5. PROPOSALS FOR IMPROVING PREDICTABILITY

This section contains a number of proposals that are developed as a consequence of the analysis concerning the current status quo concerning the predictability of European merger policy. These proposals are very general ones and they could entail sweeping changes. They are thus not developed with an eye on the probability of being implemented soon or in a piecemeal manner. Concrete, hands-on proposals will be developed in chapters D and F of this study, explicitly taking the arguments developed throughout the course of this study into account.

The goals to be achieved by a certain policy will influence predictability in a number of ways: first, predictability is a function of the precision with which certain policy goals are described in relevant legislation. It is secondly a function of the number and consistency of goals described there. To give an example: if competition policy is not only to establish and (or) maintain a high level of competition, but is also to protect competitors, small and medium-sized companies, employment rates, a balanced geographical industry structure, etc., lots of trade-offs will have to
be made. A multiplicity of partially inconsistent and difficult to operationalise goals is a sure means towards uncertainty and unpredictability. Therefore, competition policy should be oriented at one single goal, namely the maintenance of a high level of competition. This goal should be spelt out as clearly and precisely as possible.

Given a precise and clear goal of competition policy, a competition agency needs instruments to realise this goal. The instruments must, of course, be rule-based themselves. As discussed above, they should be as universalisable as possible. Universalisable rules guarantee that like cases are treated likewise. They further guarantee that anyone interested in knowing whether a certain action is legal or not is able to ascertain the legality of various actions.

A precise goal and universalisable rules notwithstanding, a competition agency will still have some discretion in making decisions. If it is used in ways that are not understood by observers of the agency, this will, of course, not lead to predictability. In order to achieve predictability, the procedures used by the competition agency should thus be as transparent as possible.

The separation of powers has been a hallmark of liberal societies ever since Montesquieu. There are good reasons for a functional separation of powers, and there is convincing empirical evidence that it has beneficial effects for the affected societies. The missing separation of powers within the European Union is said to be one reason for its current legitimacy problems.7 What is true for the European Union in general is also true for its competition policy: the separation of powers needs improvement. There are a number of reform options: the creation of an independent competition agency is probably the most radical one. Others include the more systematic division of legislative, executive and judicial functions. A number of more specific proposals have been made and this is not the right place to discuss them in any detail.8

Lastly, legal protection that is not granted within a reasonable period of time amounts to the non-existence of legal protection. It is thus important to speed up decision-making within the Court of First Instance. Whether the creation of a specialised competition chamber within the Court of First Instance would be an adequate remedy need not concern us here.

4.1.2. After notification

After a merger has been notified, an average number of 8.4 meetings are held between company representatives and DG Comp officials. Compared to 1993, the number of meetings has considerably increased; Neven et al. then found an average of only 2.5 meetings. At least two interpretations seem to offer themselves: DG Comp staff has become more accessible; this is readily used by merging firms. But it could also be that firms have the impression that it has become more important to plead one’s case personally in order to improve chances for a favourable decision.

European merger policy is often criticised as unpredictable. This critique can also be made with regard to the way the Commission delineates the relevant markets both with regard to product as well as to geographical aspects. In 1997, the Commission published a notice in which it explains how it delineates the relevant market. We wanted to know whether the publication of that notice had been helpful in the sense that it had increased the firm’s capacity to predict the Commission’s decision with regard to the delineation of the relevant market. 56.5% of respondents answered that the Notice had been helpful. This is a majority, albeit not an overwhelming one. We believe that the following conclusions can be drawn from this result:
generally, predictability can be increased by the publication of “notices” in which the Commission explains its own approaches, methods, and procedures. The notices themselves should be as clear and precise as possible in order to elicit even higher approval rates.

Until May 2004, the European Merger Control Regulation did not provide for efficiencies as a possibly offsetting factor. Yet, it could be that in practice they did play a certain role even before the reform of European Merger Policy. And indeed, 62.5% of the respondents indicated that “expected synergies” play a role in their argumentation vis-à-vis the Commission.

