Equity and Economic Efficiency in the Merger of Superior Propane and ICG Propane

Abstract

In Canada, antitrust policy and enforcement is quite different than in the U.S. The Commissioner of Competition, who is in charge of reviewing mergers, leads the Competition Bureau, the division of the federal government that promotes and maintains fair competition among businesses so that Canadians benefit from lower prices, product choice and quality of goods and services.

This case begins in July 1998 when two propane companies, Superior Propane and ICG Propane, announce that they intend to merge. The Commissioner, Konrad Von Finckenstein, decides to challenge the merger even though there are expected economic efficiency gains; in economic terms, total welfare is higher under the merger even though there are expected losses to consumers.

The Commissioner's concerns over the merger stems from the fact that the merged entity will have a near monopoly in the propane market which will result in higher prices for customers, many of whom are relatively poor.

The Tribunal, in reviewing the merger, concludes that the merger is justified by the efficiency gains created and relies on a specific section within the Competition Act that permits mergers as long as the gains from the merger are greater than or offset the anti-competitive effects. This specific section, known as the efficiencies defense, has historical significance in that it was designed to allow Canadian companies to compete in the international marketplace. In the case of the propane merger, the expected efficiency gains were estimated to be o$29.2 million which outweighed the social waste of $3.0 million.

After two unsuccessful attempts to appeal the Tribunal's decision Commissioner Konrad Von Finckenstein is left wondering where and how policymakers should define the line between efficiency and equity.

This case study is intended for students of economics, public management, and public policy. It can be used in courses on cost-benefit analysis, antitrust policy, law and economics, or policy analysis. It assumes that students have a basic understanding of microeconomics as it builds on concepts such as consumer surplus, producer surplus, monopoly pricing, and deadweight loss.

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