LU/LG3070 Competition Law

Lecture 9 – Unit 3: Merger Control II:

Substantive Assessment
Dr Ryan Stones
25th March 2021
Feedback and Support Hours: 3-4 Mondays and Tuesdays
Merger Control
1. Market Definition (Product, Geographic).
2. Jurisdiction: EU: “Concentration” (Art 3 EUMR) with a “Community Dimension” (Art 1 EUMR
turnover,); UK: Enterprises Ceasing to be Distinct (s23(1) & 26(1) EA02) and turnover or share of
supply test met (s23 EA02).
3. Procedural Obligations:
- EU: one-stop shop (Art 21), compulsory notification (Art 4(1)) and suspension (Art 7(1)); fines (Art 14(2)).
- UK: voluntary pre-notification (s96-01 EA02).
4. Substantive Assessment:
- EU: “Significant Impediment to Effective Competition” (Art 2(2)/(3)) – Horizontal & N-Horizontal Guidelines.
- UK: “Substantial Lessening of Competition” (s35 and s36 EA02) – Merger Assessment Guidelines.
a. Market Share and HHI Indicators
b. Non-Coordinated Effects
- Horizontal: Horizontal Guidelines factors (e.g. shares, closeness, switching, elimination of maverick).
- Vertical and Conglomerate: Non-Horizontal Guidelines – 1) ability to foreclose, 2) incentive to
foreclose, and 3) overall effect on competition.
c. Coordinated Effects
- Airtours/Guidelines factors: 1) ability to reach common policy; 2) transparency to monitor compliance;
3) punish deviations; 4) not disciplined by outsiders.
d. Mitigating Factors (Countervailing Buyer Power, Entry, Efficiencies)?
5. Failing Firm Defence?
6. Remedial Commitments? EU: (Art 6(2)/8(2) EUMR); UK: (s73(2)/82(1) EA02).
Substantive Tests
EU: EUMR Art 2(3) – SIEC Test:
“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.”
[Art 2(2): opposite – concentration which “would not” SIEC “shall be declared
compatible”].
UK: EA02 s35 & s36 – SLC Test:
Whether a relevant merger situation “has resulted, or may be expected to
result, in a substantial lessening of competition”.
Both SIEC and SLC test address exactly the
same competitive issues from an effects-based perspective.
GUIDELINES GUIDELINES GUIDELINES GUIDELINES
Given how fact-specific merger control analysis
is, you must be applying the relevant guidelines
in detail to write a good response!
 EU Commission:
 Guidelines on the Assessment of Horizontal Mergers
[2004].
 Guidelines on the Assessment of Non-Horizontal Mergers
[2008].
 UK CMA:
 Merger Assessment Guidelines [2010] (covering both
horizontal and non-horizontal).
Lecture Overview
I. 4(a) Market Share and Concentration Indicators
II. 4(b) Horizontal Concentrations: Non-Coordinated
Effects
III. 4(b) Non-Horizontal Concentrations: Non-
Coordinated Effects
IV. 4(c) All Concentrations: Coordinated Effects
V. 4(d) Mitigating Factors
VI. Failing Firm Defence
I. 4(a) Market Share and
Concentration Indicators
Horizontal Concentrations: a) Market Share Indicators
EU Horizontal Guidelines:
 Para 17: “very large market shares - 50 % or more - may in themselves be
evidence of the existence of a dominant market position”.
 Para 18: “Concentrations which, by reason of the limited market share of the
undertakings concerned, are not liable to impede effective competition may be
presumed to be compatible with the common market… an indication to this
effect exists, in particular, where the market share of the undertakings
concerned does not exceed 25 % either in the common market or in a
substantial part of it.”
UK MAG [s5.3.5]:
 Combined shares less than 40% “will not often give the [CMA] cause for
concern”.
 Not usually concerned about reduction of number of firms from 5>4 (or
above).
Horizontal Concentrations: b) Concentration Indicators
Herfindahl-Hirschman Index (HHI) –
estimates concentration levels by squaring
and summing market shares and noting A B C D
change (the delta, Δ). 302 302 202 202
900 + 900 + 400 + 400 =2600
EU Commission and CMA unlikely to have
concerns where the post-merger HHI is: Pre-Merger
Post-Merger
 Below 1000;
A B CD
 Between 1000 and 2000 with a Δ of less 302 302 402
than 250*; 900 + 900 + 1600 =3400
Δ800
 Or over 2000 with a Δ below 150*.

(*except in exceptional circumstances – merger with potential or recent entrant, important innovators,
maverick, etc.)
Non- Horizontal Concentrations: Indicators
As the merging parties are not competitors on the same market,
cannot use combined market shares or the before-and-after
change in the HHI as indicators.

