Introduction
The Fair Trading Act 1973 allows the Monopolies and Mergers Commission (MMC) to review mergers that could reduce competition in a "substantial part of the United Kingdom." This term, central to merger reviews, requires clear boundaries to define the MMC’s authority. The House of Lords’ decision in R v Monopolies and Mergers Commission, Ex parte South Yorkshire Transport Ltd [1993] 1 WLR 23 explains how this phrase should be applied. The ruling stated that judging a "substantial part" depends on significance, not just size. It held that the area’s economic function must be evaluated, not only its land area relative to the UK.
Defining "Substantial Part": Focus on Significance
The central issue in South Yorkshire Transport was the interpretation of "substantial part." The MMC argued the merger’s geographic scope included South Yorkshire, which they termed a "substantial part" of the UK. The House of Lords rejected relying solely on population or land measurements. Lord Mustill, in the leading judgment, emphasized that "substantial" relates to importance, not physical scale. He noted a smaller region with significant economic activity could qualify as a "substantial part," while a larger, less active area might not.
The Economic Function Evaluation
The South Yorkshire Transport decision established the "economic function" test. This requires the MMC to examine how the merger affects the area’s market. Factors include the volume of trade in the region, its role in the national economy for the relevant sector, and the number of local businesses. This approach ensures decisions about a "substantial part" focus on competition risks, the primary aim of merger reviews.
Case Details: South Yorkshire Bus Services
The facts of South Yorkshire Transport illustrate the economic function test. The merger involved bus services in South Yorkshire. Though not geographically large, the area represented a key market for bus operations. The concentration of bus routes and their impact on local transportation made South Yorkshire economically significant in this sector. The House of Lords upheld the MMC’s authority to intervene despite the area’s small size.
Impact on Merger Reviews
The South Yorkshire Transport decision reshaped UK merger reviews. It shifted focus from physical size to economic significance. This allows authorities to act against mergers that harm competition, even in smaller regions. The case provides a framework for defining market boundaries and assessing merger effects, enabling more focused competition policy.
Broadening Market Definition Beyond Geography
The South Yorkshire Transport reasoning also applies to markets defined by products or services. Defining the relevant market involves identifying the goods or services in question. This includes analyzing customer behavior and competitor interactions. For example, a merger between two leading grocery stores in a small town might reduce competition in that product market, even if the town is small. The principles of economic function and significance-based evaluation remain central to setting market boundaries, whether by location, product, or both.
Conclusion
The South Yorkshire Transport ruling provides clear guidance on interpreting "substantial part of the UK" under the Fair Trading Act 1973. The House of Lords prioritized significance, emphasizing economic function over physical scale. By applying the "economic function" test, the decision has influenced UK merger reviews, making competition policy more effective and specific. The case demonstrates the importance of evaluating market-specific factors and competition risks when assessing mergers, irrespective of geographic size. The principles from this decision continue to guide the MMC and other regulators in maintaining competitive markets.
