Mergers are a key element of strategies to increase market power and/or leverage it into adjacent markets. The European Commission is reviewing its Merger Guidelines which provide guidance on the Commission’s practice when assessing mergers within the legal framework of the EU Merger Regulation. The Guidelines contain fundamental considerations and economic concepts the Commission uses to analyse mergers.
Over the course of the summer, the Commission asked for input to make the Guidelines reflect market developments and analytical insights since their initial publication (in 2004/2008). We summarise key points from our responses to the extended questionnaire which you can find linked below.
Our key recommendation
Overall, the option to block a merger should be considered a normal, legitimate intervention and used more often. European merger control has suffered from underenforcement for many years. Few mergers have been investigated in depth, very few mergers have been blocked. This has contributed to increasing economic concentration, growing markups and profits especially at the largest firms, a rising share of corporate profits as share of the GDP and a decline of business dynamism. These developments are harming firms and consumers, contribute to rising inequality and reduce fairness and innovation.
The Guidelines therefore need to provide a better framework to analyse mergers and prevent harmful concentration. We reject narratives of competitiveness or innovation through bigger firms (scale) that aim to justify a further weakening of merger control.
Some of the detailed changes required
We describe ways in which the Guidelines can promote a more effective competition assessment that would enable the Commission to reduce the degree of underenforcement. The following steps would be productive steps in that direction.
– Reducing the use of “Industrial Organization” (IO) in favour of approaches that are better suited to capturingcompetitive dynamics: The guidelines rely heavily on the economic approach of “Industrial Organization” (IO). However, the basic assumptions of IO are not suitable for capturing the dynamics of ecosystems. As a result, the use of IO led to Type II false negatives/errors, especially in digital mergers. A better understanding of business models in the digital economy is needed, which should build on financial analysis and accounting insights (see e.g. Kotecha, Vivek, “From Industrial Organization Economics to Financial Analysis: Accounting and Financial Analysis in Competition Policy“, Balanced Economy Project).
– Consider more factors in the analysis of market power: Firstly, access to data through data partnerships contributes to the consolidation of power. t is outdated not to include the network of data partnerships as a factor that increases market power (see Cecilia Rikap, Intellectual monopolies as a new pattern of innovation and technological regime, Industrial and Corporate Change). Secondly, access to capital is influenced by the size of firms. Large companies have a favourable access to capital because of implicit state guarantees when it comes to companies that employ a lot of staff or because of their market power in the case of large digital platforms. Favourable credit ratings and low cost of capital should be included as factors contributing to market power.
–Include more ecosystem theories of harm: The current Guidelines focus on tying and bundling and are insufficient to capture other theories of harm in the context of ecosystem competition, such as the deterioration of interoperability and the use of data across markets. The EU courts have acknowledged the concept of the ecosystem (see Google Android, Case T-604/18, paras 114-116). The Guidelines should build on this. Various suggestions exist as to how to conceptualise this kind of analysis in actual markets and it is important, at this stage, to have a broad range of tools available to assess ecosystems. In the context of digital markets, two relevant frameworks are panopticon power (see Ioannis Lianos, Bruno Carballa-Smichowski, 2022, A Coat of Many Colors-New Concepts and Metrics of Economic Power in Competition Law and Economics, Journal of Competition Law & Economics) and, on the other hand, intellectual monopolies whose control extends beyond ownership (see Cecilia Rikap, 2024, Intellectual monopolies as a new pattern of innovation and technological regime, Industrial and Corporate Change). The concept of ecosystems also extends beyond the scope of merger control and the Guidelines, but mergers have been a key element of corporate strategies to expand their ecosystems (alongside even more recent strategies such as building partnerships to circumvent merger control, which unfortunately go beyond the scope of this consultation).
