Contents

Table of Merger Decisions

Acknowledgments

Foreword

A Comment on the Text by Professor Jeffrey Church

1 Introduction

1. Purpose and scope of this book

2. Legal framework and Commission procedure

2.1 The Merger Regulation

2.2 Procedure for notification and assessment

3. The role of economics in EU merger control

4. Basic economic concepts

4.1 The demand curve

4.2 The cost curve

4.3 Profit maximisation

4.4 Market power

5. Empirical economic evidence

2 Market definition

1. Introduction

2. Conceptual framework

2.1 The hypothetical monopolist/SSNIP test

2.2 Issues and complications arising in market definition

2.2.1 Magnitude of the SSNIP and the 'binary fallacy'

2.2.2 The relevant pre-SSNIP price and the 'cellophane fallacy'

2.2.3 Asymmetry in market definition

2.2.4 Indirect constraints and chains of substitution

3. Empirical techniques to assess market definition

3.1 Critical loss analysis

3.1.1 Description of technique

3.1.1.1 The SSNIP and pricing decisions

3.1.1.2 The SSNIP test and critical loss analysis

3.1.1.3 Calculation of the critical loss in practice

3.1.1.4 Data requirements

3.1.2 An example

3.1.3 Use in EU merger control

3.2 Demand estimation

3.2.1 Description of technique

3.2.1.1 Empirical demand estimation and identification

3.2.1.2 Demand estimation and market definition

3.2.2 An example

3.2.3 Use in EU merger control

3.3 Survey evidence

3.3.1 Description of technique

3.3.2 Use in EU merger control

3.4 Analysis of sales patterns

3.4.1 Description of technique

3.4.1.1 Geographic market definition

3.4.1.2 Product market definition - 'multi-sourcing'

3.4.2 An example

3.4.3 Use in EU merger control

3.5 Analysis of price levels

3.5.1 Description of technique

3.5.2 An example

3.5.3 Use in EU merger control

3.6 Price correlation analysis

3.6.1 Description of technique

3.6.1.1 Spurious correlation

3.6.1.2 Benchmarking correlation

3.6.1.3 Lagged responses

3.6.2 An example

3.6.3 Use in EU merger control

3.7 Stationarity analysis

3.7.1 Description of technique

3.7.2 An example

3.7.3 Use in EU merger control

3.8 Shock analysis

3.8.1 Description of technique

3.8.2 An example

3.8.3 Use in EU merger control

3.8.3.1 Entry

3.8.3.2 Supply outages

3.8.3.3 Exchange rate fluctuations

3 Horizontal mergers I: unilateral effects

1. Introduction

2. Important competitive constraints: economic theory and the EC Horizontal Merger Guidelines

2.1 Economic theory and key concepts

2.1.1 Economic models and market concentration

2.1.1.1 Cournot model

2.1.1.2 Bertrand model

2.1.2 Closeness of competition and diversion ratios

2.1.3 An example

2.2 Important competitive constraints in the EC Horizontal Merger Guidelines

2.2.1 Merging firms have large market shares

2.2.2 Merging firms are close competitors

2.2.3 Merger eliminates an 'important competitive force'

2.3 Commission's recent enforcement practice

3. Important competitive constraints between the parties: empirical techniques

3.1 Survey evidence

3.1.1 Description of technique

3.1.2 An example

3.1.3 Use in EU merger control

3.2 Customer switching analysis

3.2.1 Description of technique

3.2.2 An example

3.2.3 Use in EU merger control

3.3 Price/concentration studies and analysis of the impact of rivals' presence

3.3.1 Description of technique

3.3.2 An example

3.3.3 Use in EU merger control

3.3.4 Case study: Statoil/JET

3.3.4.1 JET's role

3.3.4.2 Econometric estimates

3.3.4.3 Placing econometrics in the right economic context

3.4. Entry analysis

3.4.1 Description of technique

3.4.2 An example

3.4.3 Use in EU cases

3.5 Natural experiments

3.5.1 Description of technique

