Merger Control in the EU
Introduction
One typical strategy to prevent organizations from gaining too much power is the prohibition of mergers that could cause a substantial lessening of competition (SLC). In the EU, the significant mergers which operate in several of its members are constantly under scrutiny by the European Commission. The mergers mainly operating in the UK are scrutinized by the Competition and Markets Authority (CMA). The reasons behind the extensive scrutiny include the fact that some mergers could harm competition through a significant increase in its market power. The relevant authorities are to identify and prevent these mergers. Notably, a merger may raise competitive concerns in a particular line of products while it does not in another set. Therefore, these competitive challenges have to be solved amicably such that the consummation of the whole merger is prevented.
Currently, efficiency gains are an essential issue, especially for horizontal mergers. As business conditions change within internal markets, or due to global competition and deregulations, businesses are adapting to them through mergers across Europe and globally. The Merger Regulation gives the guidelines on how the merging should be conducted Article 2(3) indicates that the creation or the strengthening of a dominant position that would impede effective competition is prohibited. The Commission in consideration of Article 2(1)(b) is responsible for taking into account any progress happening whether technically or economically. This development needs to illustrate that its main objective is to benefit the consumer and not be an obstacle to competition.
Nonetheless, even though the scrutiny of anti-competitive mergers is significant, the debate of whether the European Commission does have the proper assessment tools to look into how competition harm outweighs the efficiency gain in merger control remains. Other questions that arise include whether efficiencies such as significant cost savings could save an anti-competitive merger. Through policy Statements, the Commission has indicated that there is no real possibility to justify an efficient defence in Merger Regulation. On the other hand, several economists have indicated that efficiency gains need proper consideration when it comes to merger control.
The view of the Commission could illustrate weak enforcement of the EU when it comes to Horizontal Merger Control. Therefore, this research paper intends to understand the position of the EU in terms of this concept. an assessment of its current tools focussed on merger control especially on the horizontal mergers is to be done. Furthermore, a discussion on the significance of considering efficiency gains in merger controls is to ensue. This will help in understanding the current position of the EU in merger Control Issues.
The Concern About Mergers
A standard theoretical analysis of competition will give one description of several market structures such as the perfectly competitive market, an oligopoly and a monopoly. Each of these structures will have their features, for instance, the perfectly competitive market having many competitive firms with none of them influencing the market price individually. The oligopoly is characterized by a market of few firms with each having power over the market’s price but impeded by competition rivalry. Finally, the monopoly has one firm that se5ts the market’s price unilaterally. Notably, these market structures evolve by being concentrated such that a few firms succeed remarkably while several others fail. Sometimes, the growth of these firms is not from the increased competitive efforts but through the merging of firms.
The exercise of market power by a consumer could potentially harm consumers and even producers through exorbitant non-competitive prices, limited output and low-quality levels in products or services. It is the responsibility of competition authorities to identify and control market power, the rationale used is that the prevention of firms from market power gain is better compared to trying to control it once it is in existence. An effective merger control policy needs to determine the impact of a particular merger on the competition before it has occurred. However, most mergers have posed little or null threats to market competition as most choose investments through available cash. Others may choose to fully utilize an underused resource in the potter’s enterprise such as new technology. Other mergers may reduce competition but in negligible levels since the market is very competitive to even harm the consumers.
The mergers that pose potential harm to competition by a significant increase in the probability of exercising market power are those that need to be extremely scrutinized. Understanding the significance of this scrutiny requires an understanding of the three categories of mergers and their subsequent effect on competition. The first category has a horizontal merger that occurs between two actual or potential competitor firms. These firms are also on an identical level in the production chain such that they are targeting a similar customer base. vertical mergers occur between firms in distinct production chain levels. These firms will potentially have significant buyer-seller relationships whether in existence or potentially. the conglomerate mergers are not horizontal or vertical mergers and the firms do not engage in competitive products nor are there existing or potential buyer-seller relationships. An individual analysis of every aspect that is related to the merger is essential to ensure that an understanding of their competitive outcomes is achieved.
Merger Control in the EU
Over the last two decades, an increasing amount of work has been done by both academics and competition authorities in pursuit of improving the understanding of the political economy of the EU’s Competition Policy. The works put their attention towards numerous activities, legal processes, basal economic behaviour and the EU”s institutional framework in their competition authorities.
