19 Nov

According to the European Merger Guidelines, “for the Commission to take account of efficiency claims in its assessment of the merger, the efficiencies have to benefit consumers, be merger-specific and be verifiable. These conditions are cumulative”. It is up to the parties to verify the existence of efficiencies. Examples of efficiencies specific to non-horizontal mergers include the ‘internalisation of double mark-ups which allows the integrated firm to profitably increase output on the downstream market; furthermore better coordination of production and distribution processes, which leads to savings on inventory costs; and additionally the creation of incentives with regard to investments in new products, production processes and marketing. Price efficiencies and non-price efficiencies have been critically assessed below by using examples on TomTom / Tele Atlas and Nokia / NAVTEQ transactions.

Price Efficiencies

The Commission concluded that TomTom / Tele Atlas and Nokia / NAVTEQ transactions would result in price efficiencies. The Commission determined that both merged entities would be able to adopt preexisting double mark-ups by reason of the merging parties setting their prices individualistically pre-merger. Therefore, the parties could use the resultant higher profits to increase sales of their downstream product to the benefit of consumers. The Commission approved that the efficiencies created by the elimination of the double mark-up were merger-specific. These efficiencies could not be attained merely through contracts with the map suppliers. It assessed and denied the likelihood that either TomTom or Nokia could conclude contracts with Tele Atlas or NAVTEQ that could provide it maps at non-linear pricing with a price for marginal units close to the marginal cost of map databases. In case of Tele Atlas, having completed its appraisal of the customer contracts of both map suppliers, the Commission determined that the volume discounts common in the industry were inadequate to eliminate double mark-ups. The Commission in Nokia / NAVTEQ expected that alike volume discounts would become common in the nascent market for digital map databases for mobile applications.

Eventually, in TomTom / Tele Atlas merely, the Commission confirmed the complete effect of the offered transaction by anticipating pre- and post-merger equilibrium prices via simple model with linear demand. Thereafter The Commission approved the parties’ economic proposals that the overall effect of the merger comprising the elimination of the double mark-ups would be a slight decline in average PND prices meaning that even a large upstream price increase would have little impact on downstream prices and thus on the merged entity’s competitive positioning in the downstream market.

Non-price Efficiencies

Albeit both TomTom / Tele Atlas and Nokia / NAVTEQ managed the identical price efficiencies, they presented different non-price efficiencies. For instance, the parties in TomTom / Tele Atlas tendered their merger would permit them to produce better maps faster. Post-merger the parties intended to use feedback data gathered by TomTom from its large customer base to renew Tele Atlas’ map database. The parties presented an analysis that listed their claimed efficiency benefits in two ways. In the first method, the cost savings achieved by the use of customer feedback data in providing a pre-merger level of database quality has been calculated. In the other method, additional costs necessary to achieve with pre-merger technology the same level of map database quality that would be achieved with the use of customer feedback have been determined.

The Commission also observed that the efficiencies were “at least in part, merger specific”. Moreover, the Commission acknowledged that although part of the efficiencies could be attained through contract, neither of the parties was likely to make investments of the same degree outside the context of a vertical integration. Nevertheless, the Commission alleged that the efficiencies were “difficult to quantify and the estimates provided by the parties are not particularly convincing”.

As a conclusion: in both TomTom / Tele Atlas and Nokia / NAVTEQ, the lack of incentive to foreclose downstream competitors was fundamental to clearing the mergers. The Commission attained this conclusion via conducting an analysis of the trade-offs between the merged entities’ profits lost in the upstream market and the profits gained in the downstream market. In both cases, the Commission checked the stability of its “simple profit test” by familiarizing it to a number of alternative presumptions related to the pass-through rate, the elasticity of upstream and downstream price and the share of the map database in the total price. The Commission confirmed parties’ appraisal and concluded by declaring any significant price increase would be unprofitable. These arguments set forth clearly the Commission post-Guidelines have differences between the previous one. It will tend to conduct a robust analysis of the parties’ economic incentives to foreclose. Appropriately, merging parties may need to increasingly rely on economic consultants to both support their claims and counterbalance.

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