The counterfactual in the Stena/DFDS merger: an extensive application of the exiting firm scenario

The UK Competition Commission (CC) has unconditionally cleared the Stena/DFDS merger. This relevant market affected by the transaction was the market for ferry services between Ireland and Great Britain. At the moment of the merger it was a declining market with all the ferry operators losing market shares because of the recession. So there existed an oversupply of capacity. The merger pursues the reorganization of the ferry services provided by the parties with Stena replacing DFDS on Liverpool-Belfast and Heysham-Belfast routes and closing two Dublin-base routes. Moreover, at the same time of the merger, Stena closed its Fleetwood-Larne route.

What is of relevance in the CC decision is the counterfactual it identified. Counterfactual – what would happen if the merger does not take place- is an important step to ascertain the competition impact of the merger, and it should be carefully identified. According to the Merger Assessment Guidelines, one of the cases in which it is possible to select a counterfactual different from the prevailing conditions of competition is the ‘exiting firm’ or failing firm scenario. However, in this case the CC embraced an extensive meaning the term exiting firm and it considered that it also applied to a ‘closing route’ scenario as it was the case of Stena leaving the Fleetwood-Larne link. Then, the question tackled by the CC was: would Stena leave this route also in the absence of the merger? To reply to that, the CC considered the type of vessels employed by Stena on the route, the difficult conditions at the port of Fleetwood and the financial prospects of the route. Eventually, it concluded that Stena in any event would leave the route.

Therefore, the merger would bring about no competition loss in the so called diagonal corridor through the Irish sea, as Stena would not be present here in the counterfactual. No competition loss would occur in the other corridors where Stena would face a strong competition constraint from the other ferry operators.

The Stena/DFDS merger the flexibility in the application of the failing firm scenario: apparently, it is possible to apply it not only when an undertaking leaves outright the market, but also when it closes down a specific line of business such a maritime link. This finding is line with what was hold by the CC in Stagecoach Group/Eastbourne Buses/Cavendish Motors, where it considered that the closure of a very substantial proportion of the loss-making activities of one of the merging parties qualified for the application of the failing firm defence

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