EU Guidelines on Non-Horizontal Mergers [para 25]: Commission

unlikely to be concerned “where the market share post-merger of
the new entity in each of the markets concerned is below 30%
and the post-merger HHI is below 2000” (except in special
circumstances – para 26).

UK CMA follows the same [s5.3.5 MAG].

Indicators not Determinants
T-79/12 Cisco Systems [2013] (GCEU)
Combined 80-90% market share and HHI of 7340
for Skype + Window Live Messenger?
GC: [para 74] “…the very high market shares and
very high degree of concentration on the narrow
market, to which the Commission referred merely
as a basis for its analysis, are not indicative of a
degree of market power which would enable the
new entity to significantly impede effective
competition in the internal market.”
II. 4(b) Horizontal
Concentrations: Non-
Coordinated Effects
Horizontal: Non-Coordinated Theories of Harm

Creation or
A B C
strengthening of a
dominant position 33% 33+33=66%

D E F Elimination of
important competitive
66% 25+8=33%
force
e.g. fierce rivals (Heinz),
maverick firm
Horizontal Non-Coordinated Effects: Factors
EU Horizontal Guidelines [para 26] “A number of factors,
which taken separately are not necessarily decisive, may
influence whether significant non-coordinated effects are
likely to result from a merger. Not all of these factors need
to be present for such effects to be likely. Nor should this be
considered an exhaustive list.”
[paras 27-38]:
 Merging firms have large market shares.
 Merging firms are close competitors.
 Customers have limited possibilities of switching
supplier.
 Competitors are unlikely to increase supply if price
is increased.
 Merged entity able to hinder expansion by
competitors.
 Merger eliminates an importance competitive force.
Factor 1) Large Market Shares
EU Horizontal Guidelines, para 27: although only “first indications of market power and
increases in market power, they are normally important factors in the assessment.”
Never the sole consideration:
M.4564 Bridgestone/Bandag [2007] M.5747 Iberia/ British Airways [2010]
Bridgestone + Bandag = EEA leader for supplying Iberia and BA would have 70-80% market share on
pre-cure tread for tyre retreading, with 55-65% in some London-Spain routes…
Norway and 60-70% in the Netherlands…
… but unconditional clearance due to constraints
… but not particularly close imposed by smaller rivals, potential for competitor
competitors, in most markets expansion and entry, and pre-existing cooperation
Bridgestone’s pre-merger as part of One World alliance.
share was <5%, they supplied
different customer groups
(independent repairers v
franchisees), and had strong
competitors.
Factor 2) Closeness of Competition
Product/service differentiation within the same market may mean merging
firms are especially close rivals.

Especially high substitutability based on, e.g., location, image, range,

specifications, pricing strategy, quality, level of service.

Based on customer surveys, purchasing patterns, diversion ratios, etc.

Concentration between fierce rivals may SIEC through internalising (i.e.

losing) close competition.

May be remedied through quick product repositioning by non-merging

undertakings (HMG para 30).
Factor 2) Closeness of Competition
M.3942 Adidas/Reebok [2006] M.4439 Ryanair/Aer Lingus [2008]
Unopposed by RA’s hostile takeover bid for AL would lead to a
Commission, despite monopoly position on 22 routes, over 60% share
around 25-35% share on 13 others, and provided 80% of services
across EEA. to/from Dublin. RA claimed that not close
competitors: AL a “mid frills” and RL a “no-frills”…
Commission found them
Commission analysis and surveys found them to
not to be close
be each other’s closest rival:
competitors due to
consumer perceptions  Equally strong
(Adidas technical, positions in Ireland
professional, European; and larges bases in
Reebok leisure, targeted at Dublin.
youth and women, strong  Despite differences,
on US sports) and retailer most similar
views as to differing image, business models
pricing point, and must- and costs.
stock status.  Customer surveys.
II) Closeness of Competition
T-399/16 CK Telecoms v Commission [2020]
Para 242: “…most of the examples mentioned in the contested decision are not intended to
identify how close the parties are, or to show that they exerted important competitive
constraints on each other, but are aimed above all at showing that Three and O2 are ‘close
competitors’ rather than ‘particularly close competitors’. Thus, the Commission seems more to
analyse the closeness of competition between Three and O2, on the one hand, and the other
two mobile network operators, on the other. It concludes, in recital 1183 of the contested
decision, that the four mobile network operators, and not only Three and O2, ‘compete
closely’.

Para 243: Diversion ratios between two were based on small survey and produced results
inconsistent with elsewhere in decision.

