THE EU MERGER REGULATION: SUBSTANTIVE ISSUES

Size: px
Start display at page:

Download "THE EU MERGER REGULATION: SUBSTANTIVE ISSUES"

Transcription

1 THE EU MERGER REGULATION: SUBSTANTIVE ISSUES FOURTH EDITION By ALISTAIR LINDSAY Barrister, Monckton Chambers ALISON BERRIDGE Barrister, Monckton Chambers MAXWELL THOMSON REUTERS

2 PAGE Preface v Dedication vii Acknowledgments ix Table of Legislation A. Table of EC Treaties, Secondary Legislation and Notices xxv B. Table of Guidelines xxxi C. Table of United Kingdom Legislation xxxv Table of Cases D. Table of ECJ and Decisions xxxvii E. Table of Merger Decisions (Numerical) F. Table of Merger Decisions (Alphabetical) G. Table of Joint Ventures and ECSC Decisions H. Table of National Cases THE ECONOMIC JUSTIFICATION FOR MERGER CONTROL 1.1 Introduction 1.2 Criteria for Assessing Market Performance (a) Consumer welfare (b) Total welfare (c) Efficiency 1 (d) Analysis of criteria The Effects of Mergers on Market Performance (a) Efficiencies (b) Market power (c) The trade-off between efficiency and market power 1 023

3 Measurement of the Predicted Effects of Mergers on Market Performance Empirical Evidence of the Effects of Mergers on Consumers Overview of Analysis (a) Theories of competitive harm (b) Framework for analysis (c) Rebutting theories of competitive harm (d) Unifying and abilities (e) Relevance of economic theory THE SIEC TEST AND OTHER LEGAL AND METHODOLOGICAL ISSUES 2.1 Introduction The Objectives of EU Merger Control The Change to the Substantive Test in the EUMR (a) The Commission's 2001 consultation and 2002 proposals (b) Possible deficiencies in the "dominance" test (c) The adoption by the Council of "compromise" text 2.4 Interpreting the SIEC Test (a) Formally, the SIEC test broadens the Commission's jurisdiction (b) What is meant by "significant impediment to effective competition"? (c) The "significant impediment to effective competition" test in practice (d) "De minimis" exception (e) "Dominant position" (0 Mergers involving existing monopolies (g) "Substantial part" of the internal market 2.5 Burden and Standard of Proof (a) Burden of proof (b) Standard of proof Period over which the Predicted Effects of the Merger are Examined 2.7 Relationship between the EUMR and arts 101 and 102, National Regulatory Systems, Contractual Restrictions and State Aids (a) Articles 101 and 102 (b) National regulatory systems (c) Contractual restrictions (d) State aids Investigative Techniques International 2-053

4 3. MARKET DEFINITION 3.1 Introduction Product Market Definition: Introduction Product Market Definition: Demand-side Substitution (a) The SSNIP test (b) Evidence: introduction 3 (c) Pricing evidence (d) Shock analysis or event studies and other evidence of historic switching (e) Switching costs (f) Functional interchangeability (g) Product characteristics (h) Trade relationships (i) Evidence of sellers' business decisions (j) Sellers' relative costs (k) Critical loss analysis (1) Demand characteristics (m) Previous cartel activity (n) Evidence from customers and competitors International categorisations Product Market Definition: Supply-side Substitution (a) The SSNIP test ' (b) Evidence Specific Issues in Product Market Definition (a) Continuous chains of substitution (b) Own label goods 039 (c) Original equipment/replacement goods (d) Differentiated products (e) Captive production/in-house supplies (0 Secondary markets (g) Two-sided markets 046 (h) Range and cluster goods (i) One-way markets (j) Outsourcers or resellers who sub-contract to actual suppliers (k) Durable goods Recycled goods (m) New markets (n) Innovation markets 3 (o) Technology (p) Procurement markets (q) production and supply (r) Spot and long-term contracts (s) Physical and paper trading 3 (t) Wholesale markets 3-059

