While a short time frame of analysis can help build confidence in the conclusions reached on the likely effects of a transaction within that time frame, it misses potential harms and benefits related to longer-term potential competition. To correct this analytical deficiency requires the use of a longer time frame of analysis. However, with a longer time frame comes greater uncertainty on both probabilities and the magnitude of outcomes. Such prospective assessments often imply the balancing of probabilities by decision-makers, which are subject to substantive, evidentiary and practical constraints. In cases involving potential competition, this uncertainty is further heightened, to the point where meeting evidentiary standards designed for a short time frame analysis can become near impossible.

This paper, available here, explores avenues to deal with uncertainty under merger control, and advances two proposals. First, one should ensure that the substantive standards for clearing and prohibiting a merger reflect not only the probability but also the potential magnitude of anti- and pro-competitive effects. Second, uncertainty can be addressed by developing a three-step approach that maintains the existing evidentiary standard but allocates the burden of proof to different parties depending on the stage of the merger control process.

Section II begins by exploring the time frames used for merger control in practice.

In practice, assessing ‘existing competition’ in merger control typically involves looking to the recent past to understand the nature of the relationship between the products of the merging parties, and, where necessary, the relationship between those products and those of other third parties.  Moving forward in time, agencies also consider existing competitive constraints imposed by as yet non-existent products. To do this, agencies consider the likelihood of supply-side substitutability and whether there are any signs of likely future entry into that market that might already be constraining the firms’ ongoing business. Finally, authorities may also take into account future changes to the market that can reasonably be predicted. However, in practice the time frame for the analysis is usually quite limited – typically looking only towards two or three years in the future.

Section II also discusses the evolution of assumptions and practices regarding potential competition.

Agencies are increasingly alive to the risks that acquisitions pose to potential competition. These risks can materialise when transactions turn out to be killer or reverse-killer acquisitions, or when they simply eliminate the potential for increased rivalry between products that continue to be offered. Agencies are also increasingly vigilant to the risk of harm to existing competition on R&D investment and innovation brought by mergers between potential competitors.

In line with this, increasing attention has been paid to the impacts of a merger on potential competition. To assess this, and in addition to internal documents, valuation analysis and staff depositions are increasingly being used. Agencies are also carefully examining the likelihood of an alternative acquirer in the absence of the proposed merger. However, it is certainly the case that the tools required to examine prospective harms to potential competition will rely less on econometric studies based on historic data, and instead require an economic understanding and assessment of the changes brought about by the merger to the incentives and ability to compete of the companies left in the market.

Section II finally looks at how changes in approaches to potential competition fare against prevailing legal standards.

Given existing legal standards, current merger control approaches are of limited use in addressing potential competition when the effects are uncertain enough, even though the risks to potential competition of mergers may be higher than previously thought. Should the risks from failing to address potential competition are large enough, this could justify adjusting evidentiary thresholds to better fit those risks.

However, judicial trends seem to be towards a tightening of the requirements for prohibiting a merger instead. In Europe, the General Court recently required the European Commission to produce sufficient evidence to demonstrate that a transaction entails a strong probability of significant impediments to competition. According to this judgment, the standard of proof is stricter than that ‘more likely than not’ or than the ‘balance of probabilities’, as the Commission had long maintained. In the US, the structural presumption for horizontal mergers has been eroding and courts have been wary of finding anticompetitive effects that are (and perhaps must be) demonstrated primarily or entirely with qualitative evidence, such as a reduction in potential competition or innovation. US courts have also been limiting the principles governing horizontal mergers to acquisitions of firms that demonstrably plan to enter the market in which the acquiring firm competes within a relatively short period of time, and to when the likelihood of competitive success for the acquired firm is above 50 % – regardless of the size of the potential competitive benefit from such successful entry.

Section III explores the risks of not dealing with uncertain and risky scenarios.

A consequence of these judicial developments is to constrain enforcement efforts, limiting them to instances that do not involve actual potential competition. In doing so, merger assessment constrains itself in potentially problematic ways. An assessment that limits itself to the foreseeable future will by design miss those potential, and even plausible effects that we are not yet sufficiently confident will occur. The result is that we may glimpse possibilities, the outline of which might be discernible, yet we decide to ignore them. Adopting a framework that looks past the strictly foreseeable future and to the longer term would allow us to grapple with otherwise unrecognised harms and efficiencies. It would also allow more immediate harms and efficiencies to stack up over time, and of course, it would allow greater scope for entry to mitigate a short-term loss of competition. However, doing so would require competition law and economics to embrace uncertainty.

In addition to uncertainty, merger control also has a problem with risk. As yet, competition law has not managed to develop decision-rules that address the basic components of risk, probability and outcome simultaneously. Instead, it has confined itself to dealing in likelihoods (probabilities) without any acknowledgment of the impact that magnitude (outcomes) will have on the expected effect of a decision, as required by decision theory. While discussions of tail risks and uncertainty in merger control have arisen mainly in the context of the digital economy and debates about killer acquisitions, the likelihood and magnitude of harms and benefits should be relevant considerations in determining whether any transaction – regardless of the economic sector where it occurs – can be detrimental to competition. It is true that calculating each of these elements can be challenging, but we already deal in probabilities on a daily basis. We should also try to look into the more distant future and design systems that are able better to reflect the impact of smaller probabilities and the magnitude of their effects.

Section IV advances a proposal better to incorporate uncertainty and risk in merger assessments.

