This paper – which can be found here – discusses a novel theory of harm applicable in EU merger control (Nicolas Petit ‘Significant Impediment to Industry Innovation: A Novel Theory of Harm in EU Merger Control?’). Under this theory, the Commission can intervene in mergers that reduce innovation incentives in an industry as a whole. The author considers that this theory focuses on identifying on Significant Impediment to Industry Innovation (“SIII”).

This paper first attempts to describe the content and extent of the SIII theory. Second, it attempts to show that the SIII theory is a marked departure from established EU merger control practice. Third, it discusses the economic foundations of the SIII theory. Finally, it puts forward best practices for the assessment of mergers in R&D intensive industries. We will now look at each in turn.

  • SIII theory provides that a merger can and should be prohibited where it can be demonstrated that it will “lead to a reduction of innovation” in a given industry “as a whole”. The author holds that this theory is being considered in the Commission’s assessment of the Dow/DuPont merger, and that it is a departure from previous practice regarding the impact of mergers on innovation – which focused not on the impact of the merger on the industry as a whole, but on the impact of the merger on specific foreseeable product applications.

The basis for SIII theory can be found in a number of papers that advance three related propositions: (i) mergers in R&D intensive industries not only reduce the innovation incentives of merging parties, but also decrease their competitors’ incentives to innovate; (ii) competition agencies should focus on the “innovation activities” of industry participants, instead of looking at specific present and/or future product and/or technology markets; (iii) “innovation activities” should be measured by reference to R&D expenditure and R&D intensity, which provide good proxies to gauge the innovation incentives of the merged entity and/or its competitors.

  • The author then moves on to demonstrate that such an approach would depart from previous Commission practice. This section provides an interesting overview of European merger decisions that look at the impact of a concentration on innovation.  I suppose the main conclusion that is reached is that merger assessments in the EU require the delineation of specific product markets in which innovation will be impacted by the merger.
  • The third section is perhaps the most interesting one. It looks at the economics of innovation in order to determine whether the adoption of SIII is warranted. It begins with the observation that the relationship between firm size, market structure and innovation has remained unsettled in economic theory. He then adopts Katz and Shelanski’s approach that merger review should be based on inquiries: “about the effects of specific transactions within a particular industry based on a fact-intensive investigation into the incentives and capabilities of actual and potential innovators.” He reviews some sectoral data (on the agrochemical sector, which is an area in which both Dow and DuPont are active) and concludes that: “the risk of a reduction of industry innovation due to increased concentration in the agrochemical and seeds industries is far from established; and the case for a departure from merger control practice with the introduction of a novel SIII test is not compelling.
  • The paper concludes with a section which offers policy recommendations  intended to guide the assessment of mergers in R&D-driven industries. In particular, the author: (i) recommends that the same test (Significant Impediment to Effective Competition) be applied to innovation as it is to other parameters of competition; (ii) considers that there are alternatives to “projected R&D expenditure” which are likely better proxies to the impact of a merger on innovation, such as the impact of the merger on the classification of a firm on the four-tier “technology group” scale that is conventionally used by R&D experts; (iii) advises that regulators should be careful when  relying on metrics such as R&D expenses or intensity, or patent / citation measures; (iv) suggests that analyses of quantitative indicators of innovation must be complemented by qualitative analyses, which requires regulators to understand the key drivers of innovation in any specific  industry.

This is an interesting paper, that as other papers on the topic suffers from the fact that we don’t know what we are looking for when we try to measure innovation and use it as a competitive parameter. True, the paper tries to address this, but its recommendations ultimately do not add much to the old “one should pursue an intensive fact-finding exercise” mantra.  It is also not clear to me why the SIII the author identifies is different from a traditional SIEC test –and  I suspect the Commission would argue it is not…

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