Competition Law and Anti-Trust: Horizontal Mergers

Introduction to merger control

Mergers in competition law describe changes in market structures where entities cease to be independent and form a single firm
Goal: prevent creation of a position of substantial market power not just abuse of power
Form of change (de facto/de jure; mergers vs acquisitions) is irrelevant; what matters is that the change is permanent
Merger control is a relatively late addition in many systems
- US: Section 7 of the Clayton Act (1914)
- EU: Regulation 4064/89 (replaced by Regulation 139/2004)
- UK: Enterprise Act (2002)
Governments resist merger control regimes more than other areas of competition law
Specificities of merger control include tight timeframes, ex ante assessment, systematic assessment, and a “one stop shop” approach (except in public interest cases)

Key concepts and structure

Horizontal mergers raise two main concerns:
- Increase in market power (potential dominance)
- Coordination with other competitors (collective dominance)
Substantive test frameworks differ across jurisdictions but share common aims:
- US: Section 7 targets the effect of acquisition on competition
- EU: dominance-based test and/or the broader standard of significantly impeding effective competition

The substantive test: US vs EU approaches

US Clayton Act, Section 7:
- Text: “No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital … the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
EU Regulation 4064/89 (now Regulation 139/2004): dominance-based approach
- Dominance can be evidenced by very large market shares
- AKZO presumption: a market share of 50% or above is treated as evidence of dominance
- Article 2(3) Regulation 139/2004 (current standard):
- ext{A concentration which would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market.}
- Dominance is one possible theory of harm; the goal is to close the oligopoly gap

EU and US Horizontal Merger Guidelines (structure)

Both frameworks are structured around two key unilateral (non-coordinated) effects and coordinated effects
- Non-coordinated effects: unilateral competition concerns arising from a merger
- Coordinated effects: potential for post-merger coordination among firms to raise prices or restrict output

Non-coordinated effects

Core idea (US HMG): “The elimination of competition between two firms that results from their merger may alone constitute a substantial lessening of competition.” This is most visible in a merger to monopoly but is not limited to that scenario
- Source: US Horizontal Merger Guidelines (non-coordinated effects)
EU HMG (paragraph 24): a merger may significantly impede effective competition in a market by removing important competitive constraints on one or more sellers, leading to increased market power and loss of competition between the merging firms
Key question: can the merged entity raise prices unilaterally?
- Creation/strengthening of a dominant position is the likeliest scenario
- AKZO presumption: 50%+ market share indicates dominance
- Dominance can be established even below 40% under certain circumstances
- Non-coordinated effects are unlikely if market share < 25%
Factors identified in the Guidelines for assessing non-coordinated effects:
- Market shares of the merging parties
- Closeness of competition (how directly the parties compete)
- Switching opportunities for customers
- Capacity constraints of third parties
- Whether the merger hinders expansion by third parties
- The presence of a “maverick” firm (a firm that consistently competes aggressively against the leaders)
Practical implication: even small increases in concentration can raise concerns in closely competitive markets

Illustrative case discussions on non-coordinated effects

Bridgestone/Bandag: factors suggesting competition concerns
- Small increase in market shares
- Strong competitors exist; the parties were not close substitutes
- No clear impact on switching opportunities for customers
- Commission concluded limited concern (context-specific) – demonstrates how multiple factors drive the outcome
T-Mobile Austria/Tele.Ring: factors suggesting no concerns vs. concerns
- Maverick firm: Tele.Ring priced systematically lower; potential for customers to switch away from leading providers
- Creation of two symmetric market leaders post-merger
- Market dynamics indicated potential for coordinated/competitive concerns despite apparent symmetry
Turnover and market shares (example slide values):
- T. Austria: market shares around 30-40% (depending on year and segment)
- T-Mobile: market shares around 30-40%
- Orange-H3G: around 20-30%
- These figures illustrate how modest changes in market shares can still trigger scrutiny in nuanced markets

Coordinated effects

Definition (US HMG): a merger may diminish competition by enabling post-merger coordinated interaction among firms that harms customers
- Coordinated interaction involves conduct by multiple firms that is profitable only due to mutual accommodation
- Reactions between firms can deter aggressive price-cutting and enable price increases
EU perspective: in highly concentrated markets, a merger may significantly impede effective competition by creating or strengthening a collective dominant position, facilitating coordination even without formal agreements
Airtours case (GC): the conditions for collective dominance include
- Reaching terms of coordination
- Monitoring deviations
- Deterrence mechanisms
- Countervailing power to outsiders
Market characteristics that affect collective dominance findings (Airtours):
- Cautious capacity planning and vertical integration are not evidence of collective dominance
- Demand volatility
- Market shares are not rigid (evidence of ongoing competitiveness)
- Long-term demand growth
- Insufficient market transparency
Outcomes: EC failed to establish a position of collective dominance in Airtours due to the above market characteristics

Deterrence, monitoring, and facilitating conditions (Airtours framework)

Horizontal Merger Guidelines reflect Airtours concepts and identify conditions that influence coordination:
- Reaching terms of coordination
- Monitoring deviations
- Deterrence mechanisms
- Countervaling power (external parties that can deter coordination)
Market characteristics linked to these conditions include:
- Market concentration
- Market stability
- Homogeneity/Symmetry
- Market transparency
- Facilitating practices (e.g., frequent transactions, spare capacity)
- Barriers to entry
- Small customer/supplier base

Efficiency defence

History: pre-2004, efficiency claims faced criticism (US and some Member States) for not being adequately considered
Regulation 139/2004 formalises efficiency gains as a potential offset to anti-competitive effects
EU Horizontal Merger Guidelines, para. 76: efficiency gains may align with dynamic competition and improve industry competitiveness and living standards
Conditions to accept the efficiency defence:
- Consumer benefit
- Merger specificity
- Verifiability
Conceptual takeaway: efficiencies claimed by the merging parties must be credible, measurable, and independently verifiable