Para 249: “Although it may indeed be established that Three and O2 are relatively close
competitors in some of the segments of a concentrated market comprising four mobile
network operators, that factor alone is not sufficient to prove, in the present case, the
elimination of the important competitive constraints which the parties to the concentration
exerted upon each other and cannot suffice to establish a significant impediment to effective
competition; if that were not the case, any concentration resulting in a reduction from four to
three operators would as a matter of principle be prohibited”.
Factor 3) Limited Customer Switching
M.986 Agfa Gevaert/DuPont [1998] Commission cleared with commitments the acquisition
by AG of DP’s negative plate production business
(used primarily in newspaper, book, and commercial
printing). 50-60% market share (nearest rival 20%),
competitors with limited capacity and/or lack of
distribution capabilities.

Commission also stressed difficulties for consumers

switching:
 Use of “package deals” – supplying plates for “free”
for 2-3 years if they also acquire consumables (with
plate price included).
 Exclusivity arrangements.
 Users claimed 1-3 months to switch supplier.
 Long-standing business relations.
Factor 6) Elimination of an Important Competitive Force
M.3916 T-Mobile
/tele.ring [2007]

35-45% 20-30% 10-20% 15-25% <5%

TR had doubled shares in 3 years while others fell/stagnated, attracting 60% of customers
switching from MK or TM. TR’s prices were significantly lower that MK, TM, and O, leading to
general reductions.
TM acquiring TR probably would not lead to creation/strengthening of dominance, but would
eliminate an important competitive force.

Commission stated that “tele.ring, as a maverick, has a much greater influence on the competitive
process in this market than its market share would suggest.”
Commitments for divestiture of parts of TR’s network and capacity to 3, which lacked its own
country-wide coverage.
Factor 6) Elimination of an Important Competitive Force
M.7612 Hutchison 3G UK/Telefónica UK [2016]
Commission prohibited 3 (4th largest operator by subscribers) from
acquiring O2 (2nd) for a number of reasons, including elimination of a
competitive force. Would be biggest firm (30-40%) but not dominant.

“Three is the latest network operator to have entered the market and
has been the driver of competition since its entry, for example by
changing the industry trend of restricting data usage and data price
increases. Its recent and current market behaviour shows that it is the
most aggressive and innovative player. Namely, it offers the most
competitive prices in the direct channel, and offered 4G at no extra
cost, forcing the industry to abandon strategies to sell 4G at a
premium. It also offered such popular propositions as free
international roaming… Absent the transaction Three is likely to
continue to compete strongly.”
[paras 20-21 Summary Notice]
Factor 6) Elimination of an Important Competitive Force
T-399/16 CK Telecoms v Commission [2020]:The General Court
annulled the Commission decision.
Para 90: “Article 2(3) of Regulation No 139/2004 must be interpreted as
allowing the Commission to prohibit, in certain circumstances, on
oligopolistic markets concentrations which, although not giving rise to the
creation or strengthening of an individual or collective dominant position,
are liable to affect the competitive conditions on the market to an extent
equivalent to that attributable to such positions, by conferring on the
merged entity the power to enable it to determine, by itself, the parameters
of competition and, in particular, to become a price maker instead of
remaining a price taker.”

Para 96: “Thus, Article 2(3) of Regulation No 139/2004 must be interpreted in

the light of recital 25 thereof, which lays down two cumulative conditions in
order that non-coordinated effects arising from a concentration may, under
certain circumstances, result in a significant impediment to effective
competition: the concentration must involve (i) ‘the elimination of important
competitive constraints that the merging parties had exerted upon each
other’ and (ii) ‘a reduction of competitive pressure on the remaining
T-399/16 CK Telecoms v Commission [2020]
Para 171: “It is apparent from the contested decision that, as regards the elimination of an ‘important competitive force’, the
Commission is of the opinion that the mere decline in the competitive pressure which would result, in particular, from the
loss of an undertaking having more of an influence on competition than its market share would suggest is sufficient, in itself,
to prove a significant impediment to effective competition.”

Para 172: “Such an interpretation of the concept of ‘important competitive force’, developed in the contested decision, would
introduce, if it were to be regarded as an autonomous legal criterion, a concept additional and alternative to the concept of
‘important competitive constraint’ set out in recital 25 of Regulation No 139/2004. That would lower the standard of
proof required to prove a significant impediment to effective competition, according to whether the Commission classifies the
foreseeable effects of a concentration as ‘non-coordinated effects’ or as ‘coordinated effects’”

Para 173: “The approach taken by the Commission in the contested decision amounts in practice to confusing three
concepts, namely the concept of a ‘significant impediment to effective competition’, which is the legal criterion referred to in
Article 2(3) of Regulation No 139/2004, the concept of ‘elimination of [an] important competitive [constraint]’, referred to in
recital 25 of that regulation, and the concept of elimination of an ‘important competitive force’, used in the contested decision
and based on the Guidelines. By confusing those concepts, the Commission considerably broadens the scope of
Article 2(3) of Regulation No 139/2004, since any elimination of an important competitive force would amount to the
elimination of an important competitive constraint which, in turn, would justify a finding of a significant impediment
to effective competition.”