3.5.2 An example

3.5.3 Use in EU cases

3.6 Merger simulation

3.6.1 Description of technique

3.6.1.1 An aside on price pressure tests

3.6.2 An example

3.6.3 Use in EU cases

3.7 Win/loss and bidding analysis

3.7.1 Description of technique

3.7.2 An example

3.7.2.1 Participation analysis

3.7.2.2 Runner-up analysis

3.7.2.3 Analysis of the relationship between prices and identity of the runner-up

3.7.2.4 Analysis of the relationship between prices and number of bidders

3.7.3 Use in EU merger control

3.7.4 Case study: Pirelli/BICC

3.7.4.1 Transitional state of the industry

3.7.4.2 Bidding competition

3.7.4.3 Analysis of credible bidders

4. Further issues relevant in the assessment of unilateral effects

4.1 Introduction

4.2 Elimination of potential competition

4.2.1 Elimination of potential competition in the EC Horizontal Merger Guidelines and EU precedents

4.2.2 Case study: Analysis of potential entry in the UK Svitzer/Adsteam case214

4.3 Rivals' ability to increase supply

4.3.1 Rivals' capacity in the EC Horizontal Merger Guidelines

4.3.2 An example

4.3.3 EU cases

4.3.4 Assessing mergers in electricity markets

4.3.4.1 Market characteristics

4.3.4.2 Unilateral effect concerns

4.3.4.3 Case study: Gas Natural/Endesa

Concern 1: Would the new entity have an incentive to raise its prices as a result of the transaction bringing together many 'marginal' CCGT/coal generation units?

Concern 2: Would the new entity have an incentive to withdraw some of its marginal plants in order to raise prices?

4.4 Switching costs

4.4.1 Effects of switching costs on competition

4.4.2 Implications of switching costs for merger assessment

4.4.2.1 Lloyds/Abbey National

4.4.2.2 Lloyds/HBOS

4.4.3 Conclusions

4.5 Partial ownership

5. Countervailing factors

5.1 Introduction

5.2. Buyer power

5.2.1 Buyer power in the EC Horizontal Merger Guidelines

5.2.2 Relevance in EU cases

5.2.3 Case study: the Enso/Stora decision312

5.2.3.1 Small losses in volume have significant impact on suppliers' average costs

5.2.3.2 Sponsoring new entry

5.2.4 Conclusions

5.3 Product repositioning and new entry

5.3.1 Product repositioning and new entry in the EC Horizontal Merger Guidelines

5.3.2 Relevance in EU cases

5.4 Efficiency analysis

5.4.1 Efficiency analysis in the EC Horizontal Merger Guidelines

5.4.2 Relevance in EU cases

5.5 Failing firm defence

5.5.1 Failing firm defence in the EC Horizontal Merger Guidelines

5.5.2 Relevance in EU cases

4 Horizontal mergers II: coordinated effects

1. Introduction

2. Economic concepts

2.1 Textbook tacit coordination

2.2 Factors that affect the critical discount factor

2.2.1 Number of competitors (+)

2.2.2 Ease of entry (+)

2.2.3 Frequency of interaction/price adjustments (-)

2.2.4 Transparency (-)

2.2.5 Demand growth (-)

2.2.6 Demand fluctuations/lumpiness of demand (+)

2.2.7 Asymmetry (+)

2.2.8 Multi-market contact (-)

2.2.9 Innovation (+)

2.2.10 Degree of substitutability (?)

2.2.11 Excess industry capacity (?)

2.2.12 Market demand elasticity (?)

3. Framework for the assessment of coordinated effects

3.1 Will the merged entity and remaining competitors be able to reach a tacit understanding?

3.1.1 Theory of coordination in Sony/BMG

3.1.2 Theory of coordination in ABF/GBI Business

3.2 Are market characteristics such that any tacit understanding would likely be sustained?

3.2.1 Internal stability

3.2.1.1 Monitoring deviations

Monitoring in ABF/GBI Business

Monitoring in Sony/BMG (2007)

3.2.1.2 Retaliation

Effective punishment may not be credible

Assessment of credibility of punishment in Norske Skog/Parenco/Walsum and UPM-Kymmene/Haindl