Falling-firm defence

Core idea: the conditions of competition would have deteriorated in the absence of the merger
Guidelines are stringent for this defence:
- The failing firm would have left the market absent the merger
- No less anticompetitive alternative is available
- The assets would have exited the market
Illustrative narrative (Olympic/Aegean case): a failing firm scenario where the Commission concluded the merger was compatible because the failing firm would disappear without the merger, and the competitive harm would not be caused by the merger itself

Non-horizontal mergers: vertical and conglomerate mergers

Overview: not limited to price effects through direct market power increases; may alter input flows, distribution, and cross-market dynamics
Vertical mergers
- Foreclosure can occur at two levels: input foreclosure and customer foreclosure
Input foreclosure (upstream): post-merger restriction of access to inputs that upstream rivals rely on, raising downstream rivals’ costs
- Definition (Non-Horizontal Merger Guidelines, para. 31): input foreclosure arises when the merged entity restricts access to inputs that downstream rivals would have needed, thereby raising downstream rivals’ costs
- Factors determining ability to foreclose input markets:
- Substantial upstream market power (dominance)
- Importance (qualitative/quantitative) of the input for downstream competition
- Ability to affect input availability
- Downstream rivals’ counterstrategies are limited
- Foreclosure rationale: to foreclose downstream competitors only if the upstream-to-downstream profit trade-off justifies it
- The “essential facility” concept (Article 102 TFEU) is related but not identical; the difference lies in the qualitative/quantitative importance of inputs and the feasibility of alternative input sources
- Vertical arithmetic: profits upstream vs downstream; the risk/benefit balance of foreclosing inputs depends on margins on both levels and downstream market structure
Customer foreclosure (downstream emphasis): when a vertically integrated firm with downstream presence forecloses access to the customer base for upstream rivals
Conglomerate mergers
- Foreclosure via tying/bundling: requires significant market power in at least one market, a product deemed important by customers, and a large common pool of customers acquiring both products
- Incentives to foreclose depend on overlap in demand and the profitability of the tied/bundled products; economies of scale can amplify effects
Case study: Microsoft/Skype, Office, Media Player, Internet Explorer (illustrative bundling/tie concerns)
- Potential foreclosure channels observed:
- Harming rival OS by degrading Skype quality on Windows
- Degrading the quality of rival apps on Windows
- Tying/bundling Windows with Skype-related services
- Network effects: the value of Skype increases with platform availability; tying may affect platform competition
- Commission observations: consumers use multiple platforms (Windows, Android, iOS); competitors have various avenues to attract users; no substantiated tying evidence found in that case, but the analysis illustrated concerns about bundling and foreclosure mechanisms in conglomerate settings

Case study structure and reflections

Vertical and conglomerate mergers share the same core concerns: potential foreclosure (input or downstream) and tying/bundling behaviors
The analysis emphasizes a mix of market power, product importance, customer relationships, and the feasibility of alternative arrangements
Non-horizontal mergers commonly generate conflicts between potential efficiency gains (cost reductions, product improvements) and foreclosure/coordination risks

Summary: features and implications of non-horizontal mergers

Non-horizontal mergers do not inherently increase market power by themselves
- They can lead to lower prices, higher output, and pricing/economies of scale and scope (pricing efficiency, economies of scale/scope, allocative efficiency gains)
Intervention requires a convincing theory of harm (foreclosure or coordination) and a robust assessment of potential gains vs harms
Foreclosure-based theories (input or customer) rely on the ability and incentive to foreclose and the overall impact on competition and welfare
Integrated assessment often considers both efficiencies and anti-competitive concerns in a unified framework

The “foreclosure” concept in non-horizontal mergers

Foreclosure occurs when actual or potential rivals lose access to essential inputs or markets, hindering their ability to compete
Anti-competitive foreclosure can allow merged entities and some competitors to raise prices or reduce competitive pressure
The Guidelines outline a structured approach to assessing non-coordinated effects, including safe harbours (market shares below 30%, HHI below 2000) and a detailed examination of the ability and incentive to foreclose, plus the overall impact including potential efficiencies

Key takeaways for exam preparation

Understand the different standards for merger control: US Section 7 vs EU dominance/Significant Impediment to Effective Competition (SIEC) framework
Distinguish between non-coordinated effects (unilateral) and coordinated effects, and know what kinds of market structures are more conducive to each
Be able to discuss how factors such as market shares, closeness of competition, switching opportunities, and “maverick” firms influence non-coordinated effects assessments
Be able to describe the Airtours reasoning and the EC’s reasoning regarding collective dominance, including why certain market characteristics negate a finding of collective dominance
Know the efficiency defence criteria: consumer benefit, merger specificity, verifiability
Understand the failing firm defence criteria and typical public evidence used in cases (e.g., Olympic/Aegean example)
Differentiate vertical vs conglomerate mergers, including the two levels of foreclosure in vertical mergers (input vs customer) and the dynamics of tying/bundling in conglomerate mergers
Be able to discuss illustrative case studies (Bridgestone/Bandag; T-Mobile Austria/Tele.Ring; Microsoft/Skype) to show how theoretical concepts are applied in practice
Recognize the importance of network effects and platform dynamics in evaluating mergers with digital ecosystems (e.g., Microsoft/Skype)
Recall key numerical thresholds and statistical references used in practice: e.g., dominance presumptions at or above 50% market share; safe harbours like market shares below 30% and HHI below 2000; the qualitative nature of the guidelines for assessing foreclosures and coordination