The main economic reasons for the competition commissions ruling

The competition commissions ruling was based on a number of reasons including; competition issues (both on the local and national levels), buying power, supplier issues and the market as a whole but, there was various economic reasons affecting the cc ruling.The first reasons I will look at are the issues of competitive pricing and maximisation of consumer choice.One of the main reasons for the ruling was that the CC was not convinced that if Tesco, Asda or Sainsbury's were to merge with Safeway's prices would remain competitive. The CC wanted to be sure that any of the mergers that were being considered would bring about efficiencies that would not happen if the merger did not take place and, the CC also wanted to know what these might be (for example, IT, logistics, distribution, or head office), and whether these efficiencies would benefit the customer by providing lower prices for products or services, higher quality products or services, or a greater choice of product or service.

The CC feared that if the big four supermarkets became three competition would be reduced and could result in prices becoming "co-ordinated". This is a possibility because if there is less competition brought about by the reduced number of national supermarkets prices would eventually begin to increase and, four large supermarkets would be less likely to co-ordinate price than three.This is further evidenced when in the report the CC states, "We consider that Asda's price reducing strategy could only be sustainable through increasing market share and thus increasing concentration, which would in turn further reinforce the incentives for co-ordination to occur"At one point during the merger negotiations Asda proposed that Safeway's should be split between itself and Morrison's but the competition commission rejected this idea and stated that this would "still result in a significantly less competitive outcome than the expected alternative". This shows that the CC was largely paying attention to the issue of keeping the market competitive and maximising consumer choice.

Tony Denunzio (Asda's chief executive) said if Asda did buy Safeway's it would continue to deliver the same low prices that made the company successful. Denunzio claims the CC used "text book economics to determine what might happen in the long term" he added, "the reality is that we have a business model that reduces prices". If this is the case then it is clear the CC did not judge fairly and had possibly already made its decisions on favouring Morrisons to buy Safeway's before producing their report.The second reason I will look at is supplier issues and the buying power of the merged business.The CC wanted to ensure that the company that did buy Safeway would not have a negative effect on smaller convenience stores, grocery stores or on customers and suppliers. This is because increased buying powers by the merged company could mean that they bring about a reduction in the number of suppliers, an increase in the prices, reduced quality, and a reduction in the amount of different products offered.

This could happen because as the companies merge, the merged entities buying power would increase because the suppliers would have fewer supermarkets to sell their product to. This could result in an increase in costs for the suppliers, because supermarkets may sell their product at below-cost on a regular basis and, may demand that suppliers sell their product to them at a cheaper price, which could result in a reduction in the number of suppliers.Increased buying power by the merged entity could negatively affect customers because; the reduced number of suppliers could bring about higher prices and poorer quality products.The CC's decision to allow Morrisons to bid for Safeway means that many of these problems have been averted because, Morrisons buying power has increased but, not to the same extent that Asda, Tesco, or Sainsbury's would have. These businesses were already the biggest supermarkets in the country and if they had been allowed to bid for Safeway there power would have been further increased. This could have resulted in one of the supermarkets monopolising the market and having domination over the suppliers.

Another economic reason I will briefly focus on is the issue of excessive concentration of power in the retail sector.If the other larger supermarkets had not been blocked from bidding for Safeway's this would have resulted in there being an excessive concentration of power, this is because WM Morrison has a market capitalisation of 3.3 billion, and owns 123 stores this is considerably smaller than the other supermarkets. Safeway's its-self owns 480 stores and, the giant corporation Wal-mart owns Asda.The CC decided it would be favourable to open the market up and allow for more competition.

By allowing a smaller company (Morrison's) the opportunity to expand and offer more choice, competitive prices, higher quality service and, to force top established supermarkets to re-evaluate there current strategies and offer more to customers on all levels.The CC decided not to allow private-equity investors the opportunity to bid for Safeway's; I disagree with this decision as this would open up the market to a greater extent and allow for fiercer competition, and more choice for the customer.The CC's final ruling was in the public's interest to a large extent. The main reason why the CC came to the conclusion of blocking Asda, Tesco, and Sainsbury's from bidding for safeways was, because if Safeway did merge with one of these supermarkets it would end up having a negative effect on consumer choice, the competitiveness of prices, and suppliers as a whole.

This is because the amount of large national supermarkets would have been reduced from four to three.The CC believed this reduced number could lead to supermarkets "flexing their muscles" and bullying suppliers into offering lower prices because of the increased buying power the merged entity would experience. This would mean that smaller grocery stores could be charged higher prices by suppliers to make up for the discounts the large supermarkets have been given. This would ultimately mean that consumers would end up paying higher prices and a larger number of smaller grocery stores would be forced to close due to high expenses.

