In 2019, the UK’s competition authority blocked the merger between the second- and third-largest grocers, Sainsbury and Asda. At the time, each supermarket chain held about 15-16 per cent of market share, while the largest grocer, Tesco, held nearly 28 per cent.
Their combined market share would have been only slightly more than that of Tesco, so why did the UK Competition and Markets Authority (CMA) block the deal?
Competition is the essential force that ensures the cogs and wheels of a market economy move as smoothly as possible. In most markets, a lack of competition leads to market dominance.
Market dominance is characterised by significant market share held by a few or a single player, allowing them to control prices. This often leads to higher prices and reduced consumer welfare, as choice and quality decline. Once established, market dominance is hard to break, as the leading firm(s) enjoy protection through high barriers to entry.
In the 1980s, the US competition agency, the Federal Trade Commission (FTC), used a simple mathematical rule of thumb indicating market concentration as a guide to challenging mergers or acquisitions. Since then, business practices have become far more complex. As shown in the blocked merger between Sainsbury and Asda, market dominance can be represented by factors beyond market share.
The UK CMA’s ruling reveals the nature of modern big business—elaborate structures and interlinkages are now the norm. Key takeaways include:
1. Market dominance may operate differently at national and local levels.
2. Although consumer welfare is a main concern, the inquiry also highlighted possible negative consequences for suppliers, especially at the local level.
3. Consumer welfare encompasses more than price; having adequate choice and product quality are also critical.
4. The benefits of technology, such as online shopping and delivery services, can be diminished by market dominance.
This failed merger offers lessons that extend beyond the grocery market. (Nor am I suggesting that Malaysian consumers lack options for grocery shopping).
Market share alone is no longer a reliable indicator of market dominance. In some cases, even a large market share does not ensure dominance. Today, the complexities of business structures and their linkages to other markets must be considered to ensure competition.
With the digitalisation of the economy, dominant market players are increasingly able to entrench themselves, while new entrants struggle due to a lack of access to data. Established players further solidify their immovable status through control over supply chains and the consumer delivery market—conditions that encourage market dominance and stifle competition.
Malaysia aims to create an environment where innovative companies can start and thrive. Economics and the spirit of human endeavour suggest that innovations are more likely to emerge from start-ups than from existing giants. While start-ups can be bold and disruptive, large corporations typically focus on incremental improvements and maintaining their dominance.
In the United States, tech giants are under scrutiny for so-called “killer acquisitions,” where start-ups are acquired and then effectively shelved to pre-empt future competition.
Some entrepreneurs may welcome the idea of acquisition by a tech giant, and there is nothing wrong with that. However, the realisation of innovation, growth in the digital economy, entrepreneurship, and the potential birth of new giants are more likely to occur in a competitive environment.
The introduction of merger control under the Competition Act 2010 is overdue. Sectors ranging from retail to telecommunications, and even the labour market, would benefit from competition between companies.
As business practices accelerate in the internet age, the Malaysia Competition Commission needs powers to ensure the government’s innovative economy initiatives are supported by a robustly competitive environment.