International competition doctrine states that antitrust agencies often use three main approaches to control economic concentrations:
(1) The “absolute value approach” of competition, which consists of prohibiting any type of concentration that increases market power, regardless of the effects on efficiency. (2) The “relative value or balancing approach,” which compares the anti-competitive effects of the concentration against the efficiencies it creates and with other socio-political goals. (3) The so-called “market control approach,” which consists of letting the market control the concentration.
Under this conceptualization, the Honduran Law for the Defense and Promotion of Competition (LDPC) establishes the “relative value or balancing approach” as a mechanism for controlling concentrations. According to the Law, to determine if a concentration is prohibited, one must evaluate the anti-competitive effects of the merger against the efficiency gains obtained. This is what Article 12 of the Law indicates, which states that all “economic concentrations that generate increases in economic efficiency and consumer welfare… and that compensate for the possible negative effect on the process of free competition” are compatible with the LDPC.
The main limitation of this approach lies in the difficulty of proving that the expected efficiencies are greater than the anti-competitive effects of the concentration, based on what is established in Article 9 of the LDPC: “… whoever invokes increases in economic efficiency and consumer welfare as a result of their actions must prove such assumptions.”
Therefore, in cases where there are changes in the market structure, or if market shares or the level of concentration increase significantly, or if the result is the creation of a dominant position or significant market participation, in the analysis of approval or not by the Competition Commission (CDPC), or the scope of the conditions, in case of a conditioned approval, the economic agents involved in the concentration operations must know how to discern and expose to the authority what the efficiencies and synergies resulting from a concentration operation are.
The valuation of efficiencies plays a fundamental role in the evaluation of concentration operations, as it empowers the authority to declare the business concentration’s compatibility with the market on the basis of considering that the efficiencies compensate for the negative effects on competition derived from the economic concentration operation.
In cases where there is a rise in concentration levels, it will be fundamental, therefore, to determine which synergies and economic efficiencies will be obtained and in what way.
Specifically:
- Productive efficiencies: If, on the occasion of the concentration operation, the average production costs can be brought to the lowest level in the sector. If economies of scale and economies of scope are achieved.
- Transactional efficiencies: If, on the occasion of the concentration operation, cost savings result from the integration of two different phases of production of a good or service. If commissions and additional costs are eliminated; if there are time savings.
- Dynamic efficiencies: If, on the occasion of the concentration operation, innovation and the development of new and better products are stimulated; if technical processes are accelerated and a further reduction in prices in favor of consumers is achieved.
- Allocative efficiencies: If, on the occasion of the concentration operation, production or distribution costs are reduced and innovation increases, and how these are “allocated” or passed on to consumers. In short, if the transaction leads to the production of goods or the supply of services that meet the needs and quantities demanded by consumers; and if the market price is equal to the marginal cost.
Given the dilemma of “market power” vs. “economic benefits” that stems from concentration operations, a concentration that poses anti-competitive risks may be approved if it ultimately manages to meet the following standards: (a) Price: If the efficiencies ensure that after the transaction, prices will decrease or, in any case, be maintained at the level that existed before its celebration. (b) Consumer welfare: If the efficiencies will lead to an increase in the quality, innovation, and variety of products or services that directly benefit consumers. (c) Total welfare, with which the benefits of consumers and producers are valued equally.
The CDPC’s conditioned resolutions show that over time, and especially in relation to transactions that resulted in significant changes in market structure (significant increase in HHI concentration levels, etc., relevant acquisition of market power), such as those that occurred in the telecommunications (Claro-Digicel) and fuel (Esso-Puma) sectors, the CDPC has followed the balancing or relative value approach mandated by the Law and not the absolute value approach.