Para 174: It follows that the Commission made an error of law and an error of assessment, in recital 326 of the contested
decision, in finding that an ‘important competitive force’ does not need to stand out from its competitors in terms of
impact on competition, particularly in so far as such a position would allow it to treat as an ‘important competitive force’ any
undertaking in an oligopolistic market exerting competitive pressure.”
III. 4(b) Non-Horizontal
Concentrations: Non-
Coordinated Effects
Non-Horizontal Concentrations: Non-Coordinated
Theories of Harm
Vertical Concentrations – different levels of supply chain:
 Input Foreclosure – excluding rivals through limiting access to inputs.
 Customer Foreclosure – excluding rivals through limiting access to
infrastructure/retailers/distributors and thus consumers.
Conglomerate Concentrations – neither horizontal nor vertical:
 Foreclosure of rivals through tying/bundling complementary products.
All Same test: 1) Ability to foreclose; 2) Incentive to foreclose; 3)
Overall impact on competition.
Both covered in the Commission’s Guidelines on Non-Horizontal
Mergers [2008] and CMA’s Merger Assessment Guidelines [2010] –
again, apply the guidelines!
Vertical Non-Coordinated Theory of Harm I:
Input Foreclosure
Access of downstream
More Expensive
Input
Input rivals to upstream inputs
denied, restricted or
degraded

Producer Producer Producer

A B C
↑£↑

Consumers
Vertical Non-Coordinated Theory of Harm II: Customer
Foreclosure
Producer Producer Producer
A B C
Access of
upstream rivals
to downstream
outlets
More Expensive
Distributor Distributor restricted

↑£↑

Consumers
Vertical Non-Coordinated Effects
Question 1: Ability to Foreclose?
Essentially, extent of market power in upstream supplier / downstream
outlet market:
 Significance of:
 input for downstream product (critical component, significant cost
factor)?
 outlet and size of customer base for upstream product?
 Alternative suppliers and outlets? Costs of switching?
 Rival suppliers/outlets less efficient, more expensive, less preferred,
capacity-constrained, diseconomies of scale?
Vertical Non-Coordinated Effects
Question 2: Incentive to Foreclose?
Would it be profitable for the merged entity to foreclose?
 Would the losses in upstream input sales / not stocking upstream rivals
in downstream outlet outweigh the profits from foreclosure of rivals?
 Will the merged entity capture all of the customers from excluded
rivals?
 Capacity constraints:
 Input: is the downstream entity unable to expand production to use
input and take customers from rivals?
 Outlet: is the upstream entity unable to expand production to
attract customers of rivals?
 Would the conduct undertaken be in breach of competition law?
Vertical Non-Coordinated Effects
Question 3: Overall Likely Impact on Effective Competition
Negative Effects Mitigating or Positive Effects
 Merged entity forecloses rivals and  LEAVE UNTIL PART 4(d):
increases own prices. countervailing buyer power, upstream
entry, efficiencies?
 Merged entity increases rivals’ costs
 Possible efficiencies from vertical
and consumer prices.
integration:
 Elimination of double-marginalisation
 Increased barriers to entry – potential
– lower consumer prices?
competitors lack access to inputs  Better coordination of upstream and
/outlets (or have higher operating downstream operations, lower costs.
costs) so need to enter both upstream  Align incentives: investments in new
and downstream markets at same products, processes, marketing.
time.
e.g. Vertical Non-Coordinated Effects
M.4854 TomTom/Tele Atlas [2008]
Ability to foreclose access to input:
 TA market power (50% share).
 Digital maps as critical component
of satnav devices.
No incentive to foreclose access to
input:
 Low switching costs to Navteq.
 Garmin, main TomTom rival, already in 8-year supply contract with TA so
unable to raise map prices.
 Substantial loss of upstream licensing profits would not be compensated
by increased downstream sales.
e.g. Vertical Non-Coordinated BST
Sufficient
Customers?
Consideration of both input and
customer foreclosure is common.
M.4389 - WLR/BST [2007] (CD): WLR
(airbag producer) acquires BST (airbag fabric
producer). WLR
1. Input foreclosure for other airbag
producers? No ability (main customers are
strong, have own in-house fabric production)
or incentive (much more fabric produced by
BST than WLR can use). Sufficient
Inputs?
2. Customer foreclosure for other fabric producers? No ability as plenty of other
customers (WLR only had 15-25% of EU demand for fabrics) and its fabric rivals
were thus diversified.
Conglomerate Non-Coordinated Theory of Harm
Market 1 Market 2

merger
Highly desired Less desired
Rival product
product product

Customers wanting to acquire products from both market 1 and 2

Leveraging market power from market 1 into market 2 to foreclose rivals.

