Vincenzo Denicolò and Michele Polo ‘The innovation theory of harm: An appraisal’ IEFE Working Papers 103

The relationship between competition and innovation has been explored by a large amount of literature, both theoretical and empirical. Despite this, general results remain elusive. In the light of this, antitrust authorities have generally refrained from taking extreme stances and followed a cautious approach. Intervention has been limited mainly to cases in which the merging firms’ innovative products are close to the commercialisation stage, where  innovation outcomes have been regarded as sufficiently predictable as to be amenable to standard analysis. But policy seems to be changing. The European Commission has gradually shifted the focus of its dynamic merger analysis from product pipelines to “innovation markets or spaces”. This article, available here, argues that the theoretical foundations of innovation theories of harm are too fragile to provide the bases for radical policy changes. Antitrust authorities and the courts should continue to consider the impact of horizontal mergers on innovation by bearing in mind that effects can go either way. Section 2…

Bruno Jullien and Yassine Lefouili ‘Horizontal Mergers and Innovation’ (2018) Journal of Competition Law & Economics 14(3) 364

This is another example of an early paper criticising the assumptions of those arguing for more stringent enforcement against mergers that may affect innovation – this time focusing on the potential for efficiencies brought about by such mergers. While not new, the debate on the effect of mergers on innovation has been particularly lively in Europe since the European Commission’s broadened its innovation theory of harm, starting with Dow/DuPont. The reasons behind this debate lie in the opposite effects that mergers can have on firms’ incentives to invest in R&D. This paper, available here, argues that merger control should be a priori neutral as to the innovation effects of horizontal mergers, since the overall effect of a merger on innovation can be either positive or negative depending on the circumstances. The paper further identifies a number of key factors which influence the impact of mergers on innovation. In particular, it suggests that a positive relationship between mergers and innovation is…

Jorge Padilla on ‘Revisiting the Horizontal Mergers and Innovation Policy Debate’ (2019) Journal of European Competition Law & Practice 10(6) 370

The Dow/DuPont merger launched an economic debate about the effects of horizontal mergers on innovation. Underpinning these debates are a number of points of agreement, beginning with consensus over the debate on the relationship between competition and innovation not being directly transferable to the effect of horizontal mergers. There are also a number of shared conclusions regarding merging firms’ ability and incentive to innovate when those firms compete in developing new products (product innovation) or in reducing their costs (process innovation). Such mergers may give rise to various efficiencies and increase the merging parties’ ability to innovate, but they can also influence the parties’ incentives to engage in R&D and implement their innovations. Ultimately, whether a merger leads to more innovation will depend on the nature and relative magnitude of the positive and negative externalities that the investments made by one party generate on the other. Where there seems to be no agreement, however, is on the implications of the…

Giulio Federico ‘Horizontal Mergers, Innovation and the Competitive Process’ (2017) Journal of European Competition Law & Practice 8(10)

Recent merger decisions have revived the debate on the role of innovation in merger control. The theory of harm put forward by competition authorities in these recent merger cases posits that a merger between rival innovators may lessen competition not only because of a reduction in (static) competition on current products, but also because of a lessening of (dynamic) competition on future products. According to this theory of harm, the loss of future competition may, at least in part, stem from a reduction in innovation. This article, available here, reviews the debate on the relationship between horizontal mergers and innovation up to this point (i.e. 2017). I think it provides a good overview of the various arguments invoked to subject mergers affecting innovation to more stringent scrutiny during a first stage of the debate. Section II offers a succinct historical account of economic thinking on the relationship between competition and innovation. Innovation theories of harm in merger control are premised…

Justus Haucap, Alexander Rasch and Joel Stiebale on ‘How mergers affect innovation: Theory and evidence’ (2019) International Journal of Industrial Organization 63 283

This article, available here, argues that a complete analysis of potential efficiencies from mergers should not only analyse how the merged entity’s prices, quantities and innovation incentives change (i.e., the direct effects of a merger), but also how these change for rival firms (indirect effects). While competition authorities sometimes analyse how mergers directly affect the merged firm’s innovation incentives, especially in high-tech industries, impacts on rivals’ innovation incentives have been rarely mentioned in merger guidelines or competition cases. This is unfortunate, since the effects of mergers on innovation in the relevant market depend on the reactions of non-merging competitors. While there is a growing literature on the effects of mergers on the innovation of the merging firms, evidence on the effects of mergers on outsiders’ innovation incentives is scarce. Thus, this paper studies how horizontal mergers affect the innovation efforts of both the merged entity and its non-merging competitors. Using data on horizontal mergers among pharmaceutical firms in Europe, it…

C. Scott Hemphill and Nancy L. Rose on ‘Mergers that Harm Sellers’ (2018) Yale Law Journal 127(1) 2078

In typical mergers, the main concern is that the parties will be able to raise the prices they charge purchasers. Some mergers, however, reduce competition among competing buyers, thereby reducing the prices that sellers receive for their products and services. These adverse “buy-side” effects may harm a wide variety of sellers, including workers.  This paper, available here, examines the antitrust treatment of mergers that harm sellers. Its central claim is that harm to sellers in an input market is sufficient to support antitrust liability. Part I considers mergers that increase classical monopsony power. Monopsony is used here as the mirror image of monopoly, i.e. market power susceptible of affecting the price of inputs. Monopsony is a frequent concern in labour and agricultural markets. As with lawfully acquired monopoly power, antitrust law does not prohibit the exercise of lawfully acquired monopsony power, despite its economic costs. Yet antitrust problems do arise when buyers increase their monopsony power by combining forces. Agreements…

Eliana Garcés and Daniel Gaynor, deals with ‘Conglomerate Mergers: Developments and a Call for Caution’ (2019) Journal of European Competition Law & Practice 10(7) 457

Traditionally, conglomerate mergers have raised little antitrust concern since the merging companies’ products were not perceived to compete with each other or to be critical in the merger parties’ value chain. The assessment of these mergers has generally consisted of a check for potential foreclosure strategies by way of tying or the reduction of technological interoperability. More recently, new theories of harm emerged from bargaining theories and dynamic considerations. These theories acknowledge a greater concern about dynamic effects of mergers on innovation, that an increasing number of markets exhibit bargaining power on both sides of a transaction, and that mergers of complements may not be innocuous in markets for increasingly complex products. This paper, available here, argues that these new theories are not suitable to generate ex ante decision-making rules; instead, their applicability will need to be empirically validated on a case-by-case basis. Section 2 deals with the traditional treatment of conglomerate mergers. The most common theories of harm traditionally…

David Glasner and Sean P. Sullivan on ‘The Logic of Market Definition’ (forthcoming) Antitrust Law Journal

This paper,available here , is not technically about merger control, but it is as relevant here as in any other competition topic – and it fits nicely with wider discussions of market power and market entry, which, as we have seen in past weeks, are common in merger control. While the usefulness of, and methodologies concerning market definition would seem to be well established, in practice both are actively questioned. Some have even argued that market definition is unnecessary in competition law. While this argument is not new, Louis Kaplow has recently advanced this thesis with a particularly pointed argument that: (1) market definition serves no role except to produce market shares, (2) market shares are poor measures of market power, and (3) antitrust would be better served by ignoring market shares and trying to assess market power from estimates of residual-demand curves and the like instead. The goal of this paper is to trace the internal logic of market…