So the final ruling to allow Morrisons to bid for Safeway proved to be a positive decision in terms of the effect it would have on consumers, suppliers and price levels.The acquisition of Safeway by Morrisons would mean high levels of competition, which would mean greater benefits and choice for customers and a larger amount of customers for suppliers. So the CC's ruling was the best decision that could have been made with regards to the public.In the CC's report the interest's of a number Safeway's stakeholders were taken into account, and subject to various levels of scrutiny, but one stakeholder that took priority over all others were the customers this is evidenced by the following;On the 8th of May 2003 the CC issued, a merger enquiry issues statement to all the main mergers in contemplation. This issues letter raised various questions that the CC wanted answering and, it identified a number of issues.

The overall reasons for these questions were to find out if any of the potential mergers would eventually end up operating against the public's interest.The issues statement mainly focused on; prices and whether they would rise or fall if Safeway were to merge with one of the potential mergers, choice, and whether any of the potential mergers would offer more choice to customers, whether any of the potential mergers would bring about benefits for customers that would not be realised in the absence of the merger, and what form these might take for example;* "Customers having a better chance of being able to shop at there preferred supermarket".* "Prices of products or services being lower".* "Efficiencies being increased and passed on to customers in the form of lower prices for products/services, higher quality products or services, a greater choice of product or service, or a better quality service".

(Safeway merger enquiry issues statement, May 2003)The statement also raised the question of, "whether the acquisition of Safeway by any one of the parties might be expected to bring about increased competition, and if so, in what ways this might manifest itself (for example, in price levels, the quantity of goods or services or the diversity of the groceries offered)". It also asked "whether any of the mergers in contemplation might be expected to result in prices for groceries or other product categories being higher or choice being less (either in the one-stop or any other market) than would other wise have been the case, as a result of the actions of one of the parties, or one of the parties in association with the actions of one or more other multiple grocery retailers". (Safeway merger issues statement, May 2003)Throughout the CC's report it made it clear that the potential merger that could offer the highest levels of benefits to the customer, and keep competition high was Morrisons, and eventually Morrisons was the only supermarket allowed to bid for Safeway. This further reinforces the CC's dedication to maintaining the best interests of the customer.The stakeholders that closely follow behind customers in the order of priority are the suppliers;In the CC's report it outlines a fear it has that the acquisition of Safeway by any of Asda, Tesco, Sainsbury, or Morrison may disrupt the balance in the "bargaining positions of the party and its suppliers" (CC report summary) and this would mean that the uncompetitive prices the supermarkets would be offering would have a knock on effect and lessen suppliers bargaining power.This would also end up having a negative effect on small grocery stores, because in order to recoup the losses suppliers have incurred when selling cut-price products to supermarkets they may raise prices to smaller businesses.

The CC report claims that this inevitable problem would be made worse if Tesco, Asda or Sainbury's were to merge with Safeway, because suppliers would be at more of a disadvantage with fewer customers to sell too, and are further in danger of being bullied by the increased buying power the supermarket that merges with Safeway would experience.The CC believed that if Safeway were to be acquired by Morrison the problems of increased buying power would not be as significant, because there would be four major supermarkets. Suppliers would benefit from this in a variety of ways, such as; supermarkets would be more willing to compete, and therefore would be willing to pay for higher quality goods.The stakeholders that came third in the order of priority were the shareholders;Safeway's shareholders were not extremely high on the CC's list of priorities this is because on the 9th of January Morrison announced to the public that it had made an offer to Safeway's shareholders, and had made arrangements to merge with Safeway.

The Morrison offer was closely followed by Sainsbury's, then Asda (Wal-Mart), and then by Tesco. Because of these counter offers Safeway encountered after Morrisons made its bid for Safeway. The Safeway shareholders decided they no longer wanted to merge with Morrisons, and the bid lapsed.Safeway shareholders claimed the 272p a share Morrisons was offering was far below the company net share asset value (393p a share) and the shareholders decided it was in their best interest to consider other offers. Many of Safeway's shareholders believed that the merger would destroy the shareholder value. Some shareholders asked for Safeway to reject all the bids on the basis that suppliers and customers would not benefit from it.

When the case was referred to the CC they took other more important matters into consideration and decided that for Safeway to merge with Morrison would be the most attractive choice. The CC generally took matters concerning customers, suppliers and competition into further consideration than matters concerning the shareholders.The last stakeholders to make an appearance in CC's order of priorities were the employees;The CC's report did not generally pay much attention to matters concerning the staff members, but the head of the shop-workers union was pleased with the CC's decision to block Asda, Tesco, and Sainsbury's from bidding for Safeway. He claimed that Morrisons bid offer was the best deal for the employees.

Sir Bill Connor, the general secretary of Usdaw, that represents over 34,000 staff at Morrisons and Safeway was reported as saying "we have worked closely with Morrisons and Safeway for a number of years, we felt the proposed merger of the two was in the best interests of our members. This has been an unsettling time, and its important to bring the merger to a final conclusion"(personneltoday.com 29th September 2003)So the final ruling to allow Morrisons to bid for Safeway proved to be a positive decision in terms of the effect it would have on consumers, suppliers and price levels.The acquisition of Safeway by Morrisons would mean high levels of competition, which would mean greater benefits and choice for customers and a larger amount of customers for suppliers. So the CC's ruling was the best decision that could have been made with regards to the public.