The Supermarket Merger: HHI, Price-Matching and Local Overlaps
Three supermarket chains and four independents supply a regional grocery market with annual sales of £2.4bn. Revenue shares are Ashtons 34%, Bridgeway 26%, Co-op Vale 11%, and four independent chains with 8%, 7%, 7% and 7%. Ashtons proposes to acquire Bridgeway. The competition authority's guidelines treat a market as concentrated above an HHI of 2,000 and presume concern where a merger raises the HHI by more than 200 points, unless entry or buyer power rebuts the presumption. Ashtons argues that the independents collectively hold 29% and therefore constrain it, that two discounters are 'about to enter' three towns, and that it has already offered a two-year pledge to keep prices at Bridgeway levels. Bridgeway's own-label range would be discontinued and its two distribution depots transferred to Ashtons.
1. Calculate the HHI before and after the merger, assess the result against the guidelines, and explain the limits of the HHI in this case.
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Before. Sum of squared shares: 34² = 1,156; 26² = 676; 11² = 121; 8² = 64; 7² = 49 three times = 147. Total = 2,164. The market is already above the 2,000 concentration threshold, although only just.
After. Ashtons holds 60%: 60² = 3,600, plus 121 + 64 + 147 = 3,932. The increment is 3,932 − 2,164 = 1,768 points.
Assessment. Both limbs of the guideline are met by a wide margin: the market is highly concentrated after the merger and the increment is nearly nine times the 200-point threshold. The presumption of concern applies, and the burden falls on Ashtons to rebut it.
Limits of the measure. The HHI is only as good as the market definition. A regional grocery total conceals local catchments where only Ashtons and Bridgeway trade, and where the post-merger HHI would be 10,000. It uses revenue shares, so it ignores volume, own-label share and store format; and it treats a 7% discounter and a 7% convenience chain as equivalent constraints. It also says nothing about the closeness of substitution between the merging parties, which is what actually drives unilateral effects. Finally, it is a snapshot: a merger that removes a maverick can matter far more than the arithmetic implies. The HHI should therefore be a screening device, followed by local store-level analysis, not the decision itself.
2. Evaluate the three arguments Ashtons has advanced: that independents constrain it, that discounters are about to enter, and that a two-year price-matching pledge protects consumers.
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1. 'The independents hold 29% and constrain us.' Combined share is not the test; closeness of competition is. The independents are four separate firms of 7–8%, each with limited range and no national buying scale, while Ashtons and Bridgeway are the two largest and most similar chains. A merger between the first and second removes the closest substitute, and the independents' constraint operates mainly at the margin in specific locations. The argument would need store-level diversion evidence showing shoppers switch to independents rather than to each other.
2. 'Discounters are about to enter.' Entry rebuts a presumption only if it is timely (typically within two to three years), likely and sufficient in scale. 'About to enter three towns' is an intention, not a commitment: no sites, no planning consents, no timetable. It also leaves the rest of the region untouched. Entry that responds to a price rise is more credible evidence than entry announced before the merger is cleared.
3. 'A two-year price-matching pledge.' This is the weakest argument. Price-matching can soften competition rather than preserve it: if Ashtons commits to match Bridgeway's prices, it removes the merging party's incentive to undercut, and it may signal a reference price to rivals. It is also unverifiable in practice, covers only two years against a permanent structural change, and does nothing about the loss of Bridgeway's own-label range or the local overlaps. Behavioural remedies of this kind are generally treated as inferior to structural ones.
On all three, the counter-arguments are stronger than the defences.
3. In the three towns where only Ashtons and Bridgeway trade, would you expect prices to rise? Set out the unilateral-effects reasoning and name the single piece of evidence you would request first.
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Expected effect: a price rise. In those towns the merger takes the market from two competitors to a monopoly. Before the merger, each firm's price is constrained by the risk that shoppers switch to the other; after it, that constraint disappears and the merged firm internalises the lost sales that a price rise would otherwise cause.
The size of the effect depends on three things:
- Diversion ratio - the share of shoppers lost by Ashtons on a price rise who would have gone to Bridgeway. If that ratio is high, few of the lost customers leave the merged firm, so the price rise is nearly costless and the incentive to raise price is strong (upward pricing pressure logic).
- Gross margin - the higher the margin on the sales at risk, the more a price rise is worth.
- Elasticity of total demand - how much shoppers reduce spending or travel further out, which caps the rise.
A simple check: if 60% of Ashtons' switching customers would have gone to Bridgeway and margins are 25%, the merged firm recaptures most of the lost margin and a material price rise is predictable. If diversion is 15% and a discounter is five minutes away, the constraint survives.
Evidence to request first: store-level diversion data - ideally, customer switching inferred from loyalty-card or postcode data, or bidding/acquisition data on how the two chains responded to each other's local price changes. This is more informative than any further share calculation, because it measures the constraint the merger actually removes.