An Economist's Observations on the IBA Health Case
London, England
21 January 2004
Hosted By: The British Institute of International and Comparative Law
NERA Director Dr. Mark Williams spoke at a specially convened meeting of the Competition Law Forum at the British Institute of International and Comparative Law (BIICL) to discuss the implications of the Competition Appeal Tribunal's (CAT) ruling on the IBA intervention in the iSoft/Torex merger case.
The case concerns the merger of iSoft and Torex, two companies providing software for medical applications in the UK hospital sector. The Office of Fair Trading (OFT), acting as the first stage investigator, evaluated the proposed merger, seeking to establish whether the merger created a risk of a Substantial Lessening of Competition (SLC). The OFT then recommended that the merger be cleared, rather than being referred to the phase two authority, the Competition Commission (CC), for further investigation.
A rival software company, IBA Health, challenged the OFT's decision to approve the merger at the CAT. The CAT overruled the OFT, arguing that the decision was not well reasoned, remitting the matter back to the OFT. More fundamentally, the CAT also passed judgment on the test applied by the OFT. The CAT argued that if there were two reasonable views that could be held, the OFT was under a duty to refer, rather than seeking to form an overall view between the conflicting views. As such, the CAT was requiring a significant departure from prior practice of the OFT.
At the Competition Law Forum, Dr. Williams explored the implications of the "two views" approach, and expressed concern that if the ruling was interpreted as most lawyers (and the OFT themselves) were interpreting it, the OFT would be in a position where it had to refer significantly more mergers to the CC. This was worrying, argued Dr. Williams, when viewed against the broad consensus that the OFT already had a policy of "if in doubt, refer" and that in matters of economic analysis of markets, it was often the case that two plausible views existed that needed to be balanced one against another. In 2003 the OFT had been criticized for referring the proposed merger between Safeway and Morrison to the CC.
Under the gaze of Winston Churchill's portrait in the Carlton Club, Dr. Williams recalled the former prime minister's quip that, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."
Particular concern from an economic angle was raised at the mention in the CAT judgement of the CC guidelines that 25% market share could be consistent with an SLC. "Market share is a notoriously unreliable indicator of market power," said Dr. Williams, adding, "These concerns are heightened in bidding markets and in the presence of buyer power." The iSoft/Torex merger involves a bidding market where the government health service is the major buyer.
The OFT has appealed the decision, which will be ruled upon by the Court of Appeal in early February 2004. If the judgment is upheld, many see serious implications for the operation of UK merger control, including a potential reallocation of responsibility between the OFT and the CC.
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