2.5.3. Improvements Due to Trends in the Business Environment

In chapter III, it was shown that the business environment of many companies has fundamentally changed. This holds true for both the supply and the demand side of the market. The value of brands can be subject to quick erosion; consumer loyalty seems to have become fickle in many cases. This means that high market shares can also erode quickly. Predictions concerning future market shares have become virtually impossible. Merger policy should react to these changes, but what is the adequate response? In this section, two proposals how merger policy could take the globalised, and rapidly changing business environment explicitly into account are advanced: one is concerned with the time dimension of the relevant market, the other one with its geographic dimension.

Taking the time dimension adequately into account In a rapidly changing business environment, reliable predictions concerning future market shares have become virtually impossible. But a responsible merger policy needs to take likely developments into account: if today’s high market share resulting out of a merger is not very likely to persist tomorrow, the merger should be passed. Some observers have proposed that the time length that competition authorities should recognise in their decisions should be extended to five or even more years. This is, however, mission impossible: if short-term predictions are impossible, long-term predictions are just as unfeasible.

Drawing on market shares in merger analysis is based on the hypothesis that they can be translated into market power and can thus be used to the detriment of consumers. But what if the equation “high market share = low consumer rent” does not hold anymore? Rapid change induced either by supply or by demand side factors (or by both) can prevent the emergence and the use of market power because it leads to the possibility of unstable market structures. Rapid change is thus the crucial variable. Structure could only be consolidated – and probably used in order to raise price and restrict output – if change is slowed down. Firms with a dominant position might thus have an incentive to try to slow down change. But often, they will not be in a position to be successful in that endeavour: if they have competitors who expect to gain by innovating, they will not be successful. If consumption patterns are subject to rapid change, they will not be successful either.

We thus propose that competition authorities analyse (1) the speed of change in a given industry and (2) who controls the factors that are responsible for rapid change in a given industry. Ascertaining the speed of change in a given industry is, of course, not easy. Counting the number of patents will not do as some innovations never get patented and as new products do not necessarily have to rely on patentable knowledge (SONY created the Walkman drawing on readily available techniques). As already mentioned, rapid change can be due to supply-side factors, but also to demand-side factors. Demand side factors are certainly not beyond any influence from the supply side (marketing), but are difficult to control. In some cases, control over necessary inputs (resources, patents, public orders etc.) can seriously constrain the capacity to be innovative. In such cases, merger policy should be restrictive. If parties willing to merge do, however, not control the process, the merger should pass even if a highly concentrated market structure is the – temporary – result.

The Guidelines on horizontal mergers deal with the issue of markets in which innovations are important. Notified mergers can be prohibited if the two most innovative firms want to merge even if they do not command important market shares. According to the Commission, mergers between the most innovative firms in a market can lead to a substantial impediment of effective competition. But there is no empirical evidence which would prove that mergers between innovation leaders do indeed result in a slowing down of the speed of innovation in the market (Orth 2000). At the end of the day, the implementation of this new criterion can mean that leaders in innovation are effectively sanctioned for being “too” innovative. Since innovation is the key to competition in these markets, it would rather be the competitors than competition, which is protected by this proposal.

Taking the geographic dimension adequately into account In chapter III, it was shown that deregulation and privatisation have occurred on a worldwide scale. It was concluded that international interaction costs have in many industries been reduced to such an extent that one can talk of truly global markets. This does not seem to be adequately reflected in merger policy practice. Very often, markets are still delineated on a much narrower scale.

What is crucial for the geographical distinction is the possibility of bordercrossing trade, in particular imports. It is thus insufficient to look at actual trade statistics. What should, instead, be taken explicitly into consideration is the sheer possibility of trade. This can be ascertained by analysing the relevant transport costs as well as costs due to state-mandated barriers to entry. This procedure thus explicitly acknowledges the close relationship between defining the relevant market and ascertaining the relevance of barriers to entry.

Predictability could be further advanced if the Porter classification of completely globalised, partially globalised, and regional markets were taken into consideration by the Commission in the definition of geographical markets. If the firms knew ex ante how their industry was classified, predictability would be greatly increased.