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analysis five forces of framework
the five forces
and the diamond framework in all significant markets and submarkets that are
relevant based on industry and customer practice.
3. A risk/reward analysis of the merger, where its effect on the health of
competition is weighed against proposed direct benefits using the productivity
growth standard.
IV.2.1. Significance and Baseline Productivity Growth Analysis
This analysis can be broken up into three principal tasks: (1) identifying the set of
relevant markets and submarkets and the relevant geographic area; (2) determining
whether or not the firm meets a predetermined combined market share cutoff in the
relevant markets and submarkets; and if so, (3) establishing the baseline productivity
performance of the industry and the firms party to the transaction.
Step 1. Rather than going through the lengthy and controversial exercise of trying to
define the market affected by a merger, this new merger evaluation process is applied to
all relevant markets and submarkets. There are usually a number of economically
relevant market definitions, and each of these is considered. In determining plausible
markets or submarkets, three practical criteria can be helpful:
1. How the industry itself defines submarkets
2. How consumers segment the market
3. Whether there is a competitor focused on the submarket (i.e., a focused
company dedicated only to serving the submarket, which suggests that it is a
viable array of products, varieties, and customers with distinct needs)
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Once all plausible markets and submarkets have been identified, the geographic area
over which local externalities apply is determined. Note that the relevant geographic area
is not based on the geography of sales, but on the externalities in production. The starting
assumption is that the geographic unit is the national economy. In some industries, the
relevant geographic area can be smaller than a nation. Clusters occur within a region or
metropolitan area. In some cases, externalities can cross national borders of immediate
neighboring countries.
Step 2. To invest the resources required to investigate a particular merger or joint
venture, some significance threshold is inevitable. We advocate a relatively low
minimum market share threshold of, say, 25 percent combined share in any submarket
(discussed below). Such a threshold will conserve resources and screen out transactions
where the probability of material impact on competition is small.
There is no contradiction between this cut-off level and our rejection of seller
concentration as a measure of market power. We use concentration solely as a
significance indicator. A merger involving a small portion of any submarket is unlikely
to raise important antitrust issues. Above this threshold, we do not treat higher share
mergers differently than ones with somewhat lower shares.
Step 3. This step establishes the baseline, historical industry and company
performance in terms of productivity growth and robustness of rivalry. For this
we look at direct measures of productivity, such as revenue per hour of labor,
value added per unit of capital, etc. In order to test the vitality of rivalry in the
industry, the fluctuation of market shares in all relevant markets and submarkets
are examined. Needed data would be requested in the premerger notification
process.
If the affected industry has registered weak productivity growth in the past
relative to the economy-wide or industry averages, or if the industry has exhibited
limited rivalry historically, this should raise the level of [next page]