Question . To what extent do the EU non-horizontal merger guidelines reflect the results of economic research?What does economic research tell us?How do the guidelines measure up?How have the guidelines been applied?. Vertical merger. . . . End customers. . . . . Upstream market. Downstream marke
1. The Economics of Vertical Mergers and a Quick Look at the EU Guidelines Justin Coombs
Advanced Review of Competition Economics,
London, 3 June 2008
2. Question To what extent do the EU non-horizontal merger guidelines reflect the results of economic research?
What does economic research tell us?
How do the guidelines measure up?
How have the guidelines been applied?
3. Vertical merger
4. Vertical merger
5. What does economic research tell us? In summary, vertical mergers are less likely to raise concerns than horizontal mergers because
No direct loss of competition
High likelihood of efficiencies
Under certain conditions there could be a loss of competition
Partial foreclosure (increase in price to downstream competitors)
Complete foreclosure (refusal to supply downstream competitor)
But this risk needs to be balanced against a high likelihood of efficiency benefits
6. Partial foreclosure: rarely a concern
7. Complete foreclosure: rarely a concern
8. Efficiencies: often important Double margin problem
The companies impose pricing externalities on each other
The downstream company ignores upstream profits when setting its price
The upstream company ignores downstream profits when setting its price
These are internalised within a single company Inefficient investment
Firms have to make specific investments
These affect their bargaining position ex post
Long-term contracts would be incomplete
Firms cannot protect themselves from ex post bargaining by agreeing everything up front.
These problems are mitigated within a company
Investment levels can be imposed
Ex-post opportunism can be prevented
9. Empirical evidence Result 1
No evidence of consumer harm, even with foreclosure
Vertical mergers are generally good for consumers
VI takes place when theory predicts markets would lead to inefficient investment
10. The EU Guidelines: how do they measure up?
11. Guidelines in practice: TomTom/Tele Atlas The issues
Tele Atlas part of upstream duopoly, supplied mapping information to
Satellite Navigation manufacturers, including TomTom
If TomTom acquired Tele Atlas would it raise prices to rival SatNav manufacturers?
Decision yet to be published
Press release tells us
Ability to foreclose limited by strong upstream competitor
No incentive to foreclose
Loss of upstream profits not compensated by increased downstream sales
12. Conclusions Economic theory supports strong presumption of legality in vertical mergers
Small likelihood of competition problems, even when upstream market power exists
High likelihood of efficiencies
Guidelines acknowledge these points but are more sceptical
Balanced rule of reason approach (examine ability and incentive)
Burden of proof on parties to prove efficiencies
Careful analysis of ability and incentives
Efficiencies acknowledged, but could they ever outweigh an anticompetitive effect?
13. Thank you