This paper – which can be found here – argues that these a consistent framework for taking account innovation is necessary in EU merger control. The article is structured as follows:

  • Section 1 refers to recent Commission decisions addressing the impact of mergers on innovation. In particular, the Commission has been more interventionist in recent pharmaceutical mergers, such as in Novartis/GSK Oncology and in Pfizer/Hospira, and requested divestments of pipeline products – including, in some cases, products at an early stage of development. The Commission has also stressed the need to protect innovation as a rationale for divestment in other technology-driven industries, most recently and prominently in the context of the GE/Alstom.
  • Section 2 summarises some of the economic evidence and debate on this topic. We are treated to a review of the literature on competition and innovation. There is a wealth of empirical analysis addressing the potential effects of competition on innovation. While the insights of such research do not allow us to draw general presumptions on the impact of concentration across industries, the results do highlight important considerations that should be taken into account when reviewing a merger. Nonetheless, the case for establishing general presumptions associating levels of concentration with levels of innovation is rather weak, and he thus supports Katz and Shelanski’s suggestion that authorities should conduct merger assessments on a case-by-case basis that takes into account the specifics of the relevant industries.
  • Section 3 discusses the practical challenges of assessing the impact of mergers on innovation. He begins by noticing that the protection of innovation is a stated goal of EU merger control, alongside the prevention of price increases. Of course, and despite this stated goal, assessing the impact of mergers on innovation is no easy task in practice, and there is little guidance on how conduct such an assessment. He outlines a number of alternatives for decision-makers:
  1. to rely on potential competition. However, while the concept of potential competition is generally well established in EU merger control, it requires an analysis more speculative than that of current markets. As a result, the author thinks this approach requires caution;
  2. to rely on the alternative concept of future markets, which is yet another step further from actual competitive outcomes, and thus even more speculative;
  3. to focus on whether a transaction may negatively affect R&D, and thereby negatively affect “innovation markets”, which is an approach followed in the US. This approach has been the subject of much criticism, and the author deems it unsuitable to merger assessments in the EU.
  • Section 4 discusses the assessment of pro-competitive dynamic merger effects. It starts from the oft observed fact that there is “a strong imbalance / asymmetry between the way the Commission assesses the positive and negative impact of mergers on innovation”, with a focus on the negative effects. This is particularly so because the burden of proof is on the parties and the parties must show that efficiencies: (i) will be passed on to consumers, (ii) are verifiable and (iii) are merger specific (meaning that the efficiencies cannot be achieved to a similar extent by less anticompetitive alternatives).

In practice, the burden and standard of proof on merging parties to establish efficiencies is so high that the Commission nearly never accepts efficiency claims, even when considering static cost reductions. Given that dynamic efficiencies linked to innovation are more difficult to establish than static efficiency claims, this seems to pose a nearly insurmountable obstacle to the success of efficiency claims. Furthermore, the Commission has mainly considered such claims in cases where there is no trade-off between static and dynamic efficiencies. Having failed to provide sufficient guidance even for these simpler scenarios, it is thus unlikely that the Commission will be able to do so in the more complicated scenario where there are  trade-offs between static and dynamic competition considerations.

  • Section 5 concludes with some recommendation. He would urge the Commission to build both on economic theory and empirical evidence, and on its experience dealing with innovation, in order to develop a consistent framework for how it addresses the impact of mergers on innovation. Such a framework would need to avoid unverified assumptions about the effect of concentration on innovation, or imposing a high burden of proof for dynamic efficiencies. Instead, a counterfactual analysis is required to properly assess the impact of mergers on innovation, whether positive or negative. To be useful, any framework should not only enumerate mere possibilities where mergers could harm innovation, but include a set of limiting principles that the Commission should follow – including identifying the type of evidence necessary to establish that the transaction would lead to the discontinuation of research projects, or explaining how the Commission would deal with projects with a low probability of success.

The paper’s  analysis is in line with that of neutral academics, and provides a good overview of both the difficulties of taking into account innovation considerations in practice, and of the Commission’s attempts (or failure, according to some) to incorporate innovation in its merger control assessments.

 

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