Merger Review: The Ex Post Evaluation of Mergers
London, England
1 March 2005
Hosted By: the Competition Commission
Chair of NERA's European Competition Policy Practice Dr. Mark Williams spoke at a seminar hosted by the Competition Commission. Chaired by Professor Paul Geroski, chairman of the Competition Commission, the event was organized to present a PricewaterhouseCoopers report on the findings of a study commissioned by the Competition Commission (CC), Office of Fair Trading (OFT) and Department of Trade and Industry.
The report provided an ex post evaluation of ten mergers that had been cleared by the Competition Commission. Between 1991 and 2002, 120 mergers were referred to the Competition Commission, invariably because of competition concerns. Of these, 29 were cleared without remedies, in the belief that no lessening of competition would arise from the merger. The study considered 10 of these 29, and broadly concluded that competition had not reduced in any of these markets.
Dr. Williams was invited to act as Discussant of the report. He began by noting that the authorities seek to avoid Type 1 errors (prohibiting innocent mergers) and Type 2 errors (allowing anticompetitive mergers). By its nature, the present study could only investigate the Type 2 question. However, to the extent that false prohibitions inhibit mergers, Type 1 errors can deny the economy synergies and efficiencies arising from merger activity. Other methodological issues included potential sample selection bias and the fact that the study compared the post-merger situation with the pre-merger situation. The latter would be problematic to the extent that the relevant counterfactual would have involved an increase in competition if the merger had not proceeded.
A key methodological issue however, concerned the focus of the inquiry. Since the OFT (the Phase 1 authority) looks, in absolute terms, at very many more mergers than the Competition Commission, it is possible that the OFT inadvertently clears more anticompetitive mergers than the Competition Commission -- at least in absolute terms. This issue might however be less serious following the IBA Health case [see link in right-hand column of this page], which further increased the pressure on the OFT to refer mergers raising possible competition issues. Equally, by focusing on mergers that were cleared unconditionally, the study did not consider those mergers cleared with remedies. However, since such cases are, almost by their nature, on the borderline -- these might also be the cases most worthy of ex post analysis as to whether the Competition Commission got it right or wrong.
Dr. Williams also responded to various points on substantive issues in merger control. In regard to market definition, he noted that in some of the CC cases, they had accepted as defenses "competition from outside the market." This was interpreted as showing that the CC adopted a realistic approach to assessing competition, rather than a rigid approach based on market definition. This was consistent with recent approaches to market definition as a frame of reference rather than a precise delineation. On the question of buyer power, he noted that this involved complex analysis of game theory models of bargaining. Since these were themselves often indeterminate, the difficulties that the Commission had been perceived to be facing in this area were entirely understandable.
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