Excerpt
Table of Contents
1. Introduction
2. The European Commission’s approach towards efficiencies
2.1. Efficiencies not as a defence argument but as a factor in overall appraisal
2.1. Measuring efficiencies against the competitive harm?
3. The choice of welfare standard
3.1. Total welfare standard
3.2. Consumer welfare standard
4. Typology of efficiencies
4.1. Allocative, Productive and Dynamic Efficiencies
4.2 Five categories of merger-specific efficiencies based on the concept of the production function
4.3. Real cost savings and redistributive (pecuniary) cost savings
4.4. Fixed and variable costs
5. Conditions for taking efficiencies into account
5.1. Benefits to consumers
5.2. Merger specificity
5.3. Verifiability
6. Commission’s decisional practice towards horizontal efficiencies
7. Non-horizontal mergers
8. Conclusion
Critically assess the role of efficiencies in merger assessment
1. Introduction
European merger control did not exist as such before the enactment of Regulation 4064/89, which entered into force on September 21. Articles 81 and 82 of the EEC Treaty did not explicitly provide for merger control and doubts existed whether the control of mergers was to be encompassed within the EEC competition law regime. The greatest procedural difference between merger control and the control of dominance is that any analysis of the merger will usually be undertaken ex ante, while appraisal of dominant firm behaviour will be done ex post. However, the Commission applied Articles 81 and 82 to merger situations, notably in the case of Continental Can and BAT Ltd. and R.J. Reynolds Industries Inc. v Commission. [1] The Commission brought forward proposals to clarify the uncertainty for mergers taking place with a Community dimension on the basis on Art.308 of the EEC Treaty, under which the Community may give itself powers to perform tasks necessary for the attainment of objectives of the European Community in situations where an express power has not been made available. After extensive negotiations with the Member States, the proposal led to the enactment of Regulation 4064/89. The new regime established exclusive competence for the Community in relation to mergers falling within set thresholds. The regime addressed potential anti-competitive effects resulting from mergers. Competition concerns raised by mergers can be categorised as unilateral effects and coordinated effects. Unilaterally, the combination of the merged entities’ operations may create substantial market power and may increase prices or reduce quality to the detriment of the consumer. According to the Merger Regulation, a concentration can be blocked if it creates or strengthens a dominant position. In terms of coordinated effects, horizontal mergers may be substitutable for cartels. By increasing the concentration in the relevant market, the transaction may strengthen the ability of the market's remaining participants to co-ordinate their pricing and output decisions and to compete less vigorously.[2] However, mergers may not always be harmful to competition and when motivated by the companies’ desire to become more efficient and competitive, the merger may result in pro-competitive effects on the market. Merger-specific efficiency gains can offset anti-competitive effects post-merger.[3] The first section of the present essay discusses historically the European Commission’s approach towards efficiencies. The second section elaborates on the choice of welfare standards and explains the European approach of adopting the consumer welfare standard. The third section outlines types of efficiencies according to the economic literature. The fourth section discusses the three cumulative conditions of the European Commission in order to consider efficiency claims. The next section reveals the Commission decisional practice in cases of efficiency claims and analyses its development. In the last chapter more attention is paid to theory and practice of efficiencies in cases of non-horizontal mergers.
2. The European Commission’s approach towards efficiencies
The European system of merger control has been traditionally seen as not readily receptive of efficiency defence in merger assessments. Council Regulation 4064/89 (Merger Regulation) did not explicitly recognise a role for efficiencies assessment. According to Article 2(1)(b) of Regulation 4064/89, the Commission shall take into account in its appraisal ‘the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition’.[4] The clause triggered a debate whether the Merger Regulation allows for an efficiency defence. However, the Commission had, in policy statements, argued that: ‘(t)here is no real legal possibility of justifying an efficiency defence under the Merger Regulation’.[5] This changed in May 2004 when the new ECMR came into force and created a new regime which gives efficiencies explicit recognition. The new substantive test and the Horizontal and Non-Horizontal Merger Guidelines allow greater scope for economic efficiency arguments than thought possible in the early years of EU merger control where, in contrast, efficiencies were seen as a plus-factor in establishing dominance. The treatment of efficiencies is discussed in the Horizontal and Non-Horizontal Merger Guidelines. According to Kokkoris, the fact that the treatment of efficiencies is not mentioned in the legally binding part of the ECMR mitigates the importance of efficiencies in merger appraisal.[6]
The Horizontal Merger Guidelines explains the role of efficiencies in merger assessment:
‘In order to assess whether a merger would significantly impede effective competition, in particular through the creation or the strengthening of a dominant position, within the meaning of Article 2(2) and (3) of the Merger Regulation, the Commission performs an overall competitive appraisal of the merger. In making this appraisal, the Commission takes into account the factors mentioned in Article2(1), including the development of technical and economic progress provided that it is to the consumers' advantage and does not form an obstacle to competition.’[7]
2.1. Efficiencies not as a defence argument but as a factor in overall appraisal
Are efficiency claims seen as a defence or as a factor in the overall merger appraisal? Iversen argues that it is erroneous to speak of an efficiency defence within the true meaning of the term. The notion of ‘defence’ implies the idea that efficiencies are given a role as a counteracting element after finding that a merger will significantly impede competition. This would mean that once it has been concluded that the transaction will hinder competition, one looks to the efficiency gains and assesses whether these can outweigh the adverse effects. However, according to recital 76 of the Guidelines, efficiencies are given a role in the overall appraisal of a merger:
‘It is possible that efficiencies brought about by a merger counteract the effects on competition and in particular the potential harm to consumers that it might otherwise have (103). In order to assess whether a merger would significantly impede effective competition, in particular through the creation or the strengthening of a dominant position, within the meaning of Article 2(2) and (3) of the Merger Regulation, the Commission performs an overall competitive appraisal of the merger.’[8]
Therefore, efficiency claims are treated as a factor in the overall assessment under the new regime, not a defence within the true meaning of that term.