Conglomerate Non-Coordinated Effects
Question 1: Ability to Foreclose?
 Is it possible to engage in:
 Contractual tying – contractually requiring purchasers to take both products?
 Technical tying – where the two products only work together?
 Pure bundling – where the products are sold together in fixed quantities?
 Mixed bundling – making it cheaper for both products to be purchased
together?

 Significant market power in one of the product markets (i.e.

many customers view as especially important with few
alternatives)?
 Is there a large common pool of customers who tend to buy both
/ favour one-stop shopping?
Conglomerate Non-Coordinated Effects
Question 2: Incentive to Foreclose?
Would it be profitable for the merged entity to engage in
tying/bundling?
 Would the costs of bundling/tying outweigh the profits from
increased market shares/foreclosure of rivals?
 Is there profitable overlap of customer demand for both
products?

 Will the desirability of the tying product be harmed by

customers refusing to purchase both?
Conglomerate Non-Coordinated Effects
Question 3: Overall Likely Impact on Effective Competition
Negative Effects Mitigating or Positive Effects
 Merged entity forecloses rivals and  LEAVE UNTIL PART 4(d):
increases own prices. countervailing buyer power, upstream
entry, efficiencies?
 Deterring potential competitors from
 Efficiencies:
entering either market – reduced
 Economies of scope (reduced
profitability; need to enter multiple
costs from producing in related
markets to compete.
product markets).
 Lower sales and distribution
costs.
 Compatibility and quality
assurance of products.
Conglomerate Non-Coordinated Foreclosure
M.6281 Microsoft/Skype [2011]:

1. No incentive to degrade interoperability of

skype with rival OSs (Android, iOS) –
commercial value of skype is in as many
people using it as possible (network effects).
2. No incentive to degrade interoperability of rival communications software
on Windows – consumers already use multiple and would increase
reliance upon mobile video calls (e.g. facetime), harming skype.
3. Not likely to mixed bundle Windows and skype as that would require an
actual price to be charged for skype – unlikely to do.
Unconditional clearance at phase I
Conglomerate Non-Coordinated Foreclosure
M.5984 Intel/McAfee [2011] (CD):
Commission cleared concentration between Intel (CPU
processing firm) and McAfee (security technology)
subject to commitments.
Like Microsoft/Skype, possibility for degradation of Intel
CPUs with other security systems and technical tying (embedding MA in
Intel CPUs).
Unlike MS/Skype found that the merged entity might have incentives to
embed M in Intel chips, and could have the effect of foreclosing other
security systems.
Cleared at phase I with commitment to ensure interoperability and provide
all necessary information to rivals.
IV. 4(c) All
Concentrations:
Coordinated Effects
Coordination in Oligopoly Markets

A B C
Barriers   Barriers
to Entry 33% 33% 33% to Entry
↑£↑ ↑£↑ ↑£↑

Customers with stable demand

In certain markets, it may be possible for competitors to raise prices/limit output/share markets
in parallel without any explicit collusion between them. Likely where:
 Few firms of roughly equal size and nature  Homogenous products with little branding or
(i.e. similar cost structures, vertical innovation.
integration).  Substantial barriers to entry.
 Market transparency.  Stable demand from weak customers.
Importance of Merger Control for Coordinated Effects
Very difficult to reach parallel pricing in oligopoly markets through
other two parts of competition law.
No evidence of explicit collusion but parallel price rises as a concerted
practice for Art 101/ Chapter I?
 “Dyestuffs” [1972] (CJEU): “parallel behaviour may not by itself be
identified with a concerted practice”.
 “Wood Pulp II” [1993] (CJEU): “parallel conduct cannot be regarded as
furnishing proof of concertation unless concertation constitutes the
only plausible explanation for such conduct”. And one explanation was
that the wood pulp market behaved like an oligopoly market.
Importance of Merger Control for Coordinated Effects
Abuse of dominance “by one or more undertakings” under Article
102/Ch II?
A position of collective dominance can be found when there are
“economic links”:
 Links can be explicit e.g. strict direction of business practices through
a trade association or prescriptive contracts– liner conferences cases.
 Links can be the market structure of a tight oligopoly (Gencor
[1999] (GC) and Compagnie Maritime Belge [2000] (CJEU)).
But the abuse: excessive pricing?
 Difficulty of enforcement (see lecture 7).
 Right to find a natural consequence of oligopoly markets “abusive”?
Better to prevent oligopolistic collective dominance ex ante than prohibit ex
post: merger control.
The Airtours Factors
M.1524 Airtours/First Choice [1999]; T-342/99 Airtours v Commission [2002]
GCEU annulled the Commission’s prohibition of the acquisition of First Choice
by Airtours on the UK market for short-haul foreign package holidays. GCEU
reiterated the factors for consideration of coordinated effects [para 62]:
19%
1) Sufficient Transparency: Each member must be able to know what the
others are doing to monitor deviations from the common policy.
2) Incentives to Continue: the oligopoly must be sustainable, requiring
some credible form of retaliation to deter members from deviating. 15%
3) Ineffective Response: the foreseeable reaction of current and future
competitors and customers must not jeopardise the results of the common
policy.
20%
Note: C-413/06P Bertelsmann and Sony [2008]: [para 125] “In applying
those criteria, it is necessary to avoid a mechanical approach involving the
separate verification of each of those criteria taken in isolation, while
taking no account of the overall economic mechanism of a hypothetical tacit 30%
coordination.”
Coordinated Effects in the Guidelines

