- The method to estimate market concentration in the relevant market through the application of the Herfindahl-Hirschman Index prevails.
- The Dominance Index shall be no longer in use.
On May 14, 2015 the Mexican Federal Economic Competition Commission ("FECC") published the Technical Criteria for the estimation and application of a Quantitative Index to measure market concentration (the "Technical Criteria") in the Official Gazette of the Federation ("DOF"). The Technical Criteria is the result of a review of the concentration indexes published in the DOF on July 24, 1998. Based on such review, a public consultation was conducted, which concluded on January 15, 2015. Herein we present a brief summary of such publication.
Pursuant to the publication, the FECC sets forth that the objectives of the Technical Criteria are (i) to explain the method used by the authority to estimate, through the application of the index, the level of concentration in the relevant market and (ii) to explain the considerations for the application of the index to analyze the effects on competition of a proposed merger. Such estimations will serve the FECC to have a first review of the structure of the relevant market.
II. Herfindahl Hirschman Index
The Herfindahl Hirschman Index ("IHH") is the sum of the squares of the participations of each economic agent. This index can take values ranging from zero to ten thousand. The minimum value corresponds to a situation of highly atomized market, in which the market divides between a large number of economic agents and the maximum value corresponds to a situation in which only one economic agent owns the entire market.
Market's participation shall be calculated in percentage terms. The participation of the market shall be determined by taking in consideration the revenue indicators, the number of clients, the productive capacity or any other element that FECC considers appropriate. The FECC shall consider preferably the monetary value of total revenues of the relevant market.
In order to estimate the level of concentration in the relevant market, the IHH is calculated assuming that the merger does not take place and such results are contrasted to the IHH assuming that the merger does occur.
The FECC shall consider that a transaction has low possibilities of reducing, impairing or hindering competition and free access to markets, when the estimated result of the transaction are one of more of the following:
(i) the variation of IHH is less than 100 points; or
(ii) the absolute IHH value after giving effect to the proposed merger is less than 2,000 points; or
(iii) the delta of the IHH is between 100 and 150 points, the absolute value of the IHH after giving effect to the proposed merger lays between 2,500 and 3,000 points and the resulting economic agent is not one of the four with the major participation in the relevant market.
Fraction (i) mentioned above represents a modification, because in the criteria published in 1998, the variation of IHH should be less than 75 points.
Regarding fraction (iii), according to the FECC, the asymmetry between competing economic agents is recognized, which allows anticipating such cases in which the merger shall not have an effect that impairs free competition.
The IHH can be used by the FECC to analyze related markets or in other aspects, for example in the analysis of effective competition or entry barriers.
III. Elimination of the Dominance Index
The second index used by the FECC prior to this publication, was the Dominance Index ("DI"), which considered the relative size of the economic agents. This index was designed by the FECC. The DI was a double IHH. It weighed market participations of individual economic agents and with respect to other market participants. It was a concentration index determined by values that expressly considered the relative size of economic agents.
The FECC decided to abandon the use of the DI based on the following arguments: (i) the DI is an asymmetry measure between market participants that does not have a clear and precise link to economic theory and (ii) the DI may underestimate risks of affecting the competition process in cases that a transaction may increment market participation and reduce the number of competitors.
In our opinion, due to the fact that the FECC clearly set forth that the calculation of indexes is only an approximation to the market structure, it was not necessary to eliminate the DI from the economic analysis of mergers. Moreover, there are multiple cases from the extinguished Mexican Competition Commission in which a moderate increase of the IHH (which, for obvious reasons, regularly increases in case of any merger) beyond the established parameters but analyzed with a significant diminish of the DI, gave arguments to consider that such a merger could in fact benefit the market structure by creating a competitor with better opportunities to compete against a dominant agent.
Nevertheless, and without the DI, the FECC will have to set a specific methodology to analyze markets with different levels of concentration according to its own characteristics. This criterion is inconsistent with Transitory Article Nine of the Federal Telecommunications and Broadcasting Law that is still using the DI as a tool to analyze mergers in the telecommunication and broadcasting sectors. Therefore, we will have two competition authorities using different economic analysis tools to understand market structures. This means that analyses performed over regulated markets by the FECC could not benefit from conclusions reached by the Telecommunications Authority or vice versa.
It is highly possible that the reason to eliminate this index as a reference is to diminish the risk of litigations against the FECC in which economic agents argue that the DI should have been taken into consideration in a determined resolution for being more suitable in the case's circumstances.
Finally, it is important to notice that competition authorities from other jurisdictions only apply the IHH. This was probably taken into consideration by the FECC to abandon the use of the DI and to homologate economic analysis performed internationally.
IV. Other considerations
The use of the index and the measures are only auxiliary for the FECC. The authority shall take into consideration for the economic analysis other elements such as entry barriers, competitors' market power, access to input sources, recent behavior of economic agents, access to imports and the existence of high costs that could face consumers by using different providers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.