Control of Market concentration in accordance with the Law on Competition (Part 1)

Control of Market concentration in accordance with the Law on Competition (Part 1)

In a normally functioning economy, consolidation and merger between enterprises are positive measures to promote the economic potential of parties to the transaction, by taking the strengths of one party to offset for the weaknesses of the other party with the motto “cooperation for mutual development”,. The consolidation and merger between such enterprises are considered as a form of “market concentration” (“MC”). However, beside the positive impact it brings, MC can also have several negative impacts on the fairness of market competition. Therefore, most governments seek to control this dilemma. 

1.1 Concept of market concentration

As defined by the Organization for Economic Co-operation and Development (OECD), MC is an economic term that refers to the extent to which a small number of companies or enterprises combine to account for a larger share of the economic activity, such as in total revenue, total assets or total employment.

From the perspective of legal and economic science, MC is also inspected in various following fundamental approaches

Firstly, if considered as an enterprise restructuring process, MC is defined as a process in which the number of independent competitive enterprises in the market is reduced by the execution of mergers and acquisitions, capital purchase, or expanding the production capacity of such enterprises.

Secondly, if considered as enterprises’ behavior, MC is defined as the capital concentration or the increase of capital by merging either from many sources or from one capital that attracts another.

Thirdly, if considered as the production chain, MC can occur in the forms of horizontal MC, vertical MC or mixed MC. The horizontal form is determined to have the most impact on Anti-competitive behavior.

Fourthly, under the preliminary scope of Vietnamese law, the Law on Competition 2018 (“LOC 2018”), although do not provide a concrete definition, it provides a list of various forms of MC, including:

  1. Merger of enterprises;
  2. Consolidation of enterprises;
  3. Acquisition of enterprises;
  4. Joint venture between enterprises;
  5. Other forms.

Fundamentally, the law recognizes the four primary forms of MC: merger, consolidation, acquisition, and joint venture. The addition of the provision “other forms as prescribed with the law” provides for other recognition of other forms from other regulations (it can be a law or subordinate legislation such as Decree No. regulations or circulars).

Meanwhile, the competition law template of UNCTAD also does not define MC but only uses the terms “mergers & acquisitions” (M&A). It can be seen that the approach of Vietnam’s LOC 2018 is quite similar to the competition law template of UNCTAD.

In conclusion, whether from any perspective, we find the consistency in the understanding about MC in the legal and economic sciences of Vietnam, and similarity to such of the OECD and UNCTAD as mentioned.

1.2. Control the market concentration

1.2.1 Purpose of controlling the market concentration

MC is a phenomenon manifesting in a competitive economic environment, stemming from the legitimate and natural needs of enterprises. Doing MC is assessed to promote the economy’s efficiency, in another word have positive contributions to the enterprises and the economy, such as:

(i) MC contributes to increasing the ability of enterprises in promoting scale, capacity, technology, management, and market;

(ii) Small enterprises implementing MC to create a larger enterprise will enhance the enterprise’s ability to compete with other greater-market-power competitors, which lead to more economic efficiency and consumer benefit.

(iii) With the existence of abundant small enterprises, the market is fragmented and diverted, MC helps to create enterprises with greater economic power, which have the better competitive capacity and produce better products;

(iv) MC creates the possibility of extensive cooperation between enterprises in the market, whether in the form of horizontal, vertical, or diagonal;

(v) MC also helps enterprises get rid of losses that may lead to dissolution or bankruptcy of enterprises;

(vi) In some cases, MC may be just a manifestation of the enterprise’s investment to contribute capital or buy shares for profitability. Profitable investment can be considered as a regular activity of a healthy economy;

(vii) In the context of international integration, MC creates opportunities for extensive cooperation, bringing greater values to domestic enterprises in enjoying the transfer of science and technology, intellectual property rights, and advanced governance model in the world.

However, in parallel with the above-mentioned positive effects, MC can also bring about negative effects, the most obvious is the anti-competitive impact. Specifically:

(i) MC may create oligopoly or market manipulation,  in which the market is only shared by a small number of enterprises, thus creating opportunities for such enterprises to perform anti-competitive behaviors;

(ii) As a result of MC, super-large enterprises compel other small enterprises to leave the market themselves due to their inability to withstand the competitive pressure;

(iii) In vertical MC, the MC may lead to scarcity of input supply for other enterprises, even shutting down the existing supplies.

No one can deny the positive impact of MC, but in order for MC to be used for its true nature instead of becoming a tool of speculation, profit-making, and anti-competitive behavior, controlling economic concentration is necessary. The purpose of controlling MC is to create a legal framework and to promote positive impacts such as a fair and healthy field for enterprises to do business, but at the same time also create strict enough rules to limit the negative impacts that MC behavior can bring.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

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