Introduction

In its application of theoretical understanding to practical scenarios, competition law requires robust tools/ frameworks/ tests to properly analyse and address concerns arising from a merger or an enforcement action. Their role starts at the very beginning of setting the boundaries within which assessment will take place, i.e., the relevant market, to assessing effects of a merger or an enforcement action. As such, the sturdiness of tools to deal with markets as they exist will directly impact the implementation of competition law. Given the changes the market is experiencing, like the rise of the digital market and the general rise of dynamism due to the advancement of technology, the frameworks used should also keep pace.

The limitations of traditional merger assessment tools were highlighted by the Organisation for Economic Co-operation and Development (‘OECD’) in its paper, Merger Control in Dynamic Market. It emphasized on the dynamism in the new markets and the tendency of traditional tools to focus on the current structure of the market rather than future effects of the merger.

Given that this is the case, the object of this article is to suggest tools that can better incorporate these evolving factors, which are considered by various competition authorities for merger assessment. The emphasis is also to communicate that the tools should be considered by the Competition Commission of India (‘CCI’) as well.

Assessment Frameworks: Keeping Pace with Development

In situations where competition between firms is based on price, consideration of price-based factors is suitable. However, in markets where competition is not price-based, either because the services are free of cost or where non-price considerations are becoming important, the factors to properly evaluate competition in the assessment process will be non-price ones. This, in turn, means that for effective evaluation of such non-price factors, price-based tests will be of limited efficacy. As such, to meet the demands of assessing such markets, the tools should be appropriate for the context. The most prime example of non-price-based competition comes from digital markets.

i. Contextualizing Investigation

The challenge starts from the point of defining ‘relevant market’ as traditional ‘small but significant non-transitory increase in price’ (‘SSNIP’) test which is of limited use as the digital markets are frequently zero priced. As a result, the competition occurs on quality of products and services offered. Therefore, the appropriate metric for defining the market should be based on quality. In this context one of the tests which has gained traction to define market is ‘small but significant non-transitory decrease in quality’ (‘SSNDQ’). SSNDQ is an analogous test to the SSNIP as decrease in quality indirectly results in an increase in price as consumers are paying the same for a worse quality product. The point lies in taking ‘quality’ as the main competition parameter, that is, taking the core goods or services of the case as the initial candidate market, and then gradually testing the profit of the hypothetical monopoly after a slight but significant non-temporary decline in ‘quality’ changes in circumstances to define the relevant market. Quality is said to mean characteristics of product like functionality, durability, reliability, design, performance, and safety. SSNDQ as a parameter for defining the relevant market was used in the case of Qihoo v. Tencent, where the product in question – a messaging application – lacked a price component.

ii. Calculating Dominance

After defining the market, it also becomes important to consider how the analysis of market power is to be carried out in a defined market. The Australian and UK authorities have suggested qualitative considerations like time spent on the app, number of users, number of uploads, etc., to assess the market strength of the firm. Several jurisdictions have the shorthand tool of a firm being unavoidable trading partner, or having strategic market status to assess real market power of an entity. Such firms are what are commonly now considered to be gatekeeper firms who, in essence, control access to the market due to their dominance. Apart from the qualitative considerations mentioned above, jurisdictions like Germany, have added data as a component of market dominance. Japan considers factors like type of data collected, volume, frequency of the same, and how much of it will be helpful to the business of the other merging party. For instance, in CTS Eventim/Four Artists where Germany blocked the merger, access to data relevant for competition was an important factor to hold dominance of CTS.

iii. Privacy Erosion: Consumer Harm

Because we are dealing with digital markets and the role of data in its functioning, questions of privacy as it relates to competition become unavoidable. The most renowned case dealing with the question of privacy and competition is the Microsoft/LinkedIn merger. The EC framed concerns regarding privacy in the context of consumer harm. It made privacy a part of its assessment to the effect of foreclosure of other competitors with better privacy policiesin terms of consumer harm. As such, while assessing a merger and its possibility of consumer harm,potential erosion of privacy may be an important tool.

iv. Assessing Beyond Digital Markets

While non-price considerations are the most obvious in digital markets, they have significant relevance in other markets as well, particularly those which are subject to price control measures, such as the pharmaceutical industry. As a result, innovation plays an important role in such markets.

In merger assessments dealing with price-controlled markets, innovation is a key metric of competition as it allows for better products to be developed and for expanding product lines. In general, it can be stated that mergers may either improve innovation or may discourage innovation and resultantly, a presumption for or against a merger based on innovation factor would be misleading. One approach to check impact of a merger on innovation would be to check ‘significant impediment to industry innovation’ (‘SIII’). This test assumes that if effective competition is impeded by merger of two innovator firms, then such a merger should not be allowed. One preliminary method of screening mergers to check if such significant impediment is possible is to determineif the merger will negatively impact the classification of a firm on the four tier ‘technology group’ scale used in R&D parlance. The four categories are ‘high-technology’, ‘medium high-technology’, ‘medium low technology’ and ‘low technology’ firms. Therefore, according to SIII intervention by authorities in merger is only valid when impediment to innovation is translating into significant impediment to effective competition. An example of innovation playing a significant role in assessment was in Dow/DuPont merger. The commission enquired if other firms had the ability to compete in development of new products. To contextualize possible effect of merger on innovation, the commission identified ‘innovation space’ in the industry. Therefore, it increased merger investigation, from products close to commercialisation to products and innovations further from the ultimate stage of product development. In such spaces, it checked the concentration of the players based on the number of patents held and citation which the patents have to determine other firms’ ability to compete when compared to the parties.

Conclusion

As markets become more dynamic, newer tools will be required to assess merger activities. The emphasis and object of the article was to coherently incorporate existing issues into merger assessment, while, to a large extent, taking the normative value of incorporation of such consideration for granted. While some issues for which frameworks have been discussed might be old, emphasis is placed on them due to the challenges of current times.

As such, assuming that CCI, in the near future, may be confronted with the same, it is argued that adoption of corresponding framework to assessment will be beneficial to the extent that inadequate assessment based on traditional tools will be more harmful. The CCI to be abreast with the market it wants to regulate should incorporate tools from other jurisdictions so as to ensure fair competition in these changing times.

Parth Shahane is a 5th year law student at NALSAR University of Law.