In the aftermath of the EC merger control reform -The relevance of efficiencies in merger assessments

Abstract: One of the most common reasons for a firm to merge is that a merger is believed to generate economic efficiency. This argument has different aspects as mergers may yield efficiency gains in various ways. Economists often distinguish between three different classes of efficiencies: Allocative efficiency, productive efficiency and dynamic efficiency. All three classes are relevant in the analysis of the impact of a concentration on effective competition. Allocative efficiency refers to the optimal situation when products are allocated between consumers according to the price the consumers are willing to pay and prices never exceed marginal cost. Productive efficiency is achieved when goods and services are produced to lowest possible cost and output is maximized by using the most effective combination of input. The concept (in antitrust economics) of Dynamic efficiency is connected with whether there is enough incentive and ability to innovate and increase productivity over time. The approach to efficiencies under EC Merger Regulation has always been controversial. Although Article 2(1) of the Old Merger Regulation states that technical as well as economic progress has to be taken into account in the merger assessment provided that it is to the consumers' advantage and does not form an obstacle to competition, efficiencies were given little weight in merger assessments prior to the reform of EC merger control. Nevertheless, there is evidence that the Commission actually evaluated efficiencies in some cases but the final outcomes of these evaluations were contradicting creating confusion in this area of law. In most of these cases the Commission recognized efficiencies as a pro-competitive effect generated by the merger but there are cases where efficiencies were seen as a penalizing factor. The later approach must be seen as the result of confusion regarding the interpretation of Article 2 of the Old Merger Regulation and ambiguous statements from the Commission. The proposal of the New Merger Regulation is the result of a long period of review and in January 2004 the New Merger Regulation came into force introducing the SIEC-test as a substantive criterion. The new substantive criterion has a more economic based approach compared to the dominance test used in the Old Merger Regulation and focuses more on the effects of effective competition instead of the structure of the market. The criticism, the debate and the change of the substantive criterion in the Merger Regulation finally made it possible to explicitly introduce efficiencies to EC merger control. Today efficiencies are mentioned in both Recital 29 of the New Merger Regulation and in the Horizontal Merger Guidelines. In order to assess whether or not a concentration significantly impedes effective competition the Commission performs an overall competitive appraisal of the merger taking into account any substantiated efficiency claims. The Commission may find, as a consequence of the efficiencies that the merger brings about, that the concentration is compatible with the common market. A plausible approach to efficiencies in the merger review is a two-step test within the overall assessment of the operation. The first step is to evaluate the anti-competitive effects created by the merger and the second step is to evaluate generated efficiencies that counteract the anti-competitive effects. All factors are to be considered before the Commission decides whether or not the transaction significantly impedes competition. In order for the Commission to be able to clear a merger the final outcome of the merger must not make the consumers worse of than before the merger. As efficiencies should be an integral part of the competitive effectsanalysis it is not appropriate to talk about an efficiency ''defence'' in the sense that they would be able to intervene after an impediment of effective competition had been found. For this reason efficiencies can not make a transaction which impedes competition compatible with the common market. For the Commission to take account of efficiencies in its merger assessment and to be able to reach the conclusion that, as a consequence of the efficiencies the merger shall not be prohibited, the efficiencies have to fulfil three cumulative requirements. They have to benefit consumers, be merger specific and be verifiable. Moreover, since there exist an asymmetry between the competition authorities and the merging firms with regards to the information on the merger and the expected efficiencies it is up to the merging firms to provide the relative information demonstrating that the efficiency gains are fulfilling these requirements. The long debate about the change of the substantive criterion together with the explicit introduction of efficiencies into the recitals of the New Merger Regulation and into the Horizontal Merger Guidelines indicate that efficiencies have been given a stronger position, compared to prior to the reform, in the assessment on a merger's compatibility with the common market.