Merger Control has constantly been a fundamental issue that garners substantial considerations by the relevant authorities. Currently, it is an ex-ante policy statement that directs the Competition Authority (*CA) to assess the effects of market transactions before their occurrence. Therefore, even in the presence of the best available evidence, an inevitable uncertainty does exist especially on the appropriateness of the succeeding interventions. Merger control decisions are hence subjected to extensive Assessments to assess how well they are filtering out the anti-competitive mergers. A proper assessment will provide lessons to be used during policy-making especially in their future impact on mergers. According to Ashenfelter, Hosker and Weiberg, economic models have proven to generate explicit predictions on the competitive impacts of mergers. These economic models are normally straight-forward despite being resource-intensive in the Assessment of performance with the utilization of retrospective evidence. The minute the models are proven to be effective then the probability of achieving higher levels of efficiency, objectivity and accuracy in the future merger review process increases remarkably.
The European Commission incorporates the approach that will assess the impact of an agreement in its unilateral conduct or while concentrated on both competition and consumer welfare. The approach involves identifying the potential anti-competitive impacts on the parameters of competition. These parameters include price, quantity, product, quality, variety and innovation. Furthermore, it considers the pro-competitive effects such as efficiency. An analysis of efficiencies plays a significant function in the assessments of antitrust and merger cases by the Commission.
Article 101 of the Treaty on the Functioning of the European Union (TFEU), the antitrust field is assessed by predicting whether the merger has an anti-competitive object or impact. it considers how the object or impact may become unproblematic if the involved merging companies engage in a constant improvement in production or distribution or the promotion of progress both technically and economically. this could be stated as if the merger does creator efficiencies-provided inter-alia- then they should offset any competition restrictions brought about by the merger. While Article 102 does not have the efficiency defence wording in it as it prohibits the abuse of a dominant position, the ECJ did confirm that dominant organizations have the permission to advance the efficiency arguments to justify behaviours. Failure to do so will have the courts determine their conduct as abusive.
The EU’s merger Control also considers the aspect of pro-competitive effects while also foreseeing the potential of mergers to create efficiencies for the legislative bases at the level of the EU. in the analysis of whether a merger could hinder effective competition, the Commission will conduct a wholesome competition assessment that considers various factors as long as they have a positive impact on consumers and do not impede competition. The Commission has properly denied the stringent merger guidelines especially when it comes to the conditions of considering efficiencies. Some of these guidelines include the General Guidelines that describe the distinct types of efficiencies applicable in antitrust cases and the procedure to be met to ensure the efficiencies are relevant, and the Horizontal Guidelines dealing with the kind of efficiencies that could arise in the mergers between competitors. The Non-Horizontal Merger Guidelines are also used by the Commission in describing their course of action in dealing with efficiency claims. apart from the Commission that utilizes the several guidelines, companies are also expected to utilize them in self-assessment of their mergers to ensure that they comply with the EU’s Competition law on mergers.
EU Horizontal Merger Control In Consideration of Competition and Relevant Efficiencies
All competition laws focus on identifying and prohibiting the two types of anticompetitive conduct that is not part of merger control. These two forms include preventing the abuse of a dominant position by one firm and preventing particular restrictive agreements between two or more organizations. the existence of anti-competitive mergers potentially increases the existence of these behaviours. Horizontal mergers make up the most suspect type of merger as they reduce the number of independent competitions in the market. the anti-competitive impacts of horizontal mergers come into two; unilateral effects and the coordinated effects.
The unilateral effects involve one firm having substantial market power or significantly making increases in its market power. The worst-case effect would be the single firm creating a monopoly or the occurrence of such a merger would create a firm with greater market power or has its position strengthened that it gains the required market power. to this effect, the firm could increase its prices above competitive levels and harm consumers in the long run. Conversely, the coordinated effects involve the horizontal merger reducing competition by making it easier for organizations to remain in the market but control their behaviours. The coordination of behaviour looks into issues such as prices, quantities and qualities are affected such that competitive levels are not reached. Therefore, the firms gain some amount of monopoly or oligopoly profits for their benefit. Some examples of the coordinated efforts include the implementation of implicit and explicit agreements on the prices to be used on products or services or on the geographic territory that the sellers’ firms will concentrate on or the seller serving particular customers.
