Oligopoly Strategies and the Regulation of Mergers

Question

The Competition and Consumer Commission of Singapore (CCCS) denied the acquisition of Uber’s Southeast Asian business by Grab in 2018 as investigation showed that it would lead to a substantial lessening of competition in ride-hailing platform services in Singapore. On the other hand, CCCS approved the acquisition of Food Junction by BreadTalk Group in 2019 as its market share would still be less than 20 per cent — “considerably lower” than the market shares of larger food-court operators such as Kopitiam and Koufu.

(a) Explain possible strategies a firm can adopt to increase market share in an oligopolistic industry. [10]

(b) Discuss whether the impact on consumer welfare is the main reason for the CCCS to decide on blocking or approving mergers and acquisitions of firms. [15]

Answer

Part (a)

An oligopoly is a market structure dominated by a few large firms, each holding a significant market share. A change in market share can be read off a firm’s output, ceteris paribus. To raise market share a firm draws on price strategies and non-price strategies; this answer treats one of each.

Price strategy — a price war. A price war is a strategy used to drive rivals out of the market: firms repeatedly undercut one another’s prices, and rivals unable to sustain at least normal profit exit in the long run. The remaining firm gains a larger market share, because consumers who previously bought from the departed rivals switch to it as the nearest substitute. Its demand rises, raising its average and marginal revenue, so a profit-maximising firm producing where $MC = MR$ raises its output — a higher market share. (Predatory pricing, where a firm deliberately prices below cost to make short-run losses and force rivals out, works through the same mechanism.)

Non-price strategy — mergers and acquisitions. Horizontal integration through merger and acquisition — combining with a firm at the same stage of production — raises market share directly: it removes a competitor and transfers that competitor’s existing share to the merged entity. Grab’s acquisition of Uber’s Southeast Asian operations is an example, leaving Grab with a higher share than before. (Product differentiation, real or artificial, is an alternative non-price route: it raises demand and lowers its price elasticity, again raising output at the profit-maximising point — though the underlying mechanism, a rise in average and marginal revenue, is the same one already analysed, so it earns no additional credit if simply repeated.)

Part (b)

Thesis. Mergers and acquisitions amalgamate two or more firms into one, by voluntary merger or by takeover. Consumer welfare is consumers’ satisfaction or utility. This answer argues that, although the impact on consumer welfare is a genuine consideration, the impact on efficiency is the main reason the CCCS blocks or approves a merger.

Consumer welfare as a reason — both directions. A merger can cut consumer welfare. By raising and making more price-inelastic the demand for the merged firm’s goods, it confers greater price-setting power; higher prices erode consumer surplus, and fewer firms means fewer substitutes and less choice. But a merger can also raise consumer welfare. A larger scale of production lets the firm reap greater internal economies of scale, lowering average and marginal cost; if prices fall, consumer surplus rises. A larger output also spreads R&D costs, so the firm can improve the quality and variety of its goods — a further welfare gain. Because the effect on consumer welfare can cut either way, the CCCS plainly weighs it.

Anti-thesis — efficiency as the reason. The CCCS also weighs the merger’s effect on efficiency. A merger makes the market less competitive: with fewer firms and a larger combined share, the merged firm has greater and more price-inelastic demand and so under-produces further relative to the allocatively efficient output where $P = MC$, widening allocative inefficiency. A less contestable market can also breed complacency and X-inefficiency. Conversely, approval may be warranted where the merger raises efficiency: greater economies of scale move the firm towards productive efficiency, and higher revenue funds the innovation that sustains dynamic efficiency.

Evaluation and judgement. The reasoned verdict is that the impact on efficiency is the main reason. The CCCS is a government body, and so shares the government’s objective of maximising societal welfare. Consumer welfare is only one component of societal welfare. Efficiency, by contrast, bears on the whole of society: allocative, productive and dynamic efficiency affect not only consumers but also the profits and surplus of producers and the tax revenue accruing to the government. Because efficiency captures the welfare of every group the CCCS is mandated to protect, it is the more comprehensive — and therefore the main — criterion on which the CCCS decides whether to block or approve a merger.