5 (u) Use of demand- and supply-side analysis (v) Programme and catalogue sales 3.6 Geographic Market Definition: Introduction Geographic Market Definition: Demand-side Substitution (a) The SSNIP test (b) Evidence: introduction (c) Pricing (d) Trade flows and buying patterns (e) Transport and other transaction costs (f) Legal restrictions and capacity constraints (g) Customer requirements for local support services (h) Conditions of competition (i) Customers' procurement policies (j) EU harmonisation and procurement legislation (k) Other harmonisation of product standards (1) National preferences, language and culture Geographic Market Definition: Supply-side Substitution Specific Issues in Geographic Market Definition (a) "One-way" markets (b) Continuous chains of substitution (c) "Route by route" markets (d) Suppliers competing in both national and local markets (e) Smaller Member States (f) Multi-plant operations (g) Competitive tenders and inplants Temporal Market Definition MARKET SHARES AND CONCENTRATION LEVELS 4.1 Introduction 4.2 Market Share Data (a) Units for measuring market shares (b) Calculating market shares (c) The use by the Commission of market share data (d) Interpreting market share data 4.3 Concentration Data 5. THE COUNTERFACTUAL 5.1 Introduction The Counterfactual Other Transactions (a) Parallel mergers (b) Overlapping mergers

6 (c) Applying the counterfactual to parallel and overlapping mergers MARKET OPERATION 6.1 Introduction Principal Economic Models of Market Operation (a) The Stackelberg leader-follower model (b) Limit pricing theory (c) Game theory 6.3 Dynamic Effects: Changes in the Market over Time (a) Expanding markets (b) Static or declining markets (c) New markets (d) Innovation (e) Naturally concentrated markets 6.4 Competitive Interaction (a) Pricing (b) Costs (c) Products (d) Contractual terms (e) Network effects (f) Two-sided markets 028 (g) Tender or bidding markets (h) Derived demand 6 (i) Connected markets (j) Not-for-profit organisations EU Procurement and Harmonising Legislation National Champions HORIZONTAL MERGERS: NON-CO-ORDINATED EFFECTS 7.1 Introduction Merging Firms have Large Market Shares Differentiated Products Competitors are Unlikely to Increase Supply if Price Increases Other Factors which give Rise to Non-Co-ordinated Effects ' (a) Limited possibilities of switching supplier (b) Merged group's ability to hinder expansion (c) Loss of an important competitive force or a "maverick" Efficiencies Generated by the Merger and Other Aspects of the Merged Group's Market Position xv

7 (a) Whether efficiencies resulting from the merger may contribute to a prohibition decision (b) The merged group's financial resources CO-ORDINATED EFFECTS 8.1 Introduction The Test for Identifying Co-ordinated Effects Methodology in Analysing Co-ordinated Effects The Nature of Co-ordination 8.5 Whether Co-ordination is Present Prior to the Merger (a) The Airtours decision (b) The practical importance of a finding of pre-merger co-ordination (c) Evidence The Members of the Candidate Oligopoly Reaching Terms of Co-ordination (a) Introduction (b) Terms of co-ordination will only emerge if they are profitable 8 (c) Type of product (d) Facilitating practices (e) Similarity in costs structures (0 Complexity of the terms of co-ordination (g) Transparency of the reference point (h) Other factors affecting the ability to reach terms of co-ordination Monitoring Deviations Deterrent Mechanisms (a) Generally (b) The scope of the obligation to identify a deterrent mechanism (c) The incentives to comply with the co-ordinated outcome (d) Chances of detection and speed of punishment (e) The deterrent mechanism must eliminate the gains from cheating (0 The credibility of the retaliatory threat (g) Market operation (h) Evidence that retaliatory measures have been employed in the past Reactions of Outsiders (a) Introduction (b) The competitive fringe (c) New entry (d) Countervailing buyer power 8-055

8 Causation Capacity (a) Introduction (b) Symmetry in 8 (c) Actual capacity (d) Tacit co-ordination on capacity Structural Links and other Forms of Co-operation Evidence of Historic Cartel Activity LOSS OF POTENTIAL COMPETITION AND MERGERS IN NEIGHBOURING MARKETS 9.1 Introduction Loss of Potential Competition (a) General (b) The Commission's decision in Air LiquidejBOC (c) The Commission's other decisions (d) The approach of the US agencies Mergers in Neighbouring Markets 10. THE MERGED GROUP'S BUYER POWER Introduction 10.2 Conditions for the Exercise of Buyer Power Decisions of the Commission VERTICAL ISSUES Introduction (a) Definition (b) Ambiguous effects of vertical intearation on consumer welfare (c) Decisions of the European Union Courts (d) Notice on non-horizontal mergers (e) Consistent application of antitrust law -005 (f) Vertical effects flow-chart Possible Efficiencies in Vertical Mergers (a) Introduction (b) Transaction costs 008 (c) Double 009 Input Foreclosure (a) Introduction (b) Market share and concentration levels (c) The framework for analysing input foreclosure issues

