The Economics of Vertical Mergers and a Quick Look at the EU Guidelines

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 So 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 Result 2 Vertical mergers are generally good for consumers Result 3 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 Efficiencies acknowledged

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 Recent practice Careful analysis of ability and incentives Efficiencies acknowledged, but could they ever outweigh an anticompetitive effect?

13. Thank you