Introduction
On May 14 1015 the Federal Economic Competition Commission (FECC) published in the Official Federal Gazette the new technical criteria for the estimation and application of a quantitative index to measure market concentration, which entered into force the following day.
The technical criteria were issued after a public consultation which concluded on January 15 2015 and reflect the accumulated experience of the FECC and international best practices. The technical criteria supersede (exclusively for the FECC)(1) the resolution for a concentration measurement index previously published by the defunct Federal Competition Commission (FCC) in the Official Federal Gazette.
The main change presented in the technical criteria in comparison with the previous methodology used by the FCC is the abandonment of the Dominance Index. The FECC considered the Dominance Index to be an indicator of symmetry which measures the relative weight of market participants. The index was developed by Pascual García Alba, a commissioner for the FCC. The FECC believed that use of the Dominance Index could underestimate adverse effects on competition – mainly in cases where a transaction reduces the number of competitors to a few – by not considering the possible coordinated effects that may occur (ie, tacit or explicit collusion).
The technical criteria continue to use the Herfindahl-Hirshman Index (HHI), but the parameters for determining whether a merger is unlikely to prevent, diminish, harm or impede competition and free access to markets have been modified. In this regard, the FECC will consider a merger not to have significant effects on the relevant market if any of the following parameters is met:
- The HHI variation is less than 100 points (previously, the variation had to be less than 75 points);
- The HHI value after the merger is less than 2,000 points; or
- The HHI value after the merger is between 2,000 and 2,500 points, the HHI variation is between 100 and 150 points and the resulting economic agent after the merger is not one of the four largest economic agents in the market (ie, in terms of market share).
The first parameter mentioned above, in light of the previous FCC parameters which required a variation of less than 75 points, shows that the FECC has adopted a more permissive stance in assessing whether concentrations will affect competition. In addition, the second parameter – previously used by the FCC – has remained unchanged.
However, the FECC has established a new third parameter using the market share of the four major economic agents in a market as reference. In the FECC's view, to consider a four-firm concentration ratio along with the HHI reveals the asymmetry between competitors while also recognising that transactions which take place between competitors with low market share are unlikely to affect competition.
In practice, the new third parameter will take considerable time to implement, if it can be implemented at all, given that it requires the update of three conditions that are difficult to fulfil together:
- a moderately concentrated market, given that the HHI value must be between 2,000 and 2,500 points;(2)
- that the merger increases the HHI value by between 100 and 150 points; and
- that none of the participants in the operation is one of the four major economic agents in the market.
It would be more feasible to take the stance that where a concentration is undertaken by agents with low market share, the transaction must comply with the first parameter established by the FECC.
The FECC has been wise to recognise that the analysis undertaken through the technical criteria is only a structural analysis and serves only an auxiliary function when assessing the possible competition effects of a merger. In this regard, the technical criteria – issued pursuant to Article 63(II) of the Federal Law on Economic Competition – are just one of several factors that must be considered by the FECC in merger control procedures.(3) In previous FCC assessments, when a transaction did not comply with the structural parameters under the criteria used at the time, it was possible to obtain FCC clearance as long as the notified transaction did not harm competition; this practice has also been adopted by the FECC. Further, according to international best practices, merger control analysis must include more than a mere structural market analysis when assessing the competition effects of a transaction.
The technical criteria are intended to be used mainly in merger control procedures. However, this does not prevent the FECC from using them as an auxiliary tool in the analysis of related markets and other competition-related issues, such as effective competition conditions and market power.
For further information on this topic please contact Lucia Ojeda Cardenas at SAI Consultores SC by telephone (+52 55 59 85 6618) or email ([email protected]). The SAI Consultores website can be accessed at www.sai.com.mx.
Endnotes
(1) The technical criteria do not apply to merger control procedures conducted by the Federal Telecommunications Institute in the telecommunications and broadcasting sectors.
(2) In the United States, the authorities involved in the assessment of mergers (the Department of Justice and the Federal Trade Commission) consider that a HHI value of 1,500 to 2,500 points corresponds to a moderately concentrated market. Generally, concentrations in moderately or highly concentrated markets (more than 2,500 points) which lead to an increase in HHI value of more than 100 points (or from 100 to 200 points for highly concentrated markets) require greater scrutiny.
(3) In this regard, the criteria recognise that the FECC must consider other aspects in accordance with Articles 58, 59, 63 and 64 of the Federal Law on Economic Competition (eg, barriers to entry, market power, access to inputs, recent behaviour of the agents and imports) in order to analyse the market conditions that arise from any transaction subject to the scrutiny of the competition authorities.
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