Unilateral Effects Analysis in EC Merger Control

Abstract: The 2004 Merger Regulation introduced a change to the substantive test for the Commission's intervention in mergers. The Commission is now able to block mergers which significantly impede effective competition in the EC. The purpose of the change was to guarantee that the Commission could deal with all harmful effects to competition resulting from a merger. More specifically, the purpose was to include unilateral effects in the merger test. Unilateral effects can be described as an effect of the change in market structure following a merger, i.e. a removal of certain competitive restraints, which allows the companies remaining in the market to raise prices unilaterally. Unilateral effects can thus comfortably include the notion of dominance. However, there are unilateral effects, which reach beyond market dominance in that they can affect all companies in a market before the thresholds of dominance are reached. Importantly, these unilateral effects are generally restricted to oligopolistic markets. Economic theory shows that these unilateral effects may be the result of mergers in both homogeneous product markets and differentiated, i.e. branded, product markets. As regards homogeneous product markets, economic models make two predictions&semic first of all the more companies are in a market the lower the price is. Secondly, prices and profitability fall as total market output rises. Thus, a company's best response to an increase in output by a competitor is to reduce its own. Therefore, a consequence of a merger is that the merged company will reduce output after the merger. Some of this reduction will be offset by competors with an increase in output, however, this offset is only partial, since it will not be profitable for them to increase output to match the pre-merger level. This effect may be even more significant if the competitors face capacity contstraints since they will be restricted in increasing their output. In differentiated product markets economic theory assumes that consumers will not be indifferent in choosing between two products at equal prices, as they would be in a homogeneous market, since the products are, in their eyes, not perfect substitutes. The products may however represent close substitutes for one another. Thus, a price increase for one product, the consumers' first choice, will eventually push them to buy another product, their second choice. Assuming that these are two products which now, due to a merger, come under the same ownership, a loss of sale due to a price increase on one of the products is now likely to be captured by the same company in sales of the other product, thus giving the company incentive to unilaterally increase prices for both products. The introduction of unilateral effects analysis in EC merger control is an important change to the merger test, which has consequences beyond a simple shift to potentially lower market share thresholds. The EC Horizontal Merger Guidelines are an important tool for practicioners. However, in light of the changes implemented and the missing case law these neglect to give realistic guidance, which is available in other jurisdictions, in order to provide for the necessary legal certainty.