Volume 42 | Number 3 Summer 2007
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II. A More Economic Approach in Merger Control
A second distinctive feature of the modernization of EC competition law is the increased significance of economics.15 Clear evidence for this shift in methodology can be found in the guidelines on horizontal cooperation16 and in the block exemption Regulation for vertical restraints.17 But the most significant legal instrument that reflects this evolution is the substantive test of merger control adopted by the new Merger Control Regulation no. 139/2004.18
The control of concentrations has been introduced into Community law by Regulation 4064/89.19 Under its Article 2(3), a concentration “which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded” had to be declared incompatible with the common market. The second element of this two-tiered test turned out to be rather insignificant in its practical application. Whenever the Commission assessed the creation or strengthening of an individual or collective dominant position, a significant impediment of effective competition was presumed to result therefrom.20 The dominance test was inherently linked to Article 82: if the abuse of a dominant position is forbidden under that provision, the law should be reluctant to accept the emergence of dominant positions except for the case of internal growth. As a consequence of Regulation 4064/89, the same concept of dominance of the relevant market could be used for both merger control and the control of abusive practices. In particular, the judicial presumption of dominance flowing from a market share of more than fifty percent21 and the test of collective dominance espoused by the Court of Justice22 could be used in both contexts.23
Article 2(3) of Regulation 139/2004 has changed the order of the two elements of the substantive test of merger control. At present, a concentration “which would significantly impede effective competition . . . in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market.”24 Under the new rule the dominance test is only an example for a significant impediment of effective competition. The latter now provides the main criterion. As a consequence, even a merger that does not satisfy the dominance test can be prohibited under the new SIEC test.
This amendment may appear marginal at first sight. But it has the effect of depriving the previous case law of much of its significance. Given the impediment to economic competition exemplified by the dominance test, it is unlikely that a merger that satisfies the latter will be declared compatible with the common market. On the other hand, the application of the dominance test is not exhaustive. There may be mergers that are not caught by the dominance test that still constitute a significant impediment to economic competition.
In order to explain the need for this additional possibility of control, recital 25 of Regulation 139/2004 refers to the non-coordinated or unilateral effects that a merger may have in oligopolistic markets. A good illustration of these uncoordinated effects is the Airtours case, decided by the Court of First Instance.25 It relates to the British market of all-inclusive tours to the European continent and its surroundings. Among the four leading tour operators, numbers three and four, with market shares of 15 and 19.4% respectively, had merged.26 As a consequence, the merged entity was now number one, with a 34.4% market share; this placed it in front of the previous leader, which had a 30.7% market share, and the fourth company, which had a 20.4% market share.27 The Commission had prohibited the merger, stating that it would strengthen a collective dominant position of the four leading undertakings.28 On review, the Commission decision was declared void by the Court of First Instance. The Court pointed out that, for the assumption of collective dominance, considerable transparency of the market would be required so that every member of the leading oligopoly could monitor with sufficient precision and speed the behaviour of other market actors.29 Moreover, collective dominance would require the ability of the members of the oligopoly to impose severe sanctions on deviating members, therefore discouraging them from any attempt to push forward in competition.30 The Court held that the Commission had not sufficiently proven the presence of these elements of collective dominance in the case at hand.31
It is not unlikely that the collective dominance test has reached its limits in this case. Apparently, one of the basic requirements of collective dominance, i.e., the homogeneous character of the goods in the market, is absent here. Nevertheless, economists maintain that a merger in a narrow oligopoly may provide additional room to manoeuvre for the remaining undertakings in the market. In particular, a competitive initiative taken by a tour operator with a very large market share would be unlikely to be matched by its competitors who would be unable to book a sufficient number of hotel rooms and air transport capacity to strike back. Unilateral effects of this kind are said to be unsusceptible of being accounted for by the dominance test. Economists suggest that the SIEC test is more flexible and would allow for a prohibition needed in these cases.32 While this may be true, the economic reasoning underlying the analysis of the Airtours case appears questionable. It is based on a very limited time frame of one year and does not take into account the reaction of competitors in subsequent years. It is possible that competitors who have been surprised by the market leader pushing forward in one year will strike back in the following year. If that is true, the need for merger review beyond the dominance test would not appear to be well founded.
Another element of economic analysis that has received increased significance in the framework of the SIEC test is the efficiency defence.33 The previous Regulation 4064/89 had pointed out, in recitals 4 and 13, that concentrations are apt to increase the competitiveness of European industry, to improve the conditions of growth, to raise the standard of living, and to strengthen the Community’s economic and social cohesion. But these goals were related to the fundamental objectives of the Community as laid down in Articles 2 and 130(a) (now 158) EC, while the efficiency gains to be derived from a merger were not explicitly addressed. Those gains could give support to a merger insofar as they contributed to “the development of technical and economic progress.”34 But their role was ambivalent since they might also be suited to give additional strength to the merged entity in relation to its competitors.
To the contrary, the Green Paper on the overhaul of the merger control Regulation35 makes reference to efficiency gains only in defence of concentration, as does Regulation 139/2004. While the wording of Article 2(1) has remained unchanged in this respect, recital 29 makes explicit reference to the possibility “that the efficiencies brought about by the concentration counteract the effects on competition, and in particular the potential harm to consumers . . . and that, as a consequence, the concentration would not significantly impede effective competition . . . .”36 Thus, efficiency is considered as an element of the restriction of competition, and the guidelines on horizontal mergers published by the Commission37 point equally to the possibility that efficiency gains will offset anticompetitive effects.
There are two major objections to the new approach. In the first place, the very measurement of efficiency gains by a state authority appears to contradict the model of the market economy. This model departs from the basic assumption that market actors—whether individuals or undertakings—determine their own economic preferences individually and in a subjective way. There is no rational way of convincing an individual that the purchase of a Rolls Royce has to be preferred to that of a Skoda. It is not possible to find objective criteria that cause people to spend their money on large apartments instead of luxury cars. These individual preferences may be explained by psychological and cultural factors, or by specific needs and inclinations of the single market actors. But the market process has to accept these preferences as a point of departure, i.e., for the exchange of goods and services and the formation of prices. As a consequence, efficiency gains can only be determined on the basis of individual decisions to pay a certain price for goods or services. Efficiency is the aggregate of the increase of satisfaction felt by market actors as a result of the market process. In this respect, it is not sufficient to take into account the satisfaction of the undertakings involved in a merger; the satisfaction of third parties and consumers has to be considered as well. How can a state authority assess all these individual appreciations of a merger? Since the individual appreciation would usually depend on the prediction of the effect of a merger in the future, prognostic capacities of which nobody can boast would be required.
A second objection relates to the alleged offsetting of the anticompetitive and efficiency effects of a merger. This would require a kind of quantification of both effects which is, in fact, insinuated in the Commission’s guidelines on horizontal mergers. But such quantification would unnecessarily limit the analysis. It would focus on the merger’s effect on prices, predicting efficiency gains if prices decrease, and prevailing anticompetitive effects if prices increase. It risks excluding the structural effects of the merger that would usually last for a much longer period than the immediate effect on prices. It should not be forgotten, however, that the review of mergers was introduced precisely for those structural effects which are reflected by the dominance test.
To sum up, the more economic approach as applied by Regulation 139/2004 to the review of mergers raises many questions. It appears doubtful whether the amendment helps to protect competition, and its impact on the legal certainty required for merger operations is equally doubtful.38 It is safe to assume, however, that the bar specializing in competition law will acquire additional business.