Commission Guidelines on Horizontal

Mergers [2004] [paras 39-57] and Guidelines
on Non-Horizontal Mergers [2008] [paras 79-
90, 119-121] translate this into four factors:

1) “Reaching Terms of Coordination”

2) “Monitoring Deviations”

3) “Deterrent Mechanisms”
4) “Reaction of Outsiders” [leave until
4(d) – CBP, Entry]
1) Reaching Terms of Coordination
Whether the nature of the market makes coordination reasonably
possible (see generally slide 39 oligopoly parallelism), e.g.,:
 Fewer firms - M.1016 Price Waterhouse/Coopers & Lybrand [1999]:
“collective dominance involving more than three or four suppliers is unlikely
simply because of the complexity of interrelationships involved, and the
consequent temptation to deviate; such a situation is unstable and untenable
in the long term.”
 Simple, homogenous product - M.1383 Exxon/Mobil [2004]: petrol.
 Similar cost structures - M.4141 Linde/BOC [2006]: similar shares and
levels of vertical integration on various gas-production markets.
 Stable Demand - M.4706 Superior Essex/Invex [2007]: infrequent and
valuable large orders from buyers made coordination in wire production
unlikely.
 Elimination of a Maverick – M.7758 Hutchison 3G Italy/WIND/JV [2016].
2) Ability to Monitor - Transparency
Incentives to stick with and not undercut coordinated position
depends upon sufficient transparency for firms to monitor
deviations.
Transparency aided by, e.g.:
 Fewer firms (not always - M.1383 Exxon/Mobil [2004]: 7 firms in Lux.).
 Public prices / public trading.
 Simple pricing and lack of discounting (reason for CJEU rejecting
coordinated effects in Bertelsmann [2008]).
 Simple product (not met with bus production tenders in M.2201
Man/Autwärter [2002]).
 Absence of confidential commercial negotiations.
 Stable cost conditions.
 Use of “most-favoured nation” or “meeting competition” clauses.
 Participation in joint ventures - M.4141 Linde/BOC [2006].
3) Ability to Deter and Punish Deviations
Incentives to stick with coordinated position also depend upon a
credible, rapid, and certain mechanism for punishing deviations.
Could be, e.g.:
 Simple cessation of profitable coordination
 Retaliatory price war (but requires excess output capacity)
o Could be on other markets - M.1628 TotalFina/Elf [2001]: possible
aggressive reaction on different stretches of motorway.
 Exclusion from profitable cooperation opportunities:
o M.3333 Sony/BMG [no 2] [2007]: exclusion from compilation
albums, but unlikely to be credible through loss of sales.
o M.4141 Linde/BOC [2006]: blocking strategic decisions and
hindering profitability of joint ventures between coordinating firms.
 Poorer access to essential inputs/networks/IP held by a rival.
Non-Horizontal Concentrations and Coordinated Effects?
1) Reaching Terms of Coordination
 Non-coordinated foreclosure of rivals reduces number of firms to lower levels.
 Vertical integration may increase symmetry and decrease uncertainty between
firms (same internal decision-making, cost structures).
2) Monitoring Deviations
 Non-coordinated foreclosure of rivals makes monitoring of fewer firms easier.
 Contact with upstream/downstream part of vertically integrated entity as focal
point for monitoring.
3) Deterrent Mechanisms
 Vertically integrated firm could use input/customer foreclosure to discipline firms
not following the coordinated price as a crucial supplier/buyer.
 Rival conglomerate firms with multi-market contact could discipline (e.g. price
wars) those who break coordination on other markets.
V. 4(d) Mitigating Factors
Factors Making a SIEC Less Likely

 Countervailing Buyer Power

 Entry
 Efficiencies
Countervailing Buyer Power
Spare capacity
Potential Producer Producer Producer to satisfy
Entrant X A B C demand of
Retailers?

