The watchdog is failing to consider the role of potential competition in Britain’s narrowing grocery sector, writes Stephen Hornsby

This article originally appeared in the The Brief, the legal supplement by The Times.

It cannot be right for eight companies in the UK to account for 80 per cent of retail grocery sales — and yet, if Tesco’s acquisition of the cash-and-carry group Booker gets the green light, that is just what will happen.

When assessing a merger like this, the Competition and Markets Authority (CMA) looks at “theories of harm”. The starting point is the so-called counterfactual: what would happen in the event that the merger did not take place?

Normally, the counterfactual is the status quo ante. Because Tesco and Booker do not compete except to a trivial extent in grocery retailing, and Tesco is a retailer that mostly buys direct from suppliers, the authority has provisionally decided to approve the deal.

However, in some circumstances a different counterfactual can be applied. A permitted departure from the norm is where one of the parties was likely to enter the market of the other party to the merger.

Booker, with its intimate knowledge of the overall market, would appear to be a prime candidate for entering the grocery retailing market and thus increasing competition in it. Nevertheless, unless there is hard evidence that entry can be predicted with some confidence, the CMA does not consider that to be counterfactual.

In the provisional decision regarding the proposed Tesco-Booker deal, potential competition is not even mentioned. Clearly there can have been no evidence that Booker was intending to enter grocery retailing in a big way despite having a tiny toehold in it already.

Booker may well not have had any plans to enter the market significantly but the fact that it will not now do so eliminates a “known unknown” as far as Tesco and its competitors are concerned and therefore reinforces their collective market power to the possible detriment of consumers.

The CMA’s approach to potential competition in mergers between non-competitors is common, though Germany is looking at the issue afresh.

A particular cause for concern is the lack of competition in technology markets. Google has made scores of unchallenged acquisitions of tech companies whose immediate potential threat to the software giant is hard to discern from outside. This raises the question of why it did so.

The most commercially realistic answer is that Google itself came out of nowhere to its current dominant position, and realises that many companies out there could have the winning formula that puts it out of business in future. It could be buying such companies to stop this happening, or to prevent them falling into the hands of credible competitors.

Potential competition played a big role in examining mergers in concentrated markets in the past, especially in the US. Britain should follow the German approach and think about adopting a less restrictive test, because market concentration levels are rising across the board and innovation seems to be in decline.

Stephen Hornsby is a competition law partner at Goodman Derrick, a City of London law firm.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.