The Competition Authority has been instructed by the Ministry of Government Administration and Renewal to evaluate the effects of competition policy, including decisions under Section 16 of the Competition Act. Candidates for such an evaluation might include specific mergers that have been either permitted or prohibited. Such an evaluation would primarily be intended to highlight the effects of competition policy. Furthermore, the experience after a merger that has been stopped or approved could provide the Competition Authority with a better technical basis for assessing future mergers.
In January 2006 Gilde Norsk Kjøtt BA (Gilde) and Prior Norge BA (Prior) entered into a merger agreement. The Competition Authority decided to prohibit the merger, pursuant to the first subsection of Section 16 of the Competition Act.
The Ministry of Government Administration and Renewal overturned the Competition Authority's prohibition of the merger. The Ministry was of the opinion that it was unlikely that any potential competition from Gilde as a result of entering the market for white meat would significantly discipline Prior's activities in this market. Nortura BA was the result of the merger between the Gilde and Prior cooperatives.
The parties asserted, during the Competition Authority's decision-making process, that the merger would result in two main types of efficiency benefits. First, integration of the two groups' activities would create synergies that would provide substantial cost savings. They also maintained that the merger would lead to efficiency benefits in the form of innovation and product development which would benefit consumers. On the other hand, the parties said that the merger would also create restructuring costs.
Normally, when undertaking merger assessments, the Competition Authority operates on the premise that reduced competition and higher prices will result in lower efficiency. This is often referred to in the literature as slack or X-inefficiency. Slack means that companies use greater resources than are strictly necessary. Slack thus represents a welfare loss. The potential for slack means that a traditional estimate of deadweight loss would produce an under-estimate of the actual welfare loss associated with any price increases resulting from a merger.
There is nothing to indicate that a cooperative, where the producers own the company, would in itself result in greater spending. Any high costs that the companies could be expected to have would depend on the specific situation, good governance and not least pressure exerted by competition.
Generally speaking it is important for each cooperative to generate a profit that would be shared among the owners. If the profits are not sufficiently high there is a risk that the farmers might want to start supplying their products to other parties. Since low costs generate increased profits, low costs would be a means by which Gilde and Prior could prevent farmers from choosing to deliver their products to other parties.
The Competition Authority thought that the disappearance of potential competition from Gilde in particular would result in higher costs and lower efficiency in the merged company than Prior would have experienced if it had been subject to potential competition from Gilde. On this basis the Authority found that the merger would result in a welfare loss. Loss resulting from reduced competition was also weighed up against the cost savings cited by the parties.
When weighing up the losses and profits that would result from a merger and that would be relevant to making a decision at the time of the merger, only those cost savings that create a net increase in social welfare, that are merger-specific and that have been adequately documented are counted. The obligation to present adequate documentation rests with the parties involved. In the Competition Authority's assessment of the parties' claims, the Authority found that some of the cost savings could increase social welfare and be merger-specific. However, the documentation produced by the parties was incomplete. Consequently, there was considerable uncertainty about the claimed synergies, and they were not well-grounded in specific implementation plans.
The Competition Authority has therefore begun an evaluation of the extent to which the efficiency benefits and restructuring costs claimed by the parties in connection with the merger have been realised. The Competition Authority will also consider whether or not the cost savings that have so far been achieved are merger-specific and relevant from an economic welfare perspective. The aim of such an evaluation is to provide the Competition Authority with a better basis for assessing the reasonableness of any efficiency benefits claimed in respect of future mergers and any restructuring and complexity costs that might be incurred.
The Competition Authority has received information from Nortura about the effects they have so far experienced. As part of this ongoing evaluation the Competition Authority will also look more closely at market developments in this area, including competition from the grocery chains' own brands, and also at developments in the competitors' market positions.