Long-term
↑↑£££↑↑
Divert purchases?
contract to Will smaller
entice Retailer retailer also
entrant? Retailer A B benefit from A’s
strength?
Horizontal Guidelines: [para 64] “Countervailing buyer power [is]… the
bargaining strength that the buyer has vis-à-vis the seller in commercial
negotiations due to its size, its commercial significance to the seller and its
ability to switch to alternative suppliers.”
Countervailing Buyer Power: How?
Ability to undermine - or threaten to undermine - post-merger exercises
of market power through, e.g.,…
 Switching to rival suppliers at low  Reducing non-essential
cost. purchases.
 Sponsoring new market entry or  Aggressive competition in
rival expansion through giving a markets where the
long-term purchasing contract. producer/buyer directly compete.
 Vertically integrating upstream to  Pressurising the supplier through,
take over production. e.g., delaying purchases, time-
 Reducing purchases of products limiting contracts.
on other markets where merged  Delisting their products or giving
entity lacks market power. less favourable positions in store.
Countervailing Buyer Power: Incentives and Effect?
Not just the ability but incentive to exercise buyer power
[Horizontal Guidelines Para 66]:
 Reluctance to exercise if rival buyers will also benefit.
 Risk that buyers will just pass cost increases onto final customers.
 More likely to constrain if final customers are very price sensitive or
retail market is competitive.
Commission will not accept CBP claims if they only shield
certain buyers from post-merger market power, with others
still paying higher prices [Horizontal Guidelines Para 67].
 A particular risk if it is possible for the merged entity to engage in price
discrimination.
Countervailing Buyer Power
e.g. M.1225 Enso/Stora [1998] 50-70%
E/S would dominate market for liquid packaging
board, but buying market dominated by TP. Enso Stora
Commission found relationship of mutual
dependence.
Although switching very long and costly, TP buys
V 60-80%
50% of E+S output so they cannot lose its
custom.
TP also likely to sponsor entry or vertically
integrate due to expertise.
CBP suggested correct to
Two smaller purchasers also buy enough to
clear with commitments.
exercise considerable power over E/S, which will
not want to depend entirely on TP.
Countervailing Buyer Power
e.g. M.5658 Unilever/Sara Lee Body Care[2010]
Commission concerned largely about non-
coordinated effects in female deodorant
market, finding price increases likely.
Parties: major retailers have influence
through negotiating worse product placement,
V
delisting, or launching private labels.
Rejected: retailers would have little
incentive to not pass on price increases,
consumers don’t like private labels, no
Lack of CBP suggested need
business sense to stop “must-stock” brands. to secure commitments.
Impact of Entry on Post-Merger Market Power

Firm A Firm B Firm C Low

Firm D
45% 45% 10% Barriers
to Entry
Capacity
↑↑£££↑↑ Constraints

UK Customers French Customers

If there are low barriers to entry and outside firms have an

incentive to quickly respond to post-merger price rises or output
limitations, post-merger anticompetitive effects
are unlikely to materialise.
Entry
Guidelines on Horizontal Mergers [paras 68-75]

Three aspects:
1. Likelihood of entry:
a. Extent of barriers to entry.
b. Existence and incentives of potential
competitors.
2. Timeliness: case-by-case, but usually within 2 years.
3. Sufficiency: substantial enough to deter and defeat
post-merger anticompetitive effects.
Entry
E.g. M.833 The Coca-Cola Company/Carlsberg A/S [1997]
Creation of FFJV for bottling and distributing their
various carbonated soft drinks brands in Nordic
countries, particularly giving joint control over 50% of
upstream brands and downstream bottling in Denmark.
Major barriers to entry: brand recognition, access to
distribution opportunities (e.g. network, shelf space),
pre-existing commercial relations, advertising sunk
costs. Evidence of little previous entry except by major
international brands.
Clearance conditional on divestiture of 2 products.
Entry
E.g. M.5830 Olympic/Aegean Airlines (I) [2011]
Proposal for investors in A and O to jointly control both airlines together.
Commission prohibited the concentration: 90-100% on Greek domestic
flight routes, 30-40% of international flights out of Athens, very close
competitors, elimination of potential competition on Athens-Corfu route.
Entry unlikely: need base at Athens airport (expensive, congested),
recognised brand image, significant sunk cost, need access to connecting
traffic and Greek travel agents.

