CADE Reinforces Its Approach to Natural Monopoly Sectors: Competition “for the market” occurs at the national level, while competition “in the market” is local in nature

In a recent ruling involving the Equatorial Group’s acquisition of a minority stake in COPASA, the CADE Tribunal once again addressed a central issue for the competitive analysis of regulated sectors: how to evaluate transactions in markets characterized by natural monopolies. The case offers a significant opportunity to revisit the distinction between “competition within the market” and “competition for the market,” concepts that are particularly important in sectors such as sanitation, energy, rail transportation, ports, airports, highways, and railroads, among others.

The starting point of the decision is the recognition that certain public services have economic characteristics that make it inefficient for multiple providers to operate simultaneously in the same geographic area. In the sanitation sector, for example, the high costs of deploying and maintaining infrastructure networks, combined with low marginal costs and significant economies of scale, make the duplication of water and sewer networks economically irrational. For this reason, the service is generally provided through exclusive concessions granted to a single operator in each territory.

This observation has an important implication for competition law. Unlike traditional markets, in which companies continually compete for consumers, price, and quality, rivalry among sanitation service providers does not occur during the term of the concession. Once the right to operate has been granted, users/clients have no ability to choose between competing suppliers. According to CADE, this is precisely why competition “in the market” takes on a municipal geographic dimension and tends to be nonexistent within the area actually covered by the concession.

In the case under review, COPASA operates in Minas Gerais, while CSA Equatorial provides services in Amapá. The concession areas do not overlap, and consequently, there is no direct competition between the companies for the provision of services to the same users. From the traditional perspective of market competition, therefore, the Court concluded that there is no horizontal overlap between the parties’ activities.

The analysis, however, does not end there. The opinion of Reporting Commissioner José Levi emphasizes that the absence of rivalry during the term of the concession does not imply an absence of competition in the sector. In natural monopoly markets, competition typically occurs prior to the provision of the service, when companies compete in bids, auctions, concessions, public-private partnerships (PPPs), and privatization processes. This is known as “market-based” competition.

From this perspective, CADE reaffirmed its understanding that the relevant geographic market is national in scope. This is because economic agents located in different states may compete for the same investment opportunity offered by the government. Competition is not tied to where companies currently operate, but to their ability to compete for new concession areas.

This distinction is particularly relevant for the analysis of mergers. In conventional sectors, the absence of geographic overlap is often sufficient to dispel competition concerns. In natural monopoly sectors, however, the antitrust authority must assess whether the transaction reduces potential rivalry among entities that could compete for future concessions. For this reason, although it did not identify any overlap in the local provision of services, CADE recognized the existence of horizontal overlap at the national level from the perspective of market competition.

Despite this acknowledgment, the Tribunal concluded that the transaction did not pose significant competition risks and cleared the transaction without restrictions. The opinion emphasizes that it is not sufficient to demonstrate that two companies have the abstract capacity to compete in future bids. For an actual competition concern to arise, it must be proven that the entities are close competitors, that they effectively exert significant competitive pressure on one another, and that the transaction eliminates actual or likely rivalry – particularly significant competitive pressure in future bids.

In this regard, CADE noted that no evidence was presented demonstrating that Equatorial and COPASA had a history of direct competition in tenders, nor was there evidence that both would compete for the same opportunities in the future. Similarly, the Court considered insufficient the allegations presented by the interested third party that the sector was consolidating around a small number of participants capable of competing for future privatizations and concessions.

Another particularly interesting aspect of this approach lies in the very method used to measure the competitive position of market participants. In traditional markets, market shares are typically calculated based on sales, revenue, or the number of customers actually served. In sectors characterized by competition for market share, similar metrics can also be derived based on the activity already carried out by the players in sanitation, for example, by the number of households served; in air transport, by the number of passengers carried or takeoffs and landings; and, in other infrastructure sectors, by the length or capacity of the assets currently operated.

The precedent suggests, however, that these historical market shares may not be the primary measure of relevant competitive pressure. When competition occurs primarily through bids, concessions, or auctions, the central issue becomes less about how much of the market each company already holds and more about which companies actually have the capacity, incentives, and conditions to compete for the next opportunity. A market participant may, therefore, exert significant competitive pressure even without holding a significant share (or any share at all) in the current provision of the service in a given region.

In practical terms, the decision reinforces that transactions involving concessionaires, infrastructure companies, or strategic investors in regulated markets require a more sophisticated analysis than simply checking for geographic overlaps. Competition authorities are increasingly examining the dynamics of future bids, the structure of so-called bidding markets, and the actual ability of market participants to compete for new projects.

This material is for informational purposes only. Our Competition and Antitrust team is available to provide specific legal advice.