The CMA has blocked the proposed merger between Sainsburys and Asda on the grounds that it would limit competition and harm consumer welfare. In addition, the GMB, a trade union, praised the decision fearing large job losses as part of any potential cost-cutting programme that is common when mergers take place.
Sainsburys and Asda had promised to sell off stores in areas of the country where they were the dominant firms in order to ensure the local competition was protected. Furthermore, they pledged to cut prices by £1bn. However, the CMA argued that tracking promised price cuts would be too difficult and, following on from consumer surveys, decided to block the merger of the 2nd and 3rd largest supermarkets (in terms of market share). Fewer substitutes, as a result of the merger, may cause the AR & MR curves for the new firm to become steeper, reducing output and increasing prices.
The firms argued that consumers would be better off as the additional economies of scale would lead to lower long-run average costs, which would then be passed on in the form of lower prices and, as a result, increased consumer surplus. The merged firm, which would have taken over Tesco as the UK’s largest supermarket, would, potentially, benefit from increased bulk-buying economies, as well as technical economies, in an increasingly competitive online grocery market.