[Commission also rejected failing firm…]

Entry
Beyond barriers, likelihood of entry also dependent upon existence of
potential competitors and their incentives. Commission places emphasis on
evidence of intent to enter, e.g.:
 M.2396 Industri Kapital/Perstorp (II) [2001]: Although rival
formaldehyde producers could supply Danish market, they told
Commission they wouldn’t due to transport costs.
 M.2609 HP/Compaq [2002]: 85-95% share for personal digital
assistants but launches announced by Toshiba and Acer.
 M.5335 Lufthansa/SN Airholding [2009]: substantial barriers
to entry and Air Berlin unlikely to enter Brussels-Germany
routes due to incentives – didn’t fit its business model and
insufficient demand to make profitable.
Efficiencies
Potential consumer benefits of mergers that counteract
anticompetitive effects, e.g.:
Horizontal Guidelines Non-Horizontal Guidelines
 Cost savings (e.g. economies of  Elimination of double
scale) leading to lower prices marginalisation and transaction
(particularly variable costs). costs.
 New/improved products through  Multi-level coordination leading to
the combination of innovative products, processes, or
complementary assets and selling arrangements.
expertise.  Economies of scope and reducing
 Improved R&D (though note customer transaction costs
seminar 6 on innovation through portfolios (one-stop-
competition). shopping).
Efficiencies
Commission’s analysis of efficiencies requires them to be:
1. A Benefit to Consumers:
 Must be an incentive to pass efficiency on to consumers.
 Must be timely.
 The more substantial the negative impact of the merger, the
greater. the degree of efficiencies necessary (“sliding-scale”
approach).
2. Merger-Specific:
 Direct consequence of the proposed merger.
 No less anticompetitive alternative.
3. Verifiable:
 Reasonable certainty as to likelihood and extent.
 Quantitative data or a clearly identifiable positive impact.
Efficiencies
At EU level, efficiencies have never “saved” a merger that would
otherwise have been prohibited by the Commission

Voluntary information: sometimes not raised by the parties at all (fear

of admitting “weak case” or the “efficiencies offence”?).

If raised, Commission usually denies them or accepts them as

additional confirmation for its clearance of the merger or accepting
remedies.

Material difference in permitting mergers at national level including in

the UK: Global/GCap [2008] (UK OFT).
Efficiencies
E.g. Example where Efficiencies Confirmed Lack of Concerns:

M.3664 Repsol Butano/Shell Gas [2005]: Acquisition of Shell

gave Repsol the ability to compete more effectively in
Portuguese gas market and reduce transport costs.
E.g. Example where Efficiencies Denied, Confirming Concerns:

M.4439 Ryanair/Aer Lingus [2008]: RA claimed substantial

operational cost-saving efficiencies of benefit to consumers
once business model applied to AL. Commission claimed
inability to verify would lead to lower fares, more frequent
flights, or better service. Also not merger-specific: AL could
independently achieve through cost-cutting. No guarantee that
passed on to customers.
VI. Failing Firm Defence
Failing Firm Defence: Positives?
+ Counterfactual and lack of causation – deterioration in
competition would occur anyway through failing firm exiting
market.
+ Shareholders less likely to lose investments.
+ Creditors more likely to be reimbursed vis-à-vis insolvency
proceedings.
+ High costs of bankruptcy avoided.
+ Employees get another opportunity to keep jobs.
+ Productive assets of the firm are not lost from the market.
Failing Firm Defence
Legal test refined through 1990s and early 2000s: M.308 Kali und
Salz/MdK/Treuhand [1994] and C-68/94 and C-30/95 [1998] (CJEU);
M.2314 BASF/Eurodiol/Pantochim [2002].
Horizontal Merger Guidelines: “The Commission considers the following
three criteria to be especially relevant for the application of a "failing firm
defence". First, the allegedly failing firm would in the near future be
forced out of the market because of financial difficulties if not taken over
by another undertaking. Second, there is no less anti-competitive
alternative purchase than the notified merger. Third, in the absence of a
merger, the assets of the failing firm would inevitably exit the market.”
[para 90].
 Burden of proof on notifying parties.
 Can be raised for horizontal and non-horizontal mergers.
Failing Firm Defence

M.5830 Olympic/Aegean (I) [2011] M.6796 Olympic/Aegean (II) [2013]

 Forced out? Parent investor had  Forced out? Heavy losses,

incentives to support, restructuring investor would no longer finance,
options available. restructuring would not save.
 Alternatives? Previous attempts to
 Alternatives? No indication that
searched for another buyer. sell had failed, questionnaires to
possible purchasers revealed no
 Asset Exit? Brand and aircraft credible alternative.
would probably be bought by 3rd  Asset Exit? No other parties
parties. interested in brand or aircraft.
Next Time: Coursework Guidance
31st March 2021