The Increasing Use of Empirical Methods in European Merger Enforcement: Lessons from the Past and a Look Ahead
28 February 2004
By Dr. Lawrence Wu and Dr. Mark Williams et al.
In January 2004, the European Commission published new Guidelines on the analysis of horizontal mergers and an important revision to Article 2 of the EC Merger Regulation. Under the new EC Merger Regulation, the Commission articulated a new test under which it will review the competitive implications of proposed mergers and acquisitions. The new test moves merger analysis in Europe closer to that in the U.S.
Under the new substantive test, a transaction would be prohibited if it "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." By focusing on how a proposed merger may significantly impede effective competition, the new test recognizes the potential that, after the merger, the merged entity may be able to raise prices unilaterally and not in coordination with its competitors. In the U.S., this theory of competitive harm is called "unilateral effects." The revised EC Merger Regulation therefore bridges a perceived gap in the scope of the "dominance test," which was the governing standard in the past. Prior to the change, the Commission would challenge a transaction if it was likely that the merged entity would have a "dominant position" in the marketplace.
Whether the merging parties will be in a position to increase prices post-merger raises questions that can often only be evaluated with an empirical analysis. Thus, with the change in the EC Merger Regulation, it is likely that the nature of the economic analysis will change for many proposed transactions. In other words, given the empirical nature of a unilateral effects inquiry, it is likely that there will be more time devoted to quantifying the potential price effects of a transaction. If European merger enforcement will involve more empirical economics, what kinds of statistical and quantitative analyses can we expect in the future? The lessons from several recent EC merger investigations point the way.
The case studies that are described in the article are important because they illustrate how the Commission has been refining and extending its analysis of unilateral effects, even before the new Merger Regulation was published. The examples also illustrate the kinds of empirical methods that are likely to be used with increasing frequency as it evaluates the potential for unilateral effects under the new regulation.
There is no question that quantitative economic methods will play an increasingly important role in European merger enforcement. However, while these empirical tools are important, it is unlikely that the use of these tools will replace the understanding that can only come through a thorough review of the documents and other evidence that shed light on the nature of competition in the marketplace. After all, an empirical study must be grounded in the market facts if it is to be relevant, reliable, and useful in yielding robust conclusions regarding the likely competitive effects of a proposed merger.