Quite a few mergers can only be achieved after the merging parties have promised a number of “remedies” to the Commission. The predictability criterion can also be applied to remedies: If the merging parties correctly anticipate the remedies to be demanded by the Commission, they could decide ex ante that the expected gains of the merger still outweigh the costs – that would include the costs of remedies here. It would thus be helpful if predictability were also present with regard to this specific aspect of merger policy. Four out of five of the firms actively participating in the survey had been involved in mergers comprising remedies. Out of these firms, only about half of them (55.6%) claimed that remedies were predictable. We interpret these number as indicating that the policy regarding remedies should t d be made more transparent and predictable. The process that is used in order to identify remedies should be made as general as possible. It should also be published. This should increase predictability.

At the end of the questionnaire, there was an open question soliciting further suggestions that would be relevant with regard to European merger policy. The following proposals were made: (1) the separation of powers in European merger policy was believed to be insufficient. Many respondents therefore proposed that the separation of powers be implemented with regard to European merger policy. (2) More specifically, it was proposed to introduce the institution of an “independent hearing officer”. (3) The introduction of a stop-the-clock mechanism was suggested. (4) A further speeding up of the decision-making procedure was proposed; this was
particularly suggested with regard to the time span that is necessary before the Court of First Instance publishes its decisions. (5) Another proposal focusing on the same problem was the introduction of a special chamber for competition issues at the Court of First Instance.

In this section, we have seen that on various accounts, the predictability of European merger policy is problematic and would need improvement. In the next section, we turn to present some possible improvements.

4.1.1. Before Notification

In the theoretical section on predictability, it was pointed out that decisions on single cases can have effects that reach far beyond the specific case: prohibitions signal a tough stance, and potentially welfare-enhancing mergers might not even be pursued due to fear of being prohibited by the antitrust authorities. This effect does not show up in any statistics on merger policy although it is potentially very important. We therefore decided to include a question that would give us at least an impression concerning the relevance of this effect. The firms were asked whether they had pursued any mergers between 1997 and October 2002 that were eventually not even notified to the Commission for fear of being prohibited. More than a quarter of all respondents (28%) had experienced such cases. This shows that the impact of European merger policy clearly reaches beyond the number of cases counted in Commission statistics.

Art. 4 Regulation 139/2004 provides that mergers must be notified “prior to their implementation and following the conclusion of the agreement, the announcement of the public bit or the acquisition of a controlling interest”. Yet, many companies decide to contact DG Comp before a merger is formally notified. There are a large number of possible reasons for this: they might, e.g., be interested in getting the very first evaluation of the merger. In the questionnaire, the reasons for contacting DG Comp before agreeing on the broad outlines of a deal were not looked into. It was simply asked whether enterprises contact DG Comp before the deal is concluded. Almost 36 % of all companies do. Some ten years ago, Neven et al. (1993) published
a study on the first experiences with European merger control. It also contained a survey among the firms that had already experienced the then new policy. We decided to ask a number of questions that had been asked some ten years ago in exactly the same way in order to produce comparable data.5 The question whether firms had contacted DG Comp before agreeing on the broad outlines of a deal is one of those. Neven et al. (1993, 140) had only elicited a positive response rate of 20% to this question. Early contacts with the Commission have thus almost doubled. This could mean that predictability has not improved. If it had, fewer pre-notification
talks should be the result.

Another question that was also asked ten years ago, would, however, not exactly support this hypothesis: We asked whether the pre-notification talks with DG Comp had led to “significant modifications” of the proposed merger. 12% of the companies answered that this was the case. Ten years ago, 12.8% of the respondents to Neven et al. had answered that “major modifications” had taken place. The relative number of modifications thus seems to have been rather stable.