– Abandon the presumption of no competitive concerns for mergers with small increments in market shares: In several digital mergers, concerns were dismissed because the increment of the merger was considered in a range of less than [0-5]%. This has no grounding in the Guidelines and in not based on clear reasoning. This is an invitation to killer acquisitions and leads to underenforcement in any market where large players are prevalent. We invite the Commission to formally abandon such wrong working assumptions.
–Abandon the presumption of eliminating double marginalisation (a concept according to which integrating vertical monopolies into one leads to superior market outcomes): The Non-Horizontal Merger Guidelines (NHMG) follow a limited understanding of vertical power and vertical integration. It also includes unrealistic assumptions about efficiencies that need to be changed. Point 55 of the NHMG creates a presumption of elimination of double marginatisation, that has not found any grounding in empirical research. This provision is outdated and must be deleted.
– Ground efficiency assessments in empirical evidence: An ex-post assessment of mergers suggests that greater efficiency gains would be required than can plausibly be argued (see Affeldt, Pauline, Tomaso Duso, Klaus Gugler and Joanna Piechucka, 2021, Assessing EU Merger Control through Compensating Efficiencies, CEPR Discussion Paper No. DP16705). The Guidelines should clarify that efficiencies that correspond to narratives by merging parties should be verified in empirical studies or market tested with consumers, having special regard for vulnerable consumers and vulnerable small producers. Regarding any trade off between efficiencies and harms, we suggest a very restrictive approach. The Guidelines should require checking whether the efficiencies are real, empirically well founded, merger-specific and not themselves contributing to market power.
– Rule out efficiency defences in digital mergers: Digital mergers are even less likely to exhibit significant efficiences. There is robust evidence that companies are less likely to announce synergies in relation to digital mergers compared with non-digital mergers, and that their transaction value is more speculative, see “Elusive efficiencies in digital mergers”, Malikova et al., forthcoming. This suggests that other reasons unrelated to efficiencies are driving the speculation inherent in the digital mergers, one of which may be the potential to use more anti-competitive strategies. As suggested for mergers across sectors, the Guidelines should be very careful to avoid counting advantages of a merged entity as an efficiency while, in reality, they contribute to market power. Therefore, we suggest not to allow for an efficiency defence in digital mergers.
– Give consumer protection concerns a formal role in the process: Consumer representatives covering the relevant sectors should be given a greater role in merger review proceedings. We suggest that merging companies should be required to name consumer representatives that are related to their business activities, and that the Commission includes them as relevant parties in their merger assessment and, in particular, in the development of merger remedies.
Changes that should not be made
The Commission appears to be pondering certain changes that would presumably lead to a further weakening of merger control by justifying more market power to build up, without being rooted in clear economic evidence.
– Competitiveness should be based on fair competition and an effective competition policy that restricts market power: We reject the narrative that more scale (meaning more consolidation) leads to more competitiveness and it is at odds with the analysis of clear underenforcement in merger reviews. Other policy objectives such as national security should be clearly labelled as such and, where necessary, explicitly traded off against the objective of effective competition.
– Innovation pathways are shaped by mergers and are often restricted rather than expanded: Even where markets appear dynamic, mergers give firms with market power more options to strategically limit innovation to products that are complementary to their existing portfolio. Hence, a more cautious approach is warranted to assess the innovation promises that dominant firms make in relation to mergers. Mergers may replace innovation that would challenge established business models with innovation complementary to them. Hence, the Guidelines should put more emphasis on lost innovation when smaller companies get absorbed into ecosystems of larger and potentially dominant firms. We reject any inclusion of an “innovation defence” for mergers in the Guidelines.
– Market power through scale benefits the company that gains it: We were particularly surprised to read questions like, “How should the Commission assess the benefits of companies’ gaining scale through mergers when they create market power or a dominant position?” The framing of market power through scale as a benefit rather than harm is misleading and symptomatic of the underenforcement bias. There is no need to create additional categories of justifications beyond efficiencies. There is no reason to assume that companies would not use (market power through) scale as a private gain.
Our full answer can be found here.