Credible punishment may not be effective

The timing of retaliation

Multi-market contact

Excess capacity

3.2.2 External stability

3.2.2.1 Non-colluding rivals

Assessment of the role of the fringe in Airtours/First Choice

Assessment of the role of the fringe in Norske Skog/Parenco/Walsum and UPM-Kymmene/Haindl

Assessment of the role of the fringe in ABF/GBI Business

3.2.2.2 Buyer power

Assessment of the role of buyers in Pirelli/BICC

3.3 Will the proposed transaction make it significantly more likely that tacit coordination will occur or make tacit coordination more effective?

3.3.1 Merger specific factors affecting the likelihood and effectiveness of tacit coordination

3.3.1.1 Reducing the number of market participants

3.3.1.2 Increasing symmetry

3.3.1.3 Removing a 'maverick'

3.3.1.4 Increasing market segmentation and retaliation possibilities

3.3.2 Assessment of the effect of the merger in ABF/GBI Business

5 Non-horizontal mergers

1. Introduction

2. Economic concepts

2.1 Pro-competitive effects

2.2 Foreclosure and anti-competitive foreclosure

2.3 Other anti-competitive effects

2.3.1 Other non-coordinated effects

2.3.2 Coordinated effects

3. Vertical mergers: input foreclosure

3.1 Ability to engage in input foreclosure

3.1.1 Ability to engage in input foreclosure: an example

3.1.2 Ability to engage in input foreclosure: EU case law

3.1.2.1 Market power

3.1.2.2 The importance of the input

3.1.2.3 Potential foreclosure strategies

3.1.2.4 Other factors that may affect the ability to foreclose

3.1.3 Case study: Nokia/Navteq - assessment of ability to engage in input foreclosure

3.2 Incentive to engage in input foreclosure

3.2.1 Incentive to engage in input foreclosure: an example

3.2.1.1 Downstream price increases

3.2.1.2 Efficiencies

3.2.1.3 Use of pre-merger margin information

3.2.1.4 The commitment problem

3.2.2 Incentive to engage in input foreclosure: EU case law

3.2.3 Case study: Nokia/Navteq - assessment of incentive to engage in input foreclosure

3.3 Effect of input foreclosure

4. Vertical mergers: customer foreclosure

4.1 Ability to engage in customer foreclosure

4.1.1 Ability to engage in customer foreclosure: an example

4.2 Incentive to engage in customer foreclosure

4.2.1 Incentive to engage in customer foreclosure: an example

4.3 Effect of customer foreclosure

4.4 Customer foreclosure: EU case law

4.4.1 Case Study: WLR/BST

5. Conglomerate mergers

5.1 Ability to foreclose in conglomerate mergers

5.2 Incentive to foreclose in conglomerate mergers

5.2.1 Costs of bundling and tying

5.2.2 Benefits of bundling and tying

5.3 Effects of foreclosure in conglomerate mergers

5.4 Foreclosure in conglomerate mergers: an example

5.4.1 Mixed bundling

5.4.2 Pure bundling

5.5 Assessment of foreclosure in conglomerate mergers: EU case law

5.5.1 Intel/McAfee

5.5.1.1 Degradation of interoperability

5.5.1.2 Commercial bundling

5.5.1.3 Remedies

5.5.2 GE/Amersham

5.5.2.1 Mixed bundling

5.5.2.2 Technical tying

5.5.3 Google/DoubleClick

5.5.3.1 Allegations regarding foreclosure of ad intermediation providers

5.5.3.2 Allegations regarding foreclosure of ad serving providers

6. Diagonal mergers

6.1 Diagonal mergers: an example

6.2 Case study: Google/Doubleclick - assessment of diagonal effects

Appendix A Regression analysis and econometrics

1. Regression analysis and statistical inference

2. Regression analysis, endogeneity and the identification of economic effects

Appendix B Models for demand estimation

1. Introduction

1.1 Alternative models for continuous demand estimation

1.2 Models for discrete demand estimation

Index