14 Nov

Previously the Commission’s competitive assessment of vertical mergers focused predominantly on the parties’ ability to foreclose rivals. The Commission infrequently evaluated in-depth the parties’ incentives to foreclose rivals. Moreover in certain cases, market power in only one of the affected markets was considered “a sufficient condition” to conclude that the proposed merger was likely to restrict competition in the Common Market.

For example, in Skanska / Scancem, a merger between Sweden’s main producers of cement and construction materials (Scancem) and ready-mixed concrete, dry concrete and pre-cast concrete products (Skanska), the Commission examined in detail the ability of the merged entity to foreclose rivals where it had: roughly over 80% of the Swedish market for cement production; roughly between 40-50% of the Swedish market in ready mix concrete; and up to 80% of the Swedish market in other building materials. Based mainly on high market shares, the Commission resulted that; dominant position would be created or strengthened by the merged entity in the Swedish markets in terms of construction materials, ready-mixed concrete, dry concrete and pre-cast concrete products, as a result of which competing ready-mix producers would be essentially dependent on Skanska / Scancem for their supplies of the main raw material and cement. Particularly, the Commission’s result did not consider whether the parties had an economic incentive to raise rivals’ costs. This absence is remarkable in terms of a foreclosure strategy to be profitable; the revenues unavoidable by the merging parties upstream have to be sufficiently offset by increased profits downstream.

In Neste / IVO, Neste, Finland’s essential natural gas producer sought to merge with Finland’s leading electricity producer called IVO. The Commission was concerned that usage of strong positions that parties have in the natural gas market in order to raise competing electricity manufacturers’ costs since natural gas was an input for electricity production. The Commission focused its analysis on the parties’ ability to raise rivals costs however downplayed the fact that only “10% of all electricity production in Finland uses natural gas”. The economic incentive to raise rivals costs reduced since limited electricity products used natural gas as an input. Additionally the Commission concluded that “natural gas is strategically very important for electricity production in Finland and that its importance will continue to increase over the next years”.

Economic Incentives

Even when the Commission referred to economic incentives to foreclose in its pre-Guidelines decisions, these references were not supported by in-depth analysis. For example, in Telia / Sonera; a merger between Telia, a Swedish telecommunications and cable television operator and Sonera, Finland’s largest mobile telephony operator, the Commission concluded, without the benefit of any economic assessment, that Telia would have “an incentive to distort competition to Sonera’s advantage”. Instead, it was assumed by the commission that it would be logical for Telia to favour its subsidiary Sonera. In the meantime while considering this, an omission occurred about this “favouritism” would actually lower Telia’s revenue and another significant striking omission is the decision did not examine whether the strategy would ultimately succeed in foreclosing rivals thereby allowing the merged entity to finally recover its lost revenues. Just prior to the approval of the Guidelines, that the Commission dedicates substantial attention to the analysis of the merged entity’s incentive to foreclose. According to its decision in Imperial Tobacco / Altadis, a merger between two manufacturers of cigarettes and tobacco products, the Commission considered the vertical effects rose by the merging parties’ distribution activities and eventually concluded that the merged entity would lack the ability to foreclose rivals. Notably, regarding to the study, which have been done by merging parties is foreclosure would not be profitable and that alternative distribution channels existed. The conclusion of the study; “A foreclosure strategy would be profitable for the merged entity only under very extreme conditions, namely a very big increase in sales that is extremely unlikely in a market whose size is relatively stable” has been accepted by the commission.

Assessment under the Guidelines

According to a comparison with horizontal mergers, non-horizontal mergers are less likely to restrict competition than horizontal mergers. However still there is a potential to hinder effective competition. The theory of harm relied on potential concerns relating to: (i) input foreclosure; (ii) access to supplies or markets; and (iii) coordinated effects. Significantly, after new guidelines came into force the Commission started to analyse both the ability and incentive of the merged entities to foreclose their downstream competitors, in addition to the overall effects of the mergers in downstream markets. Therefore, new approach of commission departed from its pre-Guidelines practice of mainly limiting its analyses to the companies’ ability to foreclose rivals.

Share on LinkedInShare on FacebookTweet about this on TwitterShare on Google+Email this to someone