After having delineated the relevant market, an assessment has to be made whether a merger would significantly impede effective competition and in particular whether it would create or strengthen a dominant position. As already mentioned in the introduction to this chapter, our discussion here will be confined to the way the Commission has been assessing dominance in the past. According to the European Merger Regulation, mergers that create or strengthen a dominant position that prevents effective competition from taking place in the Common Market (or in a substantial part of it) need to be declared as incompatible with the Common Market [Art. 2 (3) MR].
The European Merger Regulation does not provide an explicit answer to the question of when a dominant position is created or strengthened. The notion of a dominant position was around long before the Merger Regulation was passed. It is part of Art. 82 TEC. There are a number of decisions by the Court of Justice which the Commission explicitly recognises in its own decisions. According to the Court, a firm is considered to have a dominant position if it has the capacity to develop market strategies independently from its competitors. This implies that the firm has at its disposal some leeway that is not controlled by either its competitors (horizontal aspect) or by its suppliers or consumers (vertical aspect).
This means that the Commission has to analyse a number of aspects in order to assess whether a firm will command a dominant position. The Regulation [Art. 2 (1) lit. b MR] explicitly mentions the economic and financial power of the firms participating in the merger, the options available to suppliers and customers, their access to supply and outlet markets, legal and factual barriers to entry, the development of supply and demand as well as the interests of intermediate and final consumers. In assessing horizontal mergers, the Commission has regularly analysed four structural factors (European Commission 1992, 408; Neven/Nuttal/Seabright 1993, 101; and Schmidt/Schmidt 1997, 184):
(1) The market position of the merged firm;
(2) The strength of remaining competition;
(3) Buyer power;
(4) Potential competition.
With regard to the market position of the merged firm, the Commission has been reluctant to publish degrees of concentration that it considers to be critical. It seems nevertheless possible to form various classes of market shares. If the combined market share is below 25%, single dominance can regularly be excluded (recital 15 of the old Merger Regulation, now recital 32). With a market share of up to 39%, it will only be assumed rarely. If market shares are between 40 and 69%, the assessment will have to take the relevance of actual and potential competition explicitly into account. But generally, market shares of 40% and more are interpreted as a strong indication that a dominant position might exist (Jones/González-Diaz 1992, 132.). Besides aggregate market shares, the financial strength of the participating firms, their technological know-how, existing capacities, their product range, their distribution nets and long-term relationship with important customers are taken into account. In evaluating the market shares, the relevant market phase is explicitly recognised. High market shares in high-technology growth sectors are thus evaluated less critically than the same market shares in markets with slow growth.
The strength of remaining competition is evaluated by drawing on the market shares of the remaining competitors, their financial strength, their know-how and production capacities as well as their distribution nets. In case, a new market leader emerges as the result of the merger, the difference in market share between the merged firm and the next largest competitors is considered. Additionally, the number of remaining competitors is counted in order to assess the alternatives in being supplied with the relevant products.
In ascertaining buyer power, the Commission focuses primarily on the bargaining strength of the other side of the market. It is assumed to have considerable bargaining power passed relatively small market shares (5-15%).
Potential Competition is recognised if there is clear evidence for a high possibility that quick and substantial entry by either established competitors or entirely new firms will take place. Potential competition must be perceived as a threat by the merged firm in the sense that it is sufficient to prevent it to act independent from competitive pressure post-merger.
Moreover, the Merger Regulation prescribes the Commission to take the development of technological as well as economic progress into account as long as it serves the consumer and it does not prevent competition [Art. 2 (1) lit. b MR]. This element has been interpreted as meaning that efficiency aspects should be taken into consideration in evaluating proposed mergers (Noel 1997, 503; Camesasca 1999, 24). But this element is only taken into consideration if the notifying parties claim that their merger serves technological or economic progress. It is the firms who carry the onus of proof. This criterion was checked in AÉROSPATIALEALENIA/
DE HAVILLAND, GENCOR/LONRHO and NORDIC SATELLITE DISTRIBUTION. In all these cases, the Commission believed the efficiency gains as insufficient. In the history of European Merger Regulation, not a single case has been passed in which explicit mention of the positive technological or economic effects was made. Efficiency considerations have thus only played a marginal role in the Commission’s decision-making practice (Schmidt 1998, 250).