9 (d) Identify the leveraging conduct (e) Ability to foreclose access to inputs (f) Incentive to pursue an input foreclosure strategy (g) Impact on competition in the downstream market (h) Causation (i) Efficiencies Customer Foreclosure (a) Introduction (b) Market share and concentration levels (c) The framework for analysing customer foreclosure issues (d) Identify the leveraging conduct (e) Ability to foreclose access to customers (f) Incentive to pursue a customer foreclosure strategy (g) Impact on competition (h) Causation (i) Efficiencies Foreclosure of New Entry Other Concerns Arising from Vertical Integration (a) Co-ordinated effects and express collusion (b) Price discrimination (c) Information (d) Avoidance of regulatory constraints (e) Reduced incentive to engage in research and development (f) Loss of liquidity on the input market Other Situations Giving Rise to Vertical Foreclosure Concerns (a) "Diagonal" overlaps (b) Indirect vertical relationships (c) Buyer power 12. CONGLOMERATE ISSUES 12.1 Introduction (a) General (b) Ambiguous effects of conglomerate mergers on consumer welfare (c) Decisions of the European Union Courts (d) Notice on non-horizontal mergers (e) Grounds for intervention in conglomerate mergers (0 Organisation of the chapter Generic Treatment of Conglomerate (a) Market share and concentration levels (b) The framework for analysing conglomerate leveraging issues

10 (c) Identify the leveraging conduct 009 (d) Ability to pursue the leveraging conduct 010 (e) Incentive to pursue the leveraging conduct 016 (0 Foreclosure (g) Causation (h) Efficiencies Tying, Pure Bundling and Mixed Bundling (a) Introduction (b) The Chicago school (c) Ability and incentive to tie or bundle (d) The exclusionary effects of tying or bundling 028 Other Theories of Leverage 12.5 Portfolio Power or Range Effects (a) The scope of portfolio power theories 030 (b) Applying leveraging theory to portfolio power cases 12.6 Reduced Incentive to Engage in Research and Development 035 CO-ORDINATION IN JOINT VENTURES Introduction (a) The effects of joint ventures on competition (b) The relationship between arts 2(4) and 2(5) of the EUMR and co-ordinated effects Co-ordination of Behaviour (a) General (b) Identifying the markets for analysis (c) Identifying the mechanism for co-ordination (d) Assessing the parents' incentive and ability to engage in co-ordination 007 (e) Appreciability (0 Causation (g) Article 101(3) analysis COMPETITION FROM ACTUAL RIVALS 14.1 Introduction Assessing the Strength of Competition from Rivals (a) General 002 (b) Market shares (c) Concentration data 004 (d) Bidding studies 005 Viability of Alternative Sources of Supply (a) General (b) Incentive to expand output

11 (c) Ability to expand output (d) Credible alternatives for customers (e) Sufficiency of competitor activity (f) Competition from outside the market 14.4 Links between the Merged Group and its Competitors (a) General (b) Can the Commission take account of links which do not confer control? (c) The weight to be placed on links conferring control (d) The weight to be placed on links which do not confer control COUNTERVAILING BUYER POWER 15.1 Introduction Assessing Buyer Power (a) General (b) Existence of viable alternatives or credible threats (c) Whether buyers have an incentive to act (d) Whether buyers' power is counterbalanced by similar or greater power of the merged group (e) The role of smaller customers 15.3 Leading Decisions on Buyer Power 16. NEW ENTRY 16.1 Introduction Relevant Principles (a) Test of likely, timely and sufficient (b) Likelihood of entry (c) Timeliness (d) Sufficiency (e) New entry as a "trump" 16.3 Barriers to Entry (a) Definition (b) Technical and strategic advantages (c) Entry impediments (d) Analysis of barriers to entry in practice (e) Barriers to expansion (0 Barriers to exit and contestable markets xx

