Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Horizontal mergers and innovation: why I agree with Tommaso Valletti

with 3 comments

Tommaso

It is only fair that I start this post by thanking those who have congratulated me on my recently announced promotion – including Alfonso, who could not have used nicer words.

Now that the announcement is behind us, it makes sense to go back to what really matters: weekly blogging. Few things have given me more satisfaction in my academic career.

And what a better way to do so than to comment on a recent speech of an academic-in-exile. Tommaso Valletti is one of the most articulate, thoughtful and entertaining speakers around. So when he takes part in a conference, we can be pretty sure something exciting and topical will have been discussed.

Last week he addressed one of the big issues of the day: the introduction of innovation considerations in merger control – and more precisely horizontal mergers.

In essence, Tommaso argued that there is nothing new, unusual or exceptional in recent mergers (such as Dow/DuPont) that have looked at the effects on innovation. In this sense, recent criticism of the Commission practice would not be justified.

I agree with this point of view. These cases – as far as I can tell – are competition law as usual. What is more – and perhaps more importantly – there is nothing parameter-specific about innovation. If cases like Dow/DuPont are criticised many cases concerning parameters other than price could also be criticised, and for the same reasons.

The Commission need not show harm to innovation – or any other parameter – in EU competition law

There is a key point which, I believe, has never been given the importance it should have – which is why I think it makes sense to insist on it.

A lot of criticism of the Commission practice seems to be based on the assumption that the Commission, when evaluating the likely effects of a merger, needs to show, to the requisite legal standard, its impact on innovation – or price, or quality, or output.

This assumption is not supported by the case law (the opposite is true, in fact). The Commission can show that a transaction will give rise to a significant impediment to effective competition without – just to mention an example – quantifying the price increases in the post-merger scenario.

It is clear from the relevant rulings that an impediment to effective competition can be established by proxy – in light of the nature of the product, the features of the relevant market and so on.

In other words: if it can be shown that a significant source of competitive pressure will disappear after the merger, and that nothing suggests that this loss of competitive pressure will be corrected by the behaviour of competitors, suppliers and/or customers, a finding of significant impediment to effective competition will naturally follow.

Thus, the Commission does not need to enter into discussions about whether the rate of innovation will go up or down after the merger. All that it would have to show is that two competitors were exercising significant competitive pressure on each other. Just remember the GC judgments after Ryanair/Aer Lingus and Deutsche Borse/NYSE Euronext are challenged.

A proxy is a proxy is a proxy

If the above is – I think – clear from the Guidelines on horizontal mergers and the case law, why so much controversy?

This controversy is in part explained by the fact that the Commission may take action without there being a market in the strict sense of the word. According to some views, this shift would represent a major development in merger control. There would be a difference between intervening in cases where competitive pressure does not revolve around a distinct product that can be readily identified.

Again, I am not sure I am convinced. We have always known that the definition of the relevant product and geographic market is not an end in itself – it is just a tool (or proxy) to identify the competitive pressure faced by firms.

If that is the case, it is difficult to argue that the definition of the relevant market is, as a matter of law, a prerequisite for intervention. In other words, there has never been anything sacred about market definition.

If the degree of competitive pressure can be identified by means of other proxies – research poles, or capabilities and so on – this should be perfectly acceptable. This, I believe, is one of the key points that Tommaso Valletti is making. And it is not even a new one: the Guidelines on horizontal co-operation agreement have suggested that these alternative proxies can always be used.

As can be seen, I fail to see what is really new under the sun.

Well, perhaps there is something new. The argument some stakeholders are making, which amounts to suggesting that a reduction of competitive pressure is not necessarily problematic in innovation-intensive industries.

That claim is not implausible and is worth debating. But the EU merger control regime is already equipped to deal with it. The efficiency defence is the appropriate forum in which to advance such claims. Would it be difficult, if not impossible, for them to suceed in practice? Of course. But such difficulty is in line with the exceptionality of the claim itself.

Written by Pablo Ibanez Colomo

23 March 2018 at 8:58 am

Posted in Uncategorized

3 Responses

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  1. Interesting post, and I tend to agree there has been a lot of hysteria in the debate. To my mind the Commission’s critics have largely missed the point.

    The real gap in the Dow/DuPont decision is how it deals with competitor reactions to a reduction in innovation by the merging parties.
    The decision gives it a paltry treatment, out of line with its importance in the guidelines. The Commission seems happy to largely assume that rivals will respond by innovating less (just as, in the case of price effects, it assumes they will respond by raising prices). This is an economic fallacy – innovation is economically different to price. Higher prices create positive spillovers for rivals (you raise your price, I want to raise mine too), whereas innovation creates negative spillovers (you cut your innovation, I want to innovate more).

    That means competitor reactions need a much closer and more detailed treatment in these decisions. The Commission must answer the question why, if the parties leave a profitable innovation on the table post-merger, no rival firm will capitalise on the opportunity.

    David Foster

    23 March 2018 at 10:01 am

  2. Hi Pablo

    Congrats on a well deserved promotion!

    Some questions, for which I do not have the answer.

    1). Horizontal Merger Control has been devised with competition in prices in mind ( as evidenced, among other, by the definition of market power in the HMG ). It is moreover inspired by the SCP paradigm ( structure, conduct, performance ).

    2). I do wonder if the SCP paradigm works for innovation or works as well as for prices or works for innovation as well as for prices without adjustment. An increase in concentration does tend to result in price increases. I am not sure that is the case for innovation. And I am not sure that happens only in isolated instances. ( Is it me or we do not know which market structures are more conducive to innovation ?).

    3.). The COMP should care about competition in parameters other than prices — when relevant. I am not sure they can assume they are relevant without establishing it. Otherwise they might want to revisit their rules on information exchanges — which make exchanges in prices pretty much unlawful. Put differently, are there industries where people do not compete in prices?

    4.). A proxy is a proxy — but it needs to be an accurate proxy. Not sure the cases meet the Tetra Laval standards of causation you favor when speaking about Articles 101/102.

    5.). The implications of these decisions are major. Each time you conduct a merger control risk assessment in an innovation intensive industry, particularly if your deal can result in R and D Decreases, now you have to take into account ( the proxies the EC favors for ) innovation.

    I do not have a solution. My hunch, though, is neither has Valleti.

    These are my views only.

    Very best

    Pablo

    Pablo Figueroa

    23 March 2018 at 10:04 am

  3. […] Antwort: Nein, es ist eher „CHECKKKKK“. Mich beschäftigt derzeit die Frage, was die neue oder nicht so neue, jedenfalls ins Rampenlicht gerückte Innovations-theory of harm aus Dow/Dupont für die […]


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