In assessing dominance, market shares are still the single most important criterion, although the Commission insists that market shares as such are not sufficient for the assumption of a dominant position. This would be the case, if the other criteria spelt out above reduce the relevance of market shares. The Commission in its decisions in ALCATEL/TELETTRA, MANNESMANN/HOESCH and MERCEDES- BENZ/KÄSSBOHRER stressed the compensating effects. What is problematic with these offsetting factors is the enormous leeway that the Commission has in applying and interpreting them. This is especially noteworthy with regard to the evaluation of potential competition. In some cases, it was liberally assumed to be relevant (MANNESMANN/VALLOUREC/ILVA, MERCEDES-BENZ/KÄSSBOHRER, SIEMENS/ITALTEL), in others, it was interpreted quite restrictively (RTL/VERONICA/ ENDEMOL, ST. GOBAIN/WACKER CHEMIE/NOM, VOLVO/SCANIA and METSO/SVEDALA). This enormous leeway has thus led to inconsistencies in the Commission’s decisions.
The revised Merger Regulation (139/2004) has introduced a new substantive criterion in order to ascertain the compatibility of a notified merger with the common market. Before the revision, a merger that created or strengthened a dominant position had to be prohibited. This criterion was extended through the revision. Now, mergers that threaten to significantly impede on effective competition won’t be accepted (SIC test for short). The Commission has thus moved most of the way towards the Substantial Lessening of Competition (SLC) test prevalent in Anglosaxon countries. That the EU uses a different acronym for the new test seems to be an issue of semantics rather than of substance. The introduction of the SIC test has substantially increased the Commission’s power to prohibit notified mergers. It is the purpose of the new criterion to include mergers that do create additional market power but that do not quite reach the threshold of a dominant position yet. In its Guidelines, the Commission names a number of factors whose presence would lead it to expect that competition would be substantially impeded. The Commission proposes to distinguish between coordinated and non-coordinated effects.
Following the enactment of the Guidelines on horizontal mergers, market shares as an important criterion for ascertaining whether a proposed merger is compatible with the common market have gained additional ground. This implies a further strengthening of the very traditional Structure-Conduct-Performance paradigm. The introduction of the Hirschman Herfindahl Index attests to that. According to the Commission, a merger is supposed to raise serious doubts if it leads to an aggregate HHI value of 2000 and if the merger leads to an increase in the value of the indicator of at least 150 points. Although these threshold values are above those used in US merger control (1800, 100), they might well lead to a tougher merger policy. Suppose two companies with a market share of 8 and 10 per cent want to merge and there are four other companies that each hold 20.5 per cent of the market. In that case, the post-merger HHI would amount to 2005, its increase would be 160. The Commission would thus raise serious doubts of the proposed merger being in accordance with the Merger Regulation. Notice that recital 32 of the MR declares that mergers that create a combined market share of below 25% are regularly not suspected to be problematic. In the example, a new firm with a combined market share of only 18% would make the Commission raise serious doubts. This means that the Regulation and the Notice are partially contradictory.
What are the possible effects of switching to SIC on predictability? It seems to make sense to distinguish two cost categories that can accrue as a consequence of the switch: (1) costs that arise due to reduced predictability during the transition to the new test and (2) costs that arise because predictability is lower under the new test even after the transition uncertainty has vanished.
It is certain that transition costs will accrue. These arise because the Commission has leeway in interpreting the new Regulation. This also holds for the Court of First Instance and the European Court of Justice. Ex ante, it is unclear how much precedence will be worth under the new Regulation. Firms willing to merge will therefore have problems predicting the likely actions of the European organs. If the costs of switching to another Regulation are higher than the discounted value of the improvements brought about by the new Regulation, than it would, of course, be rational not to switch criteria.18 It is argued in this section that predictability of European merger policy might not only suffer due to transition costs but due to a lower level of predictability even after transition.
Many people believe that European merger policy will become more restrictive after the switch to the SIC-test whereas the Commission insists that nothing substantial will change and the switch only serves to increase legal certainty. The competing expectations concerning the future of European merger policy are part of the transition costs just mentioned. We believe that the new Regulation does indeed contain the possibility to establish a more restrictive merger policy:
– Non-coordinated effects can now be taken into account even if they do not create or strengthen a dominant position. One could even argue that this amounts to an introduction of oligopoly control.
– Non-coordinated effects will apply to all kind of oligopolies. The Regulation does not constrain its application to “highly concentrated” oligopolies or the like.
– Numerals 61 to 63 of the Merger Guidelines are entitled “Mergers creating or strengthening buyer power in upstream markets”. This might lead to an increase in the number of cases in which vertical or conglomerate issues are named as a cause for concern.
– There has even been discussion whether the change of the substantial test will lead to a lowering of the threshold with regard to the SSNIP value used.
What is relevant with regard to predictability is not that merger policy will necessarily become more restrictive but simply that such a possibility exists and that it is unclear what will, in fact, happen.
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