Member Article

The competition review of local market mergers is often complex. This series of three articles breaks down that complexity into ten key questions.

Part 1

• What is a local market merger?
• What is the geographic market?
• How important is it to get the correct market definition?
• How is a local market analysis undertaken?

Part 2

• What is an isochrone analysis?
• Who are the customers of a business?
• Who are the competitors?

Part 3

• Is competition in the market sufficiently strong?
• What can be done to resolve any issues?
• What complications can arise?

This article looks at the four key questions within Part 1:

1. What is a local market merger?

Local market mergers exist where the natural catchment area of a business is the immediate vicinity where the business is located. Many such mergers are retail businesses, namely, the sale of goods or services by shops to customers such as cinemas, pharmacies, petrol stations and betting shops. There are also local market mergers where the customers are businesses.  An example of such business-to-business (B2B) mergers is the production and sale of cement to builders. Some mergers, typically where large groups or chains of local businesses exist, will require both a local market analysis and a broader (for example, national) analysis because some elements of the business are active at the broader level.  Thus a chain of DIY shops engages with customers at the local level, hence the local market analysis but the business buys its products from suppliers that are active nationally. On this latter upstream market, the business competes with other DIY groups to buy products from producers and both the buyer and seller are active on a national market.

2. What is the geographic market?

In merger analysis, to consider whether a transaction may be expected to result in a substantial lessening of competition, it is first necessary to define the product market and the geographic market. The former relates to the goods and/or services sold by the purchaser and the target businesses. The latter is the physical area where buyers engage with the purchaser and the target businesses. The geographic market may be as broad as being global (for example, crude oil) or as narrow as being one or two miles or less (for example, pharmacies).

3. How important is it to get the correct market definition?

The degree of analysis required will depend upon the result of the preliminary analysis identifying the extent, if any, to which the geographic catchment area for each of the purchaser and the target businesses are close or overlap.  If it is self-evident that there is clearly no geographic overlap between the two businesses, then further analysis is unlikely to be required. For example, both parties to a transaction are independent supermarkets, each with three stores. The purchaser’s stores are in a town (for example, Southampton in south-east England) and the target’s stores are in a different town that is far removed (for example Leeds which is 237 miles away in the area between the middle and north of England).  No person who would naturally shop at the stores in Leeds would consider going to a store in Southampton.  Expressed in economic terms, the costs associated with shopping at a store, which are the cost of travel and presumed nominal cost of travel time, would be high for a Southampton-based customer shopping at one of the target’s stores in Leeds, and high also compared to the amount of money typically spent at a supermarket on a single shopping trip.  Therefore, being economically rational, a customer of the purchaser’s stores would not consider that the target stores are competing for its weekly shop. In contrast, if a target business is per our example in the centre of Southampton while the purchaser has three outlets in Portsmouth (about 20 miles or 30 minutes by car) further analysis would likely be required, while if the purchaser instead has three outlets on the outskirts of Southampton, then a detailed analysis would be critical to determine whether any substantive issues arose.

4. How is a local market analysis undertaken?

The way a business engages with its customers and where those customers are based should be considered with an open mind to ensure all material aspects of the business are included in the analysis. However, there are some common methods of analysis used to determine the geographic market.

These analytical tools address the questions:

• Where are the customers of the purchaser business based?
• What are the travel times from the customers to the purchaser business?
• How do the above results relate to the results of those questions for the target business?
• How do the combined results relate to the results of those same questions asked of any competitors in the vicinity of the purchaser and/or target businesses?

To address these questions, different tools may be used. Which tools to use is often determined by the availability of customer information. The tools commonly used fall into two groups: isochrone or distance to customer analysis and customer location data analysis.