A year of merger bans?

When defining the relevant market for the merger of Empik and Merlin, the Polish competition authority did not give sufficient consideration to the time factor.

The market position of the merging companies could change over time, but so could the distinctness of their markets.

From the start of this year, following the recent blocking of PGE’s acquisition of Energa in the utility industry, the president of the Office of Competition and Consumer Protection has already issued another decision prohibiting a concentration. The decision issued on 3 February 2011 concerns two companies selling books, periodicals, music, film and multimedia titles: NFI Empik Media & Fashion S.A. (owner of Empik stores) and online retailer Merlin.pl S.A.

The transaction would involve Empik’s taking control over Merlin through a capital increase that would give Empik 60% of the shares and votes in Merlin. The decision was issued in a proceeding that began in July 2010. The lengthy proceeding included the most extensive market study ever conducted by the Polish competition authority, which addressed inquiries concerning the concentration to over 1,100 competitors and suppliers (such as publishers, distributors, internet retailers and music companies).

Under Art. 20 of the Competition and Consumer Protection Act dated 16 February 2007, the president of the office will prohibit a concentration if it would result in a significant restriction of competition on the market, particularly by creating or strengthening a dominant position. An undertaking with a dominant position can prevent effective competition on the relevant market and act to a significant degree independently of its competitors, customers, suppliers, and consumers. There is a presumption that an undertaking has a dominant position if it has over a 40% share in the relevant market.

During the anti-monopoly proceeding the president of the office should define the relevant markets in which the participants in the concentration operate, in terms of products and geography, as well as their actual market power. Under Art. 4(9) of the act, “relevant market” means the market for goods or services which based on their intended use, price, quality and other properties are regarded as substitutes (product market) and are offered in an area in which there are similar conditions for competition in light of the type and properties of the goods or services, the existence of barriers to market access, consumer preferences, and material differences in prices and transport costs (geographic market).

Under this definition, the president of the office concluded that there are four common markets for Empik and Merlin in which their joint market share exceeds 20% (i.e. markets where the concentration would have a horizontal effect):

  • the domestic retail market for sale of general-interest books
  • the domestic retail market for internet sales of music recorded on traditional media
  • the domestic market for purchasing of general-interest books
  • the domestic market for purchasing of music recorded on traditional media

In defining the relevant markets in this case, the competition authority found there is substitutability of particular products purchased and offered by the participants in the proposed concentration (e.g. books and music recordings).

The most significant findings for purposes of the decision, however, were, first, that not all of the books sold may be regarded as substitutes, in terms of both supply and demand. Two main groups of publications were identified in this respect: (i) general-interest books (such as literature and non-fiction) and (ii) specialised books and academic textbooks, which are targeted to precisely defined audiences.

Second, in her analysis, the president of the office found that at the current stage of economic development, there is no substitutability between the traditional sales channel for the products offered by Empik and Merlin (i.e. brick-and-mortar stores) and the internet sales channel.

Based on this approach to the relevant markets, she concluded that the planned concentration between Empik and Merlin would result in significant restriction of competition on the Polish domestic market for retail online sales of general-interest books, the domestic retail market for online sales of music recorded in traditional media, and the domestic market for purchasing of general-interest books.

There appears to be one essential element lacking in the competition authority’s analysis of the relevant market: the time factor. This is an extremely important aspect in review of a concentration. The review should consider not only the current market position of the participants, but also their market position in the foreseeable future. The competition authority should examine whether the market position of the participants is likely to increase, decrease or remain unchanged in the foreseeable future (for example because of the entry of new competitors on the market).

Even assuming that today there are persuasive reasons to treat traditional sales and online sales separately, in my view the decision lacked a deeper analysis of whether these two distribution channels will become mutually substitutable in the foreseeable future. Given the increasing level of internet access in Poland and the growth in online sales, which may result in reduction of prices in traditional bookstores because of price competition from online retailers, will we not soon have, in effect, a single retail market for books and recordings?

If the Office of Competition and Consumer Protection keeps up this pace, 2011 may prove to be a record year in Poland in terms of rejection of proposed mergers. Barely a month into the year, there have already been two negative decisions. The record so far was 2009, when there were three rejections, and in 2004–2008 there was only one negative decision each year.

Andrzej Madała, Competition Law Practice Group, Wardyński & Partners