The primary enforcement policy in the EU is market dominance as per the revised 2004 Merger Regulation. It will greatly emphasize on illustrating the negative effect that has occurred on the competition by the merging operations. This is instead of putting all concentration on the dominance of market power; the EU focusses on undertaking a more detailed analysis of the possible effect of the merger. This is expected to reduce enforcement initiatives. Furthermore, the finding of a dominant position is also not considered the absolute requirement for the blocking of a merger. The revised Regulation specifically mentions dominance as a concerning example which would permit enforcement against a merger that has anticompetitive unilateral effects. Other concerns could support enforcement by the Commission even if the merger would not make them the largest organization in relevant markets. Before any reform, the unilateral impact from the mergers could be blocked solely by a transaction that involves the leading organization. The same rules would indicate that collective dominance was a significant impediment to effective competition. Nonetheless, the revised Regulations expanded the reach of collusion analysis. it also increased the range of enforcement initiatives. the application of the new regulations is still ongoing and only time will answer on the magnitude of its impacts.
The EU does provide Horizontal Merger Control Guidelines which are related to the predetermined objective of appraising mergers and in the merger control process. This is done based on economic impacts. The Assessment of these economic effects needs prior clarification of the concept. Notably, the merger-control objective remains “consumer-welfare hence guiding towards greater objectivity and justifiability of any of the decisions taken. The Mergerefficiencies are hence defined as the welfare gains that are derived from the combination of distinct economic entities. Nonetheless, the definition of welfare gains does not provide proper guidance on what should be considered during the merger reviews. Efficiency gains will rely on welfare standards that one chooses. Consumer welfare standards will have the relevant authorities being solely concerned with the welfare of consumers. On the other hand, the total welfare standard involves relevant authorities considering the overall welfare and it should off-set the losses accrued from consumer surplus through an increment in production surplus.
Article 2(1)(b) of the EC Merger Regulation has obligated that any efficiency claims need to be for the benefit of consumers and not impede any form of competition in regards to technical or economic progress. Recital 29 also has emphasized on consumer welfare which explains that efficiencies need to be counter-action in the effects of competition. specifically any of the potential harm. Therefore, it is prudent to state that the EC Merger Regulation through the Horizontal merger Guidelines is providing no room for total welfare standards as it upholds utmost consumer welfare standards.
Nonetheless, while the European Commission has applied the efficiency criterion to deal with merger cases that could potentially harm competition, its respective role remains ambiguous in the enforcement of merger controls of the EU Commission. Most of the efficiencies failed to meet the described criteria. The recognized efficiencies would not meet the criteria because the advantages to consumers were not proven and restraints were felt in competition. It is generally difficult to have a merger that increases its market power and be justified on efficiency gains. The formal trade-off analysis, and balancing the pre-competitive efforts and against any effects of anti-competition will hence face a lot of hurdles in the EU’s Merger Regulation. The Commission is being illustrated as avoiding this question of efficiency during an analysis f the relevant merger decisions that have been taken.
One could state that enforcement practices have the EU indirectly considering the issues related to efficiency. Rather than having a direct examination of cost savings, the Commission prefers to incorporate a dynamic approach that will analyze the future competitive effects. One example is the Mannesmann/Vallourec/Illva case where the Agency denied the formulation of a domination market position due to the potential competition that could arise from abroad which will sufficiently be a restriction on the behaviour of merging organizations. Important merging decisions illustrate the ease in proving the effectiveness of potential competition that does verification on the efficiency gains. While on one hand, the European Commission is preventing offences against its competition objectives, on the other hand, it gains a leeway to consider the non-competitive goals.
Conclusion
While concern has been raised on the enforcement measures taken by the EU in terms of its Horizontal merger Controls, this analysis has illustrated that the Commission is focussing on its objective of consumer welfare. The EU Commission has focussed on a critical analysis of the efficiency gains especially on the potential harm of the mergers on the competition. Therefore, while their activities may be different from other Competition Laws on efficiencies, the region is understandably making strides in the control of horizontal mergers.
BIBLIOGRAPHY
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B. Legislation
EU Merger Control is Council Regulation (EC) No 139/2004,
C. Cases
The Mannesmann/Vallourec/Illva Case
D. Others
Stanley M (Understanding Regulation – Merger Control2018)
