Tommaso Valletti and Hans Zenger, on ‘Increasing Market Power and Merger Control’ (2019)

A significant body of empirical research has documented a structural increase in margins across a wide range of industries and countries. On average, firms enjoy appreciably greater pricing power today than used to be the case in prior decades. Research also showed that this increase in mark-ups coincided with a decline in the labour share of output, higher aggregate concentration, larger corporate profitability, and a slump in business dynamism (as measured by indicators such as entry, investment and innovation). Some researchers have attributed recent margin trends primarily to the growth of so-called “superstar firms”—highly profitable companies that have successfully seized the opportunities generated by globalization and technological change (such as digitization and automation). Others have linked increasing mark-ups to a lack of competition, e.g. overly permissive merger control. This article, available here, explores the implications of increased pricing power for merger control. It is structured as follows: Section 2 discusses the implications of increased pricing power for the assessment of…

Jorge Padilla on ‘Should Profit Margins Play a More Decisive Role in Horizontal Merger Control?’ (2018) Journal of European Competition Law & Practice 9(4) 260

This paper, availabl, here, argues that, while profit margins should (and do) play a role in the assessment of the potential price effect of a horizontal merger, there is no justification for the adoption of a policy that targets high-margin markets. Such a policy is bound to produce false negatives (Type II errors) and false positives (Type I errors) because: (i) accounting profits are not necessarily in line with economic profits, (ii) comparing accounting profits across firms, industries and countries is a notoriously complex exercise, bound to produce misleading conclusions, and (iii) mergers between profitable and not so profitable firms facilitate the efficient reallocation of resources and are, therefore, likely to have positive microeconomic and macroeconomic implications. Section II looks at the relationship between profit margins and market concentration. Economists have debated the relationship between profit margins and market concentration for years. Based on some cross-section industry studies in the USA, industrial organisation economists believed for a long period of…

Pauline Affeldty, Tomaso Dusoz and Florian Szücs on ‘25 Years of European Merger Control’ (2019) DIW Berlin Discussion Paper 179

The first European merger control regime came into force in 1990. Since then, merger control has evolved significantly. This paper, available here, employs a new dataset, comprising all merger cases until 2014 that led to a decision by DG Comp (more than 5,000 individual decisions). The goal of the paper is to evaluate the time dynamics of the European Commission’s decision procedures. Specifically, the paper assesses how consistently different arguments related to so-called structural market parameters – market shares, concentration, likelihood of entry and foreclosure – were deployed by the Commission over time. The paper first estimates the probability of intervention as a function of merger characteristics. It finds that the existence of barriers to entry, increases in concentration and, in particular, the share of product markets with competitive concerns are positively associated with intervention by the Commission. After the reform of 2004, an effects-based approach centred on a clearly stated theory of harm became a cornerstone of EU merger…

Volker Nocke and Michael D. Whinston on ‘Concentration Screens for Horizontal Mergers’ (2020) NBER Working Papers no 27533

Concentration measures play a central role in merger analysis. Existing guidelines identify various presumptions – both safe harbours and presumptions of anticompetitive effects – based on the level of the post-merger Herfindahl index and of the change that the merger induces in that index. These presumptions have a significant impact on agency decisions, especially in screening mergers for further review. However, the basis for these screens, in both form and level, remains unclear. The authors of this paper, available here, show that there is both a theoretical and an empirical basis for focusing solely on changes in the Herfindahl index, and ignoring its level, in screening mergers for whether their unilateral effects will harm consumers. The authors also argue that the levels at which the presumptions currently are set may allow mergers to proceed that cause consumer harm. Section 2 reviews concentration screens in various versions of the US Horizontal Merger Guidelines. The first version of the Merger Guidelines –…