The Commerce Commission denies Woolworths' and Foodstuffs' claims the grocery market is intensely competitive and says a takeover of The Warehouse will make it even less so.
Woolworths and rival Foodstuffs are, in the High Court in Wellington, appealing against a commission ruling that prohibits either company making a bid to take over the Red Shed operator.
Commerce Commission lawyer Stephen Kos told the court the market essentially consisted of a single acknowledged price leader and other price followers. "The effect of the merger would be a creation of a pure duopoly."
The competition watchdog did not subscribe to the proposition the market was characterised by intense competition, and would remain intense if The Warehouse was taken over, he said.
He labelled statements by Woolworths that a reduction of market participants from three to two did not necessarily substantially lessen competition, as "not persuasive".
Australian academic Stephen King, who is hearing the trial with Justice Jillian Mallon, asked if the commission had assumed three operators created substantially more competition than two, or if any analysis had been done.
The commission's decision to reject applications by Woolworths and Foodstuffs was largely based on The Warehouse's move into supermarket retailing through its new Warehouse Extra hypermarket stores.
Now Woolworths and Foodstuffs had roughly equal market shares, Kos said. If either company acquired The Warehouse Extra stores it would create a disincentive to operate with "competitive vigour", he said. "The question is the degree of vigour with which Extra would be operated by Woolworths in competition with itself."
Kos said if Woolworths owned Extra stores and raised prices at its existing stores, it would be able to pick up lost custom through the Extra stores.
Foodstuffs co-operatives run the New World, Pak 'N Save and Four Square brands, and Woolworths operates supermarkets under the Woolworths, Foodtown and Countdown brands.
The commission said it was concerned by the appellants' arguments "that it is permissible to nip competition in the bud in the relevant markets by removing a new entrant while it is still modest in size and is still developing its distinctive offering".
Much of rest of the evidence will be heard in closed court owing to its commercially sensitive nature. The appeal is to end on November 2.