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 three key questions within Part 2:

1. What is an isochrone analysis?

One can measure the distance from a shop to a customer.  At its most simple the distance would be measured ‘as the crow flies’. Thus, the hypothesis might be that the geographic market for a cinema is five miles as the crow flies. A more sophisticated approach would be to take account of the transport network. Thus, the hypothesis might be that the market is five miles according to the transport network. An even more sophisticated approach would be to take account of the time taken to travel, thus distinguishing between major and minor roads, and the time of day when the journey occurred. Isochrone analysis (from the Greek, ‘iso’ meaning the same and ‘Chronos’ meaning time) is a tool measuring the time taken to travel from two points on a map. This tool is used, probably unknowingly, by people when using Google, Waze and similar travel apps to plan their journey. Specialised software exists more appropriate to merger analysis, but the principle is similar. As a result of the analysis a picture is produced identifying the relationship of the parties and other potentially competing businesses in the area. A hypothetical example is shown below.

In this example, for a travel time of 20 minutes, some of A’s customers are in the catchment area of B suggesting that A and B compete at least for those customers.  B and C also have some customers in common, but A does not appear to compete for the same customers as C.  D is an ‘island’ having no customers that are also potentially customers of A, B or C.

Determining the travel time to use in the isochrone analysis is one of the key elements to ensure the tool is yielding the correct result. As a rule of thumb, the isochrone analysis should capture at least 85% of the customers of the business being analysed. This leads to the question of who are the customers of a business?

2. Who are the customers of a business?

All local market businesses have a sense of where their customers are approximately based.  Absent any actual evidence, the usual method to determine the question is a customer survey. Customer surveys are composed of four types of questions. First, identifying the location of the customer (using precise information such as post-codes, or less precise but still potentially relevant information such as naming a town or suburb). Second, the mode of travel (car, public transport). Third, the choices made by the customer in visiting the identified store, for example, ‘why did you come to this pharmacy rather than any other?’.  Fourth, the frequency of such visits. There are several challenges to producing a customer survey, of which a material one is to ensure that the survey results will be accepted by the competition authority as providing valid evidence. The UK’s competition authority – the Competition & Markets Authority (CMA) – has produced guidance on many aspects of the design, interpretation, and assessment of surveys.

Increasingly businesses do have some, and often detailed information on its customers. The most common source for such information is store loyalty cards. This information can be combined with the purchase information of those customers that have loyalty cards to build a picture of the customer location, frequency of visits and type of purchases made.

Whether the evidence is through a customer survey and/or customer loyalty cards, it will be necessary to determine the extent that this information is representative of a store’s customers generally. For example, it seems reasonable that more frequent cinema goers would have a loyalty card compared to those who went only occasionally. If 45% of teenage cinema goers go only once every three months or less, then the data that is collected from those that have cards might not be representative. For example, those with a loyalty card might generally live closer to the cinema being analysed, so relying on just those customers would result in a catchment area that was too small.

3. Who are the competitors?

If it is determined there is competitive interaction between the purchaser and target businesses, the assumption is that there will be some lowering of competition in the market post-transaction. It is important to note that the competition authority will assume that the purchaser and target stores within the same local market were competing pre-transaction and will not compete post-transaction. This is the case even if the two stores remain with their previous brands and on their face appear not to have changed their business following the merger. The next step is to identify the competitors and the degree to which they compete and thus counterbalance or otherwise negate any negative effects on competition caused by the transaction. Expressed simply, a competitor is one whose customers are shared with at least one of the purchaser or target businesses. The more there is customer overlap, the more the businesses are likely competing. It will be important at this stage to compare the competitors and potentially reconsider the product market definition. For example, if the market is cinema exhibition, the question can be asked whether a modern edge-of-town large multiplex cinema is to be treated as equally competitive as an old in-town three-screen cinema from the customers’ viewpoint.