Before a merger can be officially notified to the Commission, a questionnaire – the so-called Form CO – needs to be filled in. Complaints concerning the time requirements to fill this form in can often be heard. On average, companies need 64.4 person-days to prepare the form. Ten years ago, the average duration elicited by Neven et al. (1993, 140) was 45 days. Considering the importance of all the mergers notified at the European level, the time required to fill in the form does not appear to be overly excessive. But because one can hear so many complaints concerning the complexity of Form CO, we decided to add an open question that was to encourage respondents to make proposals how Form CO could be improved. It is, first of all, noteworthy that the necessity of extended information was almost universally acknowledged. 6 The Commission was, however, requested to display more flexibility depending on the merits of the individual case. It was further proposed that phase I proceedings should not come to a stop if only details in Form CO are missing. On a more specific level, it was proposed to shorten sections 8 (“General Conditions in Affected Markets”) and 9 (“General Market Information”). Another proposal made was that in order to reduce redundancy, section 6 (“Market Definition”) should be combined with section 8 (“General Conditions in Affected Markets”).

Another way to ascertain the necessary lead time before a merger can be notified is to ask for the number of weeks that elapse between the first contact with the DG Comp and notification. The average time passed was 6.3 weeks (6.5 weeks ten years ago). The time necessary has thus been very stable. It has remained, however, constant on a high level; on average, pre-notification talks last longer than phase I proceedings that are constrained to a single month.

4.1. A Survey Amongst Large European Firms

The motivation for the survey was to receive reports from companies that have been involved in mergers that had to be cleared by the European Commission. A second reason for conducting a survey was the hope to elicit proposals for reform that had grown out of direct experience with DG Comp.

A straightforward method was used in order to receive data: a questionnaire was devised which contained quantifiable as well as open questions. The quantifiable questions can, again, be broken down into two parts, namely one part dealing with the experience of firms with European merger policy in general and the other part dealing with one specific case. Here, the respondents were asked to choose the most complicated case their company had been involved with since 1997. The open questions were added in order to elicit reform proposals. The survey was conducted in November 2002. It thus antedates the recent reforms of EU merger policy.

A total of 42 questionnaires were sent via the European Round Table (ERT) office in Brussels to all member companies of ERT. Companies were promised that information would only be used in anonymised form. Shipment of the questionnaires was handled by the ERT in Brussels in order to make that promise credible. 25 completed questionnaires were returned, a very good response rate, especially if one keeps in mind that not all of the 42 members might have had first-hand experience with mergers on the European level.

Since 1997, these 25 companies have been involved in 153 merger cases. The total number of merger cases that the European Commission has dealt with in the same period was 1,562. Our survey thus covers some 9.8% of all cases. On average, these companies notified 6.1 mergers over the course of the last five years. They are thus quite experienced in merger activities, which means that their evaluation of the predictability of European merger policy should be given some weight – and their suggestions at improvement should be taken very seriously.

Table 2:Descriptive Statistics of the Survey Results

We propose to present the results of the study f udy emulating the chronology of a typical merger case, namely (1) before notification, and (2) after notification.4

4. THE PREDICTABILITY OF EUROPEAN MERGER POLICY

Predictability has been defined as the capacity to make predictions concerning the actions of others that have a high chance of turning out to be correct. With regard to European merger policy, predictability can thus be interpreted as the capacity of a firm willing to merge with another firm to predict the likely reaction of the Commission of the European Community to the notification of a proposed merger. It seems reasonable to assume that no firm handing in a notification enjoys being prohibited from executing a proposed merger since prohibitions entail considerable costs that would otherwise not accrue. If predictability of European merger policy was perfect, this should thus lead to the absence of any prohibitions because prohibitions are costly. Taking Madison’s argument quoted above explicitly into account, one should expect predictability to increase over time as uncertainty regarding the interpretation of legislation by the administration and the courts decreases case-by-case.

Ideally, the relationship between the time passed since new legislation was enacted and the number of cases should thus look like the following graph:

Figure 1:Idealized Development of Prohibitions over Time

This is, of course, an idealised slope. Changes, even marginal ones, in legislation can cause local bumps just as the inauguration of new personnel that wants to document its tough stance on the issues can. But a curve derived from empirical cases should be at least somewhat reminiscent of the idealised curve. Based on all the cases dealt with by the European Commission during the first twelve years of European merger policy, this is not exactly what factually happened.

