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There are several reasons why efficiency gains from horizontal mergers are an important issue today. Business conditions are changing rapidly, for example as a result of the internal market, increased global competition, and the deregulation of many industries. The consequent need to adapt the industry structure has generated a wave of mergers in Europe as well as in the rest of the world. The current wave is of historical proportions.
All mergers with a so-called Community dimension must be notified to the Commission and are subsequently reviewed under the Merger Regulation 1. According to Articles 2(3) of the Regulation, a concentration which “creates or strengthens a dominant position as a result of which effective competition would be significantly impeded” shall be prohibited. Otherwise it shall be allowed. the Commission shall, in making this appraisal, amongst other things take into account “the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition”. The latter clause has triggered a debate whether the Merger Regulation allows for a so-called efficiency defence. Can important cost savings (or other efficiencies) save an otherwise anti competitive merger? The Commission has, in policy statements, argued that, “(t)here is no real legal possibility of justifying an efficiency defence under the Merger Regulation.
(Commission, 1996)” Many economists, starting with Williamson (1968), have argued that competition authorities should take efficiency gains into account. Another reason why it is important to discuss an efficiency defense under the Merger Regulation is the introduction of the concept of joint dominance. According to the Merger Regulation, a merger can only be blocked if it creates or strengthens a dominant position. A firm is dominant if it has a large degree of market power - a monopoly-like situation. In such cases one talks more precisely of single firm dominance. The Commission has widened the concept of dominance to include also joint, or oligopolistic, dominance. The relevance of joint dominance in merger cases was confirmed by the Court in the Kali+Saltz decision. This suggests that merger policy has become stricter. Economic theory suggests that cost savings (and other efficiencies) are more likely to dominate the anti-competitive effects of a merger, the lower is concentration. Hence, the introduction of joint dominance makes it more natural to consider efficiencies today.
Recent developments in economics may make an efficiency defence more tractable. For example new computer based simulation techniques can be used as a way to estimate the likely anti-competitive effects of a merger and, at the same time, balance these effects a against possible efficiency gains. Such techniques are starting to be used in the USA and in Canada.
Finally, one may note that the treatment of efficiencies in merger control also has been debated in the U.S.A. That discussion gave rise to a revision of the Merger Guidelines to clarify how the U.S. Department of Justice and the Federal Trade Commission treat efficiencies. Before this, several revisions of the Merger Guidelines have occurred that show a gradually more positive attitude towards efficiency. One can also notice a similar development in the Federal Courts’ treatment of efficiencies. In the 1960’s the Supreme Court seemed to reject an efficiency defence. In the 1990’s lower courts have started to analyse efficiencies in a way similar to the Merger Guidelines.
To help answer the two questions whether E.U. merger control should allow an efficiency defence, and if so, how it should be designed, we start with an extensive review of the relevant economic research, including both theoretical and empirical work. Next, we draw up a “check-list” of relevant dimensions that need to be considered when assessing the possible role of efficiencies. Finally, we compare alternative approaches to include efficiencies in a merger control system, emphasising the central role of informational limitations.
We should emphasise that although the insights provided by economic research are vital inputs for answering the questions, the final choice necessarily involves value
judgements. For this reason, this report cannot come to a definite answer to the above
two questions. We should also emphasise, already here in the beginning, that various
issues addressed in this report are still the subjects of intense academic research. Many
of the facts require more detailed analysis.
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