will they remain loyal to the merging firms or will they go elsewhere? If consumers shift their consumption elsewhere, then the market includes products other than those of the merging firms.

There is no magic formula to define the relevant market: we use a body of clues, like in a police investigation. The clues may be qualitative and relate to variables such as the observation of consumer behavior, the role of brands, price differences between products or differences in distribution channels. They can also be more quantitative, when data are available and reliable: for example, one can study whether product prices are positively correlated over time.
Defining a relevant market is always a difficult exercise and appearances can sometimes be misleading. For example, two products that are quite similar in their functionalities do not necessarily belong to the same relevant markets if they do not have the same uses: for example, a luxury car is not on the same market as a utility car. The broad notion of “car market” does not make much sense from a competitive point of view: a customer does not choose between buying a Porsche or a Kangoo. It is therefore necessary to delimit as many relevant markets as there are specific needs to be satisfied in the automobile sector. Symmetrically, two physically different products may nevertheless belong to the same relevant market: for example, a high-speed train is different from an airplane; however, over a distance such as Paris/London, it is likely that the train and the airplane are on the same market: they are fairly substitutable because they satisfy the same need, that of moving quickly between two capitals, for a fairly equivalent total travel time.

Defining the relevant market is a crucial issue for companies: if the market is very large, the M&A transaction is less likely to adversely affect competition than if the market is small. But the relevant market is only the first step of the competitive reasoning. We will talk about it again next week.

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