12 17. THE FAILING FIRM DEFENCE Introduction The Current Test The Evolution of the Test (a) The Commission's approach prior to BASF (b) The BASF decision Decisions Applying the Test (a) 006 (b) BLU (c) (d) Deterioration in competitive strength falling short of failure Application of the Test in an Economic Downturn 17.6 Whether the Failing Firm Test is Drawn Too Narrowly EFFICIENCY GAINS 18.1 Introduction (a) General 001 (b) Rationale for treating efficiency gains as a positive factor in merger appraisal (c) Options for giving positive effect to efficiency gains Evolution of the Commission's Approach to Efficiencies (a) Reform of the EUMR (b) Input from academic economists 18.3 The Treatment of Efficiency Gains under the EUMR Specific Issues in Analysing Efficiency Gains (a) Benefit to consumers 18 (b) Merger-specific (c) Verifiable 18 (d) Substantial (e) Timely (0 Disregarding anti-competitive strategies (g) A preference for reductions in marginal or variable costs 017 (h) Extent of remaining competition (i) Efficiencies arising in markets other than the one in which market power is created or strengthened (j) Types of efficiency 020

13 19. OTHER EVIDENCE OF THE LIKELY EFFECTS OF THE MERGER ON CONSUMERS 19.1 Introduction Categories of Evidence 20. REMEDIES Introduction (a) General (b) Burden of proof (c) Remedies in phases I and II (d) Structure of this chapter General Principles Relevant to the Selection of an Appropriate Remedy (a) Comprehensive solution (b) Effective implementation (c) Proportionality (d) The benefits of the transaction for consumers (e) The overall effect of the remedies package on consumers (f) The effect of the remedies on technical and economic progress (g) Compatibility with the competition rules (h) No power to "over-remedy" (i) Behavioural and structural remedies 20.3 Selection of Remedies by Theory of Competitive Harm (a) Non-co-ordinated effects (horizontal overlaps) (b) Co-ordinated effects (c) Loss of potential competition (d) Procurement power (e) Vertical issues (0 Conglomerate issues (g) Co-ordination in joint ventures 20.4 Empirical Studies of the Effectiveness of Remedies (a) The FTC Divestiture Study (b) The Merger Remedies Study 20.5 Transferring a Market of a Business (a) Introduction (b) Model texts (c) Clear identification of the divestment business (d) A viable business (e) All necessary assets should be included in the divestment package (0 Divestment of "more than the overlap"

14 (g) Divestment of "less than the overlap" (h) Retention by the divesting party of an interest in the divested business (i) The purchaser of the divestment business (j) When it is necessary to sell the business to a single purchaser (k) Whether it is necessary to sell the business to the purchaser offering the highest price 069 (1) Time limits (m) Interim preservation and carving out of the business (n) Post-completion transitional support for the purchaser (o) Prohibition on buying back the assets Transferring a Market of Intellectual Property Rights (a) When the transfer of intellectual property rights will provide an appropriate remedy (b) Pharmaceuticals mergers (c) Consumer goods mergers Removal of Links with Competitors Access Remedies (a) Introduction (b) Circumstances in which an access remedy may be appropriate (c) General issues relating to remedies designed to facilitate entry (d) General issues relating to remedies designed to prevent foreclosure (e) Monitoring (0 Duration (g) Examples of remedies granting access to infrastructure or technical platforms (h) Examples of remedies granting access to technology or intellectual property 20.9 Amendments to Long-term Exclusive Agreements (a) Introduction (b) Examples of remedies terminating exclusive agreements Other Remedies (a) Introduction (b) General principles (c) Transfer of specific assets (other than intellectual property rights) to transfer a market position (d) Termination of distribution agreements (e) The supply of goods or services to eliminate vertical foreclosure concerns or facilitate entry

15 (0 The creation of "product space" to facilitate new entry 20 (g) Other remedies designed to "sponsor" new entry (not falling within the "access" category) (h) Assurance of purchases from third parties (i) Correction of market flaws (j) Other remedies Crown Jewels, Buyer, Fix it First and Conditional Remedies (a) Alternative and "crown jewel" remedies (b) "Up-front buyer" and "fix it first" remedies (c) Conditional remedies Other Aspects of the Remedies Process (a) Legal status of the Notice on Remedies (b) The roles of the trustees (c) The "review clause" (d) Third party consents (e) Commitments given in earlier cases (f) Commitments to resolve two or more cases (g) Clearance without accepting the commitments (or all of them) (h) Status of different types of commitments and consequences of breach (i) Declarations from the competent authorities of Member States (j) International co-operation (k) Conduct by the merging parties in the context of the Commission's investigation Structuring Transactions when Remedies Issues are Expected PAGE Index 743