I have a piece on the Conversation on this joint venture. But I want to discuss the implications for competition authorities in more detail.
The joint venture will need to be cleared by competition authorities around the world. But as I note in my article, this involves crystal ball gazing that would tax even the best competition regulator.
A simple example, during my time as a Commissioner at the ACCC, was the merger of Angus & Robertson and Borders here in Australia (and New Zealand). Remember them – two of the biggest book retailers in the country. The ACCC approved the deal in 2008. I looked back over the public documents yesterday. It was exceptional work by the mergers staff, but it also shows the difficulty of picking trends and directions in rapidly changing industries.
The ACCC approved the merger. But not because we saw e-books and internet retailing marching towards dominance over local bricks-and-mortar stores.
Specifically, the ACCC considers that the internet is unlikely to provide a strong competitive constraint on bricks and mortar book retailers, at least in the short to medium term, and the ACCC did not rely on the internet as a constraint in reaching its decision. (paragraph 65)
Rather, we focussed on physical books and saw the real competition issue as back catalogue. This was Borders’ (and to a lesser degree A&R’s) specialty. The ACCC decided that the merger did not breach the competition threshold – but from memory it was a close thing.
The ACCC considered that the ability of customers to switch to other book retailers will to some degree limit the ability of the merged entity to further increase backlist prices above RRP. Further, it appears that Angus & Robertson imposes only a very limited constraint on Borders’ back-list pricing. In these circumstances, the ACCC does not consider that the proposed acquisition will result in a substantial lessening of competition in the form of a significant increase in the retail prices of mid-list and back-list books. (paragraph 86)
What happened? Well, almost three years to the day after the ACCC cleared the merger, Borders and Angus & Robertson were in receivership. Change to the retail book sector had occurred fast and (perhaps linked to some poor management) the ‘feared monolith’ of book retailing had collapsed.
Rapidly evolving industries create a dilemma for competition authorities. They cannot rely on past views of the industry to make predictions about future trends. The industry is changing – but the regulator can only guess about direction and speed. And merger analysis is all about predicting the future. In rapidly changing industries, this future is really murky.
What should competition authorities do? I think the answer is to worry a lot more about long-term ‘barriers’ and less about short-term ‘market share’. Regulators do not want to stop the industry evolving but (as I note in the Conversation piece) they need to be wary of attempts by businesses to move the industry in an anti-competitive direction. If an industry is evolving rapidly, competition authorities cannot really judge the competition effects of mergers with any great certainty. The aim should be to keep the industry as open as possible to evolution continuing. This leads to two conclusions.
In industries that are rapidly evolving due to technological change:
- competition regulators should be less concerned about mergers except where they involve a critical bottleneck (e.g. what Telstra has had in the past and what the NBN will be in the future for fixed line internet); and
- competition regulators should be increasingly vigilant for non-technology based activities by large players that try and limit future competition (e.g. contracts that limit third-party deals, like the price of e-books).
In Australian terms, this means less emphasis on mergers and more on our ‘abuse of market power’ laws.