2. SOME THEORETICAL CONSIDERATIONS CONCERNING PREDICTABILITY

Predictability can be defined as the capacity to make predictions concerning the actions of others that have a high chance of turning out to be correct. In economics, the term uncertainty is much more frequently used than the term predictability. The two terms are closely intertwined: the absence of predictability can also be described as the presence of uncertainty. As markets become increasingly turbulent, the predictability of the framework established and implemented by politics has become even more crucial. Merger policy can, however, also increase uncertainty if competition authorities are granted too much discretionary power and if they draw on various economic theories eclectically. It has been shown empirically that the stability of the framework within which companies act is decisive for economic growth and development. This includes, of course, the predictability of competition policy.

A market economy is best described as a system of decentralised exchange often by millions of actors who are free to set their own goals. Ideally, exchange based on voluntarily entered-into contracts indicates that the parties involved expect to bebetter off as a result of the contract, otherwise they would not have consented to it in the first instance. But some contracts that make the participating parties better off might have welfare-reducing effects on other, third parties. From an economic point of view, the function of legislation in a market economy consists in (a) making welfare-enhancing exchange as easy as possible, and in (b) making welfare-reducing exchange as difficult as possible. Antitrust or competition rules – two terms that will be used interchangeably – play an important role with regard to these two functions.

Since market economies are often made up of millions of autonomous decisionmakers, uncertainty is a constitutional condition of such systems. We cannot with any certainty predict the actions of millions of other actors. Uncertainty can, however, have detrimental effects on economic growth and development: it is connected with a short time-horizon, which reduces the propensity to invest as well as the readiness to specialise and to contribute to a welfare-enhancing division of labour. One function of legislation thus consists in reducing the degree of uncertainty. It has been argued (Kant 1797/1995, Hayek 1960, 1973) that the best way in which the state can contribute to the reduction of uncertainty consists in passing universalisable rules. These are rules that are (1) general, i.e., they apply to a multitude of cases in which a multitude of actors will be engaged, (2) abstract, i.e., they are formulated negatively and thus do not prescribe a certain behaviour but simply prohibit a finite number of actions, and (3) certain, i.e., interested individuals can know whether a certain action is within the legal domain or not.

Universalisable rules do not eliminate uncertainty completely because they do not prescribe actors what to do. The dynamics of market economies depend on the possibility of individuals to act innovatively and innovations will by definition be unexpected by many. Universalisable legislation is a necessary but not a sufficient condition for a high degree of predictability. A high degree of predictability will only result if newly passed legislation will be implemented by an administration in a manner that allows interested individuals to anticipate the administration’s decisions; if courts are involved, then the same applies, of course, to the courts’ adjudication. This was already recognised by James Madison (1788/1961), who wrote in the 37th of the Federalist Papers: “All new laws, though penned with the greatest technical skill and passed on the fullest and most mature deliberation, are considered as more or less obscure and equivocal, until their meaning be liquidated and ascertained by a series of particular discussions and adjudications.” Formulated differently: A system of rules whose interpretation is perceived as unsystematic or erratic is almost as bad as not having a rule system in the first place; hence the particular importance of case law.

Lack of predictability in competition policy can also be detrimental to the realisation of welfare gains. If market actors are uncertain as to what competition rules mean or how they will be interpreted by the competition authorities and/or the courts, a number of negative welfare effects can result: if market actors believe that a merger will not be cleared, mergers whose consummation would allow the realisation of efficiency gains, will not take place. This means that productive efficiency is lower than it could be were the merger carried out. On the other hand, if market actors believe that a proposed merger will be cleared, they might already invest in the
entity to be created as the result of the merger. Prohibition of a merger can, then, be interpreted as a case of disappointed expectations, or: unpredictability of the competition policy as currently implemented.

Decisions on single cases have effects that often go far beyond a single case: they are observed by a multitude of other actors and thus become precedent. Precedent that signals a tough stance on proposed mergers can also be a barrier to the realisation of welfare gains: potentially welfare-enhancing mergers might be discouraged by precedent right from the outset. As just pointed out, this will prevent the realisation of higher levels of productive efficiency. Predictability allows market participants to make predictions concerning the decisions of competition authorities that have a good chance of turning out to be correct. The existence of precedent as such is not sufficient to secure a high level of predictability. Rather, the criteria used by the competition authorities should be as clear-cut as possible. Additionally, the analytical tools used to translate criteria into operational data should be as transparent as possible.

Legal certainty also has a time dimension. For entrepreneurial action in general and for mergers in particular, timing is often crucial. It is therefore not only important to get the right decision at all but to get it in time. In case the merging firms believe that a competition agency interpreted the relevant legislation falsely, the availability of legal remedies that are at their disposal within very short notice can thus be very important. Before inquiring to what degree these essentials of predictability are realised with European merger policy, let us have a quick look at some empirical evidence concerning the role of predictability.