Merger Control in Dynamic Markets – OECD – December 2019 OECD discussion
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The document discusses the complexities of merger control in dynamic markets, highlighting the ambiguous effects of mergers over both short and long terms. It emphasizes that static indicators may not reliably predict long-term outcomes and suggests a focus on product substitutability, market share evolution, barriers to entry, and specific efficiency gains. The authors propose flexible remedies to adapt merger control practices to the changing competitive landscapes in these markets.
Merger Control in Dynamic Markets – OECD – December 2019 OECD discussion
- 1. Merger Control in Dynamic Markets 1 Pedro Gonzaga (Pedro.GONZAGA@oecd.org) Gabriella Erdei (Gabriella.ERDEI@oecd.org) OECD Competition Committee
- 2. Mergers have ambiguous static and dynamic effects 2 • Any horizontal merger trades-off two effects: – Short-term elimination of one (potential) competitor – Realisation of efficiency gains • The net outcome is ambiguous: Static effects • Prices • Quality (design, safety, durability, content, customization, etc.) Dynamic effects • Product innovation • Process innovation • Investment In what circumstances is it enough to look at the static effects of the merger?
- 3. Merger review in “static” markets that change little over time 3 • Short-term effects are generally good predictors of long-term effects. time welfare variation 0 merger E.g. extraction of natural resources, production of raw materials.
- 4. Merger review in dynamic markets: scenario 1 4 • Short-term: efficiency gains (parties are not current competitors). • Long-term: loss of competition in innovation spaces and loss of future competition in new developed products. time welfare variation 0 merger E.g. pharmaceuticals, chemicals.
- 5. Merger review in dynamic markets: scenario 2 5 • Short-term: elimination of a current competitor. • Long-term: dynamic efficiency effects (e.g. innovation spillovers) or entry of a new competitor. time welfare variation 0 merger E.g. News platforms, review websites, technology hardware and software...
- 6. In highly dynamic markets, short-term effects are not always a good indicator of long-term effects 6 Short-sighted merger control Risk of Enforcement Errors Error Type 1 Error Type 2 The assessment of effects within a longer timeframe can improve the precision of merger control in dynamic markets. But how to adapt merger control to dynamic markets in practice without increasing enforcement unpredictability?
- 7. #1 Merger analysis should focus on the substitutability of products and capabilities 7 Short term Medium term Longer term • Overlapping products • Overlapping geographical areas • Pipeline products • Projects to enter new regions Innovation capabilities: • IPRs • Laboratories • Skilled labour • Natural resources • Technologies Substitutability can be assessed with a diversion ration analysis. Limitations of market definition.
- 8. #2 The evolution of market shares is a better indicator of competition than static market shares 8 Market A Year 1 Year 2 Year 3 Year 4 Firm 1 50% 49% 50% 50% Firm 2 50% 51% 50% 50% Market B Year 1 Year 2 Year 3 Year 4 Firm 1 80% 60% 25% 40% Firm 2 20% 40% 75% 60% Which market is more competitive? In evaluating monopoly power, it is not market share that counts, but the ability to maintain market share. (United States v. Syufy Enters)
- 9. #3 The assessment of barriers to entry & exit is crucial to determine long-term harm 9 • Direct evidence: • Indirect evidence: – Repeated past entry and exit is the most reliable indicator. – Surveys to market participants about their intention to enter are not always reliable. Barriers to Entry Barriers to Exit Entry costs that incumbent did not incur Sunk costs
- 10. #4 Dynamic efficiency effects deserve special consideration 10 • Efficiencies must be merger specific: – Can the efficiency be achieved through other means (e.g. research joint venture)? • Efficiencies must be passed through to consumers. – Net innovation pressure test? (Salinger, 2019) Economies of scale in R&D Appropriation of innovation spillovers Entrepreneurial exit Innovation Incentives
- 11. #5 Dynamic markets may require flexible remedies 11 Examples of trigger events Entry / lack of entry of a new competitor within an established timeframe Development of a new technology that addresses competitive concerns Variation in market shares, prices or investment beyond a threshold Expiration / attribution of intellectual property rights Regulatory reform that changes competitive conditions Structural remedies Behavioural remedies Conditional on market evolution? Review clauses?
- 12. Merger Control in Dynamic Markets 12 Pedro Gonzaga (Pedro.GONZAGA@oecd.org) Gabriella Erdei (Gabriella.ERDEI@oecd.org) OECD Competition Committee