In May 2004, the legal basis for merger evaluation in the EU was substantially revised. By then, it was apparent that the old legislation – which first came into force in 1989 – was lacking in a number of ways. Most importantly, the assessment of market power was based on the so-called dominance test – a criterion that required the ‘creation or strengthening of a dominant position’ to be applicable, and therefore was ill-suited to prosecute mergers leading to collective dominance or increased scope for collusion in an oligopoly. Moreover, mergers reducing effective competition without the creation of a dominant position could not be legally challenged under the old legislation (Vickers 2004).
Additionally, there was an increasing requirement to substantiate merger decisions – as well as several other European Commission competition policy enforcement tools – with sounder economic reasoning. This need was made particularly evident in 2002, when the Court of First Instance identiﬁed problems with regard to the rigour of the Commission’s economic analysis in three cases that were initially prohibited, and overruled the Commission’s decisions (Lyons 2004).
Various other factors underlined the need to revise merger regulations. The accession of ten additional member states to the EU in 2004 meant a significant increase in caseload, demanding increased resources and more efficient procedures. Further, cases like GE/Honeywell – which was cleared by US authorities but blocked by the Commission, creating diplomatic turmoil – showed the need for a more coherent jurisdiction among international competition authorities (Coppi and Walker 2004).
Regulation 139/2004 was designed to remedy these and other concerns. The main goal of the reform was to achieve what became known as a ‘more economic approach’ to merger control. Along those lines, numerous amendments were made to merger legislation:
- The dominance test was abandoned in favour of the more flexible ‘significant impediment of effective competition’ test;
- The position of a Chief Economist, supported by a team of PhD economists, was created;
- An ‘efficiency defence’ clause, making it possible to balance anticompetitive concerns with expected efficiency gains, was introduced; and
- A set of horizontal merger guidelines was issued, with the goal of making the evaluation procedure more reliable and transparent.
Evaluating the success of European merger policy reform
In a recent paper (Duso et al. 2013), we empirically examine the success of the reform in achieving the goals outlined above. To this end we constructed a detailed dataset of 368 merger cases scrutinised by the Commission between 1990 and 2007, including most high-profile mergers. We collect extensive information on the merger, the decision, and the firms involved – either as merging parties or main competitors – to examine how merger control in the EU affects firms’ behaviour and performance. We assess the impact of the legislative change along four dimensions that we deem to be relevant for competition policy enforcement: decision predictability, decision discrepancies, rent reversion, and deterrence. We then adopt a before-and-after approach to single out the effect of the 2004 reform of merger regulation.
Transparency and predictability
First, we are interested in the degree to which firms can anticipate the outcome of an investigation, that is, the transparency of the merger control procedure to market participants. A transparent decision making process is conducive to fair and consistent verdicts and an important ingredient for legal certainty. Hence, we estimate how well the investigation outcomes can be predicted ex ante using publicly available information. The estimation results show, for instance, that interventions are less likely when US firms are involved, and more likely for conglomerate mergers. Also, the model is rather successful in predicting outcomes: the share of correctly classified cases rises from 0.71 in the pre-reform period to 0.76 in the post-reform period.
Similar studies with a comparable research question (e.g. Bergman et al. 2005) also find that the Commissions’ decisions are influenced by those factors that are expected to be related to a merger’s welfare effect, such as merging firms’ market shares and concentration ratios. Similar results are found for other jurisdictions. Furthermore in this vein, Szücs (2012) compares decision patterns of American and European merger law enforcement, finding evidence for convergence between the two after the 2004 reform.
Discrepancies in decisions
Second, we investigate the frequency and determinants of discrepancies between the Commission’s and the stock markets’ evaluation of a merger. We adopt a standard static oligopoly framework that allows us to gauge the competitive impact of a merger by looking at its effect on rivals’ profits (Farrell and Shapiro 1990). The underlying intuition is that a consumer welfare-reducing merger benefits rivals (i.e. increases their profits) while a pro-competitive merger harms them.
We use the rivals’ stock market reaction to measure the merger’s profit effects and, hence, its competitive nature. We then compare this measure with the outcomes of the Commission’s investigation and define discrepancies to exist if the Commission remedied or prohibited pro-competitive mergers (type I discrepancies), or if the Commission unconditionally cleared anti-competitive transactions (type II discrepancies). We observe that the frequency of type I discrepancies significantly decreased post-reform – which is in line with the idea of a more economic approach – while no robust pattern could be found for the type II discrepancies.
We then look at possible determinants of such discrepancies and observe some robust findings. For example, pro-competitive mergers involving US firms or that are cross-border in nature are less likely to receive an unfavourable decision, while full mergers are more likely to do so. Other articles investigating similar issues find that European merger policy might be seen as protectionist (Aktas et al. 2007) or influenced by political interests (Duso et al. 2007).
Third, we look at the ability of different decisions to dissipate anticompetitive rents. If financial markets are efficient, then the stock market’s reaction to a merger announcement should reflect the expected future profits due to the merger. These gains can be either due to expected efficiencies or due to an expected increase in market power. An efficient competition-policy regime should be able to differentiate between the two, and take measures to counteract market power-related gains. Thus we would expect a negative correlation between the abnormal stock market returns that merging firms and their rivals experience around the announcement of an anti-competitive merger and those around the publication of the Commissions’ decision – if the latter is efficient.
We investigate this issue econometrically, and find that only merger prohibition significantly reverses anticompetitive rents for both merging firms and their rivals. Cleared mergers seem to send positive signals for future rivals’ profitability, while the effectiveness of remedies (e.g. the divestiture of certain assets) appears to be limited. Using a similar dataset, Duso et al. (2011) reach an analogous conclusion, and find that remedies seem to be more effective in less problematic cases or in industries where they have previously been implemented. It thus seems that in cases that raise serious anti-competitive concerns, prohibitions are the most appropriate tool.
Finally, we address the issue of deterrence effects achieved through competition-policy enforcement. This is an important and under-researched topic: To what degree does the existence and behaviour of the antitrust authority induce firms to comply with the proposed rules of market conduct? To measure the impact of deterrence, we estimate how the Commission’s past decisions affect the probability that a newly-notified merger is anti-competitive. For the pre-reform period, we find that past prohibitions significantly reduce the likelihood of mergers being anti-competitive, while they do not deter pro-competitive mergers. Thus prohibitions seem to achieve ‘good’ deterrence without preventing socially desirable mergers from being proposed i.e. over-deterring. Post-reform, where we observe too few prohibitions for any statistical analysis, their role seems to be assumed by cases withdrawn during an in-depth investigation (which some commentators have referred to as ‘quasi-prohibitions’).
These findings are in line with those by Seldeslachts et al. (2009), who use data on a cross-section of antitrust jurisdictions to show that prohibitions lead to fewer merger notifications in the following year. Moreover, Clougherty and Seldeslachts (2013) find that the merger-policy enforcement in the US seems to shift merger activity from horizontal deals towards less-problematic vertical mergers. They also interpret this result as a sign of the ‘good’ deterrence properties of US merger control.
In sum, our assessment draws a cautiously optimistic picture of the impact of the 2004 reform on European merger law. While there remains room for improvement in several aspects, the reform seems to have been successful in bringing European competition law closer to economic principles.
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Clougherty, J A and J Seldeslachts (2013), “The Deterrence Effects of US Merger Policy Instruments”, Journal of Law, Economics, and Organization, 29(5): 1114–1144.
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Duso, T, K Gugler, and F Szücs (2013), “An Empirical Assessment of the 2004 EU Merger Policy Reform”, Economic Journal, 123(572): F596–F619.
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