Only when the potential negative effects, their likelihood, or a combination of both flowing from a merger are large enough will an agency be justified in prohibiting a merger. This is a view similar to the ‘balance of harms’ approach outlined in the Furman Report. However, merely moving from focusing on the probability of harm occurring as we currently do, into looking at expected values of harm is likely only to reduce mistakes at the margin. A serious consideration of ‘potential competition’ will instead require taking longer time frames into account, with concurrent increases in uncertainty regarding the correctness of the analysis.

Given evidentiary standards, it may be virtually impossible for competition agencies to meet their burden of proof in mergers where concerns relate to possible long-term implications, and particularly when (actual) potential competition is involved. Similar concerns apply to evidence of efficiencies. In thinking about how to address uncertainty, a reasonable starting assumption is that, in a merger involving potential competition, both evidence of anticompetitive effects and of absence of anticompetitive effects will likely be thinner than in a merger review focusing on existing competition. It follows that an approach to potential competition that addresses the risks of both over- and under-enforcement must contend with the fact that the evidentiary thresholds will be more difficult to meet for both agency and merging parties.

In order to do so, the paper advances a three step approach. While seeking to maintain the current standard of proof inasmuch as possible, this approach would see the burden of evidence change between the parties. During the first stage, the agency would need to establish that there is a realistic prospect of harm, both in terms of likelihood and magnitude, to potential competition. To prevent agencies taking undue advantage of this relaxed framework, reliance on this ‘realistic prospect of harm’ test should be limited to actual potential competition – i.e. it would not apply if the merger control assessment could focus on existing and reasonably foreseeable competition. At a second stage, if this threshold is met, then parties would have, in addition to the possibility of trying to refute this finding, the burden of showing that: (a) the identified harms to potential competition were not likely, even if there were a realistic prospect of them occurring; or (b) there are realistic prospects of countervailing pro-competitive efficiencies. In this latter case, the burden would once again revert to the agency to show that, while there was a realistic prospect of efficiencies, this is not a likely prospect. Importantly, decisions reached at each stage of the analysis would be reviewable (e.g. parties could challenge a finding that there is a realistic prospect of harm, even if they failed to meet their burdens under the next steps, and etc).


Since I outlined the nature of our argument above, I believe the only serious comment I can provide in this context without abusing this platform is to point out the limitations of the paper as I see them – and emphasise that this paper does not reflect the views of the OECD, its committees or members.

This paper is more of an attempt to stir up a debate about how to address potential competition in practice than a final work result (is is for Competition Law and Policy and Debate, after all). While part of a larger conversation that is taking place on these topics, it attempts do develop a more ‘analytical’ approach that focuses on the specific challenges of ‘potential’ competition and ‘uncertainty’ for competition law. In doing so, it hopes to move beyond formalistic models and quasi-political controversies about how to address problems in specific economic sectors.

However, the main challenge for any analytical approach is the definition of its constituent elements, and this piece is no exception. One particular problem is that the piece may be too short given its ambitions. More work should have been devoted to more clearly delineating crucial analytical concepts such as ‘potential competition’, ‘reasonably foreseeable’, ‘actual competition’, etc. – particularly in light of the importance we ascribe to them in the legal test we proposed. A failure to do so could provide a basis for arguing that we are advocating for lower evidentiary thresholds across the board, which is not our objective at all.

Another issue is that there are very good reasons why merger control sticks to foreseeable developments and steers away from dealing with truly uncertain scenarios. The advantage of focusing merger analysis on the foreseeable future, i.e. the next 2-3 years, is the certainty and confidence that one can develop about the likelihood of effects caused by the transaction during this period, and the fact that it allows agencies to circumscribe their efforts to those transactions with the greatest prospect of creating social harm. There are also good reasons to believe that increasing agencies’ discretion as regards firms’ commercial behaviour on the basis of speculative efforts concerning the far-off future may prevent valuable market developments and lead to a waste of valuable agency resources – which is why there are (stringent) evidentiary standards in the first place. In addition, there are rule of law-based arguments against the imposition an undue restriction on activities that are prima facie lawful. Obviously, I believe these are not insurmountable obstacles to the approach we propose – in effect, our proposal seeks to deal with them – but I do think that, in an ideal world, we should have addressed them more fully and, in doing so, refined our policy proposal.

Further, we were unable to address institutional design in this piece. It could be said that, inasmuch as the evaluation of the fulfilment of the requirements under each step is left to the agency, then this would in practice lead simply to a lowering of evidentiary thresholds in practice, even if not in theory. This is not a problem where an independent body should make those findings (e.g. a court, as would be the case in US), but this set up might create problems regarding the timeliness of decisions, production of evidence, etc. We ascribe great importance to judicial review in mitigating these risks, but there can be genuine doubts as to whether that would be enough.

Lastly, this paper can be subject to a criticism similar to one I have made regarding (most?) papers I have reviewed on the topic. Underlying it is an unspoken concern with certain types of mergers escaping scrutiny. We have tried to adopt a conceptual approach that avoids individualising economic sectors, and to stay within the bounds of existing legal frameworks – which we believe are better suited to deal with individual merger cases. However, the real problem we face may very well not be related to individual mergers per se, but with increased market concentration and systematic acquisitions of potential competitors by incumbents. If this is the case, then the reaction should be systemic as well – e.g. prohibiting mergers in problematic sectors either absolutely or more softly (e.g. by creating a presumption of illegality and imposing a burden to demonstrate efficiencies on the parties in all cases), establishing ex post review mechanisms, or even adopting (more or less intrusive) ex ante regulation. Personally, I think this is a fundamental question going forward, and it is something that we could also have looked at, even if it falls outside the scope of the paper.

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