The Development of Prohibitions over Time

Figure 2: The Development of Prohibitions over Time

The next graph simply shows the number of prohibitions as they occurred over time. True, the number of prohibitions is rather low: only 18 out of 1908 notified cases were prohibited, i.e., a little less than one percent. But there has certainly not been a downward trend in prohibitions, which means that predictability has not increased over the years.

A second aspect regards the time dimension. It was said that the time needed in order to get legal remedies could be crucial for the legal certainty of merger policy. European merger policy used to be hailed for the tough time limits imposed by Regulation 4064/89 that forces the Commission to distinguish between two phases of investigation and that proscribes the Commission to finish the first phase after one month and the second phase after another four months.1 Practitioners have often noted that de facto, the process is not quite as fast because getting all the information that the Commission demands before being willing to open phase I would oftentimes require a number of weeks. But by and large, the decision-making process of DG Competition is a rather fast one.

But what about the case in which the Commission decides to prohibit a merger? In that case, the merging firms can decide to appeal the decision by taking a case to the Court of First Instance (CFI). A decision by the CFI declaring the proposed merger compatible with EU Law will, at least in most cases, only “save” the proposed merger if it does not take years before the CFI decides. Table 1 below contains a list of cases in which the merging firms appealed to the CFI and lists the number of months that passed before the CFI published its decision. The number of companies that have taken their case to the CFI is very low; the “average” is therefore a rather crude indicator for the time-length a firm would have to expect should it decide to take its case to Luxembourg. But actually, the expected time-length might be the single most important reason for the low number of cases actually ending up at the CFI: if some three years pass before a firm can expect to get the “right” decision, the proposed merger might not make sense any more. A long time-span until the decision can therefore mean the de facto absence of legal protection. Although this picture is already pretty gloomy, it is not even the entire picture yet: Even after three years have passed and the CFI has published its decision, legal certainty is not yet achieved because the Commission now has the possibility to appeal the decision by bringing the case to the European Court of Justice. There, the case would supposedly be pending for at least another two years.2

Table 1: Time passed between the Decision of the Commission and the Court of First Instance
(Source: http://europa.eu.int)

In this section, two rather abstract and academic criteria have been used in order to ascertain the predictability of European merger policy, namely the number of prohibitions that were compared with a stylised curve that should materialise were European merger policy highly predictable and the time needed before a final decision in a merger case could be obtained. But these are criteria used by outside observers who try to make sense of European merger policy. A radically different approach towards learning something about the quality of European merger policy in general and its predictability, more specifically, is to ask those who have first-hand experience with DG Comp. This is exactly what we did.

3. SOME EMPIRICAL RESULTS CONCERNING PREDICTABILITY

Let us now quickly turn to some empirical studies that can be interpreted as evidence for the rucial importance tance of predictability. As an example for the importance that should be attached to the issue of predictability with regard to the general functioning of market economies, we cite a cross-country study by Brunetti et al. (1997). Empirical research concerning the effects of merger policy is very rare. Most of the existing studies deal with the effects of US antitrust policy. We will refer to two of these studies, Shughart and Tollison (1991) and Bittlingmayer (2001). Empirical evidence concerning the economic consequences of European merger policy is virtually non-existing and definitely a desideratum.

Over the last number of years, an entire cottage industry dealing with the economic effects of formal institutions as, e.g., constitutions and legislation has developed. Rather than providing an overview of that literature, we confine ourselves to the presentation of one such study here (a short survey can be found in chapter five of Voigt 2002). It has been selected because it does explicitly exclude the material content of rules and concentrates exclusively on the perceived credibility of rules.

