Mergers are frequently undertaken for diversification reasons. For example, mergers can be used to serve the purpose of reorganisation, creating synergies, boosting administrative, increasing operational or economic efficiencies. Most often mergers are beneficial to business and the society, however, this doesn’t mean that all mergers should be encouraged. There are mergers that have the harmful market power effects appears to overwhelm the beneficial productivity effect.
The main aim of merger control is to prevent only mergers leading to the creation or reinforcement of a dominant position and thus depriving consumers of benefits resulting from effective competition such as low prices, high-quality products, wide selection of goods and services and innovation. Therefore, the most important goal of merger policy is to avoid the creation of post-merger entities that would have the ability to abuse their market power to the detriment of consumers without raising unjustified obstacles to the economic freedom of companies.
To determine whether a merger has the potential to cause significant anti-competitives effects on relevant markets, competition law introduces to the public the concept of market concentration as a specific indicator of market power. The two most commonly used concentration measures are concentration ratio (CR) and Hefindahl – Hirchmann Index (HHI).
CR as a measure of Market concentration
The concentration ratio is a widespread measure of market concentration in practice. Its popularity stems from its simplicity, in terms of calculation. The concentration ratio is calculated as the sum of the percentages of the market share of several (k) largest enterprises in the industry concerned, i.e.
+ CRk : Concentration ratio
+ Si: Market share of the i-th company
+ k: k companies in the industry concerned.
Depend on the size of the industry concerned, market shares of at least 03 companies should be used to make a meaningful result. The value of the concentration ratio can range from 0% to 100%.
Depending on the percentage conclusion on the market concentration, belonging to the type of market structure can be made.
- Market with perfect competition (very low concentration ratio)
Market with moderate competition, CR3 < 65%, moderate concentration ratio
- Oligopoly market, CR3>65%, high concentration ratio
Monopoly market, CR1 close to 100%.
HHI as a measure of Market concentration
Unlike CR which only take into account certain number of companies, HHI takes into consideration all companies in the industry concerned. HHI is the sum of the squared markets shares of all companies in the industry, i.e.
+ Si: Market share of the i-th company
+ n: Number of companies in the industry
HHI value range from 1/n to 1, the lowest value (1/m) happens when all companies have same the same market share. The highest value 1, happens when there is a monopoly market.
Alternative way to measure:
HHI = 1/n +nV (2)
+ n: number of companies in the industry
+ V: Statistical variance of market shares of companies
If all companies have the same market share (si = 1/n) then V=0 and H = 1/n
If the number of companies remain unchanged, then the higher the fluctuations of the market shares result in the higher value of the Variance.
In cases where the exact number of companies as well as their size cannot be determined. HHI can be measured by distribution theory (Hart, 1975):
Where: η2 is the changes of the original distribution.
+ HHI < 0.01: Perfect competition market
+ 0.01 ≤ HHI ≤ 0.1: High level of competion
+ 0.1 ≤ HHI ≤ 0.18: Medium level of competition
+ 0.18 ≤ HHI: High concentration to monopoly market.
HHI is a common measure of market concentration and is used by competition authorities to determine market structure, often pre- and post- mergers. Specific concentration value is used by competition authorities to evaluate potential merger issues.
Implications of market concentration measuments
Merger changes market strutures, lower the number of competitors in the market and thus has the potential to create a monopolist or dominant firms.
An industry with high market concentration value implies that industry has low competion or/and a few numbers of companies are dominating the marketplace. Also, a highly concentrated market has higher probability that firms can be able to coordinate their behaviour in an anti-competitive way.
Safe habours based on quantitative thresholds such as market share and market concentration level has been widely recognised by many competition authorities. In Vietnam’s competion law, if any of the following conditions is satisfied, the concerned merger is considered safe and does not subtantially restrain competition in a relevant market:
- The combined market share of the enterprises proposing to participate in the economic concentration is less than 20% in the relevant market;
- The combined market share of the enterprises proposing to participate in the economic concentration is 20% or more in the relevant market and the total market share squares of the enterprises after such economic concentration in the relevant market will be less than 1,800;
- The combined market share of the enterprises participating in the economic concentration is 20% or more in the relevant market, and the total market share squares of the enterprises after such economic concentration in the relevant market will be above 1,800 and the increase in the total market share squares of the enterprises in the relevant market both before and after the economic concentration is less than 100;
- The market share of the enterprises participating in the economic concentration which have a relationship with each other in the chain of production, distribution and supply of a specified type of goods or whose business lines provide mutual inputs or provide ancillary support to each other is less than 20% in each relevant market.