2.2.Measuring efficiencies against the competitive harm?
The Guidelines does not provide how efficiencies will be measured against the competitive harm. Svetlicinii argues that without previous experience in assessing efficiencies and with no cases decided where efficiencies are the sole ground for merger clearance, the Commission was faced with a dilemma: to take a generalist approach and lay down only principles under which efficiency claims will be examined or to provide detailed guidelines specifying types of efficiencies, exact timing, burden of proof requirements and evidence necessary for substantiality claims. The Commission adopted the first scenario, where the development of the efficiency defence is left to practice.[9] This situation generates legal uncertainty as the Commission reviews claims on a case-by-case basis. Thus, whilst recognising efficiencies and to some extent providing guidance on the role of such, the new regime did not clarify to what extent the Commission will take efficiency claims into consideration. Therefore, it does not allow undertakings to predict the weight of its claims, and furthermore to perform an evaluation of the prospects of efficiency gains where a merger is detrimental to competition.
3. The choice of welfare standard
What constitute efficiency gains rather than losses depends on the relative weight given to the welfare of the different groups of market participants or in other words, the choice of welfare standard. Two types of welfare standards can be distinguished, namely consumer welfare standard and total surplus standard.
3.1. Total welfare standard
Total welfare standard takes into account the sum of producers and consumers welfare. According to this standard, mergers are authorised even when leading to higher prices and should be approved if the gains realised by producers exceed the losses experienced by consumers. The wealth transfer from buyers or sellers is not given any weight in the analysis as consumer welfare has the same value to society as producer welfare.[10] Economists advocate the adoption of total surplus standard by competition authorities. There are two arguments for avoiding redistributive effects of mergers. Firstly, there is a difficulty in determining the degree of wealth distribution resulting from a merger. Secondly, economists support the position that all market participants (consumers and producers) are equally ‘worthy’ and there is no basis for giving preference over one group. In reality, however, most jurisdictions rest on the consumer welfare standard. According to Kokkoris: ‘In reality, however, the choice of a welfare standard does not reflect the findings of the economic science, but rather has the nature of a political choice, which works against the adoption of the total surplus standard.’[11]
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[1] M. Furse, Economics of Competition Law (2008), Oxford University Press.375
[2] S. Bishop and M. Walker, The Economics of EC Competition Law (2010), Sweet & Maxwell.350
[3] ICN Merger Working Group, ICN Merger Guidelines Workbook (2006).61
[4] Article 2(1)(b) of Regulation 4064/89
[5] L.-H. Röller, J. Stennek and F. Verboven, Efficiency gains from mergers in ‘The Efficiency Defence and the European System of Merger Control’ (2001), No.5. 1
[6] I. Kokkoris, Assessment of efficiencies in horizontal mergers: the OFT is setting the example, (2010), European Competition Law Review.2
[7] Horizontal Guidelines para 76
[8] Horizontal Guidelines para 76
[9] A Svetlicinii, Assessment of the non-horizontal mergers: is there a chance for the efficiency defence in EC merger control?, (2007), European Competition Law Review.3
[10] de la Mano, For the Consumer’s Sake: The Competitive Effects of Efficiencies in European Merger Control (2002), Enterprise Papers No 11.18
[11] I. Kokkoris, Assessment of efficiencies in horizontal mergers: the OFT is setting the example, (2010), European Competition Law Review.1