Examine the following two extracts and, drawing on the module materials, assess the arguments for and against the merger between Cochlear and Oticonto medical. using at least one diagram to support a comparison of pure monopoly with perfect competition.

Medical Device Network, 7 December 2022

The UK’s Competition and Markets Authority (CMA) has announced that the merger of two major hearing implant providers, namely Cochlear and Oticon Medical, may lead to higher prices for the National Health Service (NHS).

The deal could also lead to reduced quality as well as impact innovation for UK patients who depend on these devices.

In April, Cochlear agreed to acquire Oticon Medical, the hearing implant division of Demant, for kr850m ($119.8m).

According to the CMA, Cochlear’s proposed acquisition would create a negative impact on patients requiring implants, most of whom purchase their devices through the NHS.

Both Cochlear and Demant are involved in the supply of cochlear implants and bone conduction solutions, which are surgically implanted.

These devices help enhance hearing for people with mild to severe or total hearing loss, meeting the requirements of different patients based on the cause of each individual’s hearing loss.

CMA’s phase one investigation revealed that the proposed deal would result in the merged businesses holding a 90%-100% share of the bone conduction solutions market in the UK.

CMA expressed concern that the closing of the deal would result in the elimination of the strongest competitor in this segment.

This is expected to lead to decreased innovation, higher prices, or fewer choices for hospitals and their patients.

The investigation also focused on the impact of the merger on the supply of cochlear implants, where Cochlear has a significant presence.

It revealed that Oticon Medical has a minor presence in this segment in the UK and was not expected to become a significant rival in the future.

CMA’s findings also found that the merged businesses will have competition from two other providers in the UK.

CMA Mergers senior director Sorcha O’Carroll said: “We’re concerned that this deal could lead to higher costs for the NHS and worse outcomes for patients who rely on life-changing hearing implants.

“The merger will wipe out one of the main suppliers and leave Cochlear with a near monopoly in the supply of bone conduction implants.”

Competition and Markets Authority, 20 January 2023

1.  Cochlear Limited (Cochlear) has agreed to acquire the hearing implant division (Oticon Medical) of Demant (the Merger). Cochlear and Demant are together referred to as the Parties, and for statements relating to the future, Cochlear and Oticon Medical are referred to as the Merged Entity.

2.  After examining a range of evidence, the Competition and Markets Authority (CMA) believes that the Merger, if carried into effect, will result in the creation of a relevant merger situation, and meets the threshold for reference to an in-depth phase 2 investigation, giving rise to a realistic prospect of a substantial lessening of competition (SLC).

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4.  The Parties overlap in the supply of cochlear implants (CI) and bone conduction solutions (BCS) (together, hearing implants) in the UK, which are devices that are surgically implanted in patients with hearing loss to improve their ability to hear.

5.  The CMA found that CI and BCS products serve distinct clinical patient needs. Therefore, these devices are not alternatives for each other. Further, the CMA found that other hearing solutions, such as hearing aids, are not good alternatives for hearing implants. Hearing implants are typically prescribed after hearing aids have been tried and failed, they typically seek to correct more serious hearing loss than hearing aids, cost significantly more than hearing aids, and, unlike hearing aids, require surgery. The CMA has assessed the impact of the Merger on the basis of the supply of (i) BCS and, separately (ii) CI, in the UK.

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10.  The CMA found the Merged Entity would have a combined share of 90-100% in the supply of BCS in the UK, and the Merger would result in the elimination of the strongest competitor. The CMA considered that the one remaining competitor, MedEl, would not impose a sufficient constraint on the Merged Entity, considering its low share of supply and because it only supplies an active BCS product. As such, the CMA believes that there is a realistic prospect that the Merger would result in significant competition concerns in the supply of BCS in the UK, which could result in reduced innovation, quality and service, and higher prices.

11.  The CMA found that the supply of CIs in the UK is highly concentrated, with the Merged Entity having a combined share of approximately 70-80%, with an increment of 0-5%. The CMA examined the evidence carefully given Cochlear’s substantial presence, however, the CMA found that Oticon Medical’s low share of supply was consistent with its weak strength as a competitor both currently and going forward.

12.  The CMA found that competition in the supply of CI is primarily based on product innovation, followed by other factors such as price. Oticon Medical was seen as a weaker constraint relative to other existing providers. There is limited evidence to suggest that it currently is or would in the future impose a material constraint on Cochlear. The CMA believes that there will remain two competitors to constrain the Merged Entity in CI in the UK post-Merger who would provide a much greater constraint on Cochlear in comparison to Oticon Medical.

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15.  The CMA believes that barriers to entry and expansion for the supply of BCS and CI in the UK are high, given the regulatory costs of entry and the significant resources and time required to develop suitable products. As such, the CMA found that entry into BCS was unlikely in the foreseeable future.

16.  The CMA also found that purchasers of CIs and BCSs, which are primarily the NHS and clinics, were unlikely to have buyer power, given the lack of alternative suppliers.

17.  The CMA therefore believes that the Merger gives rise to a realistic prospect of a substantial lessening of competition (SLC) in the supply of BCS in the UK, as a result of horizontal unilateral effects.

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24.  Cochlear submitted that its strategic rationale for the Merger is to gain increased scale to invest in hearing implants technology and clinical trials, which would improve awareness of and access to hearing implants, provide patients with clinical solutions better suited to their needs, and provide long-term support to Oticon Medical’s CI and BCS patients, in order to avoid detriment to these patients and reputational damage to the industry.

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66.  While the Parties submitted that the BCS businesses’ profitability is overstated, the internal documents indicate that it is profitable and contributing to Demant’s revenue growth.

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97.  The CMA assessed whether it is or may be the case that the Merger has resulted, or may be expected to result, in a substantial lessening of competition (SLC) in relation to horizontal unilateral effects in: (a) the supply of BCS in the UK and (b) the supply of CI in the UK.

98.  The concern under such theories of harm is that the removal of one party as a competitor may reduce competition between suppliers of BCS or CI products in the UK. This may lead to the merged firm having a weaker incentive to innovate, or to provide favourable contractual terms or competitive prices for customers, which may also result in reduced quality and service in each respective market.

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118.  The CMA considers that the Parties are very close competitors in the supply of BCS in a highly concentrated market. They are two of only three providers participating across BCS. This is supported by share of supply data that shows the Merged Entity will become the near-monopoly provider.

119.  The CMA considers that there is consistent evidence to suggest a need will remain for BCS for the foreseeable future. The Parties offer the only solutions available to patients requiring this product. Further, the CMA considers that both BCS products broadly serve the same clinical requirement. While there may be some instances where one product is more suitable for a patient than the other, the CMA considers that going forward, there will likely be a material proportion of patients for which BCS products are alternatives.

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129.  Based on the above, the CMA believes that there is a realistic prospect that the Merger may result a significant lessening of competition in relation to the supply of BCS in the UK, given that it would eliminate the strongest competitor and create a near monopoly supplier in the UK.

• an explanation of how market power can lead to inefficient outcomes
• use of diagrams, including at least one diagram (with cost and revenue curves) to compare a monopoly outcome with a perfect competition outcome
• evidence that you understand what the Competition and Markets Authority is concerned about when investigating this merger
• evidence that you also understand arguments in favour of the merger