In a study commissioned by the World Bank, Brunetti, Kisunko, and Weder (1997) use what could be called “subjective uncertainty indicators”. They asked local entrepreneurs in some five dozen countries whether they believed the announcements of their governments to be credible. If the locals do not believe their government, then a government announcing secure private property rights, low tax rates, etc., will not induce investment. There is thus a very close relationship between credibility and predictability. Notice that neither concept focuses on the content of the rules but just on the formal issue of whether some policy (in the form of legislation or the like) announcement is believed to be implemented. Brunetti et al. (1997) surveyed more than 2,500 entrepreneurs in less developed countries and approximately 200 entrepreneurs in OECD member states. The partial indicators “security of persons and property rights” and “predictability of legislation” are most closely correlated with economic growth in this sample of 58 countries. The partial indicators “corruption”, “perceived political instability” and “predictability of judicial decisions” closely correlate with investment rates.

Let us now turn to the empirical studies interested in the economic effects of antitrust policy. Shughart and Tollison (1991) are interested in ascertaining the employment effects of the Sherman and Clayton Acts, i.e., those two laws that are commonly believed to be the core of US antitrust policy. They conjecture that unanticipated strengthening of antitrust enforcement, i.e., low predictability of the actions of antitrust agencies, can force firms to adopt inefficient production technologies. As firms are forced to lower their current and planned production quantities, they might have to lay off some of their employees as a consequence. Suppose enforcement of antitrust legislation is unexpectedly strengthened in a particular industry. Mergers might be prevented and divestitures ordered. Suppose this is accompanied by unchanged production technology, which would mean that from a production oriented point-of-view, the optimal size of firms in the industry has remained unchanged. Yet, the optimal size of firms in that specific industry is reduced due to increased enforcement effort. Shughart and Tollison argue that this will lead firms to lower their current and planned production as well as to lay off some of their employees. If other industries with similar structures observe this, unemployment may also increase there. For the period between 1947 and 1981 (the starting point was chosen because 1947 is the first year for which extensive data concerning the U.S. labour market are available), they find a positive and significant relationship between unanticipated increases in antitrust enforcement activities and the unemployment rate. This study can thus be read as empirical evidence supporting the claim that the absence of predictability – here called unanticipated increases in antitrust enforcement activities – can have real economic costs, namely an unemployment rate that is higher than if merger policy was predictable.

Bittlingmayer (2001) is interested in determinants of investment levels. In empirical studies seeking to identify the factors determining investment, only economic variables such as interest rates or the prices of capital goods have traditionally been taken into consideration. Bittlingmayer now argues that these regressions always leave a fair amount of variation in investment unexplained and suspects that political uncertainty could be one such factor. He is then in need of a proxy for political uncertainty and chooses antitrust enforcement as that proxy. Based on data for the period between 1947 and 1991, he comes to the conclusion (ibid., 321) that “statistically, each extra case [of antitrust enforcement] is thus associated with a total decline in investment of about $1.7 billion.” It is worth noting that the major adverse effects on investment do not arise within the industry of the firms against which a suit has been brought. Using an industry classification made up of 21 industries, an extra case filed is associated with a decline in investment in each of these 21 industries, where decreases are between $34 million and $110 million.

It can thus be concluded that unpredictable merger policy can have real costs in terms of increased unemployment and decreased investment levels. We now turn to the question whether European Merger Policy is predictable.

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.

1. INTRODUCTORY REMARKS

The title of this study puts the predictability of European Merger Policy at centre stage. This hapter serves to motivate and explain the outstanding importance attached to predictability. In the next section, the crucial importance of predictability for economic growth and development will be spelt out on an abstract and general level as well as with regard to competition policy and, more focused still, with regard to merger policy. Section three contains a brief summary of some of the empirical evidence dealing with the consequences of predictability – or its absence. In section four, the current degree of predictability in European Merger Policy is operationalised. Predictability in European Merger Policy was also the issue of a survey conducted among large European firms. Their perception of predictability is reported there as well. Section five contains a number of institutional proposals whose implementation could help increase the predictability of European Merger Policy – and hence its overall quality.