This post reviews three OECD papers on the implications of the pandemic for competition law. Each paper focuses on a different topic.
A first paper focuses on merger control in the time of COVID-19.
In times of acute crisis, such as the one provoked by COVID-19, many firms may need to leave the market, which may trigger increased merger activity. Without thorough merger review, there is a serious risk that the economic crisis would result in higher market concentration and market power in several sectors. At the same time, the unparalleled economic uncertainty we are living through means that competition authorities face a number of challenges in the exercise of their merger control powers.
A first challenge relates to how to conduct forward-looking competitive assessments in turbulent market conditions. Merger reviews assess the effects of transactions by comparison to the circumstances that would have prevailed without the transaction (i.e. a counterfactual). In most cases, the counterfactual starts from the competitive conditions prevailing at the time of the merger and takes into account reasonably predictable market changes in the future. In turbulent times, it becomes more difficult to identify the relevant counterfactual. Thus, competition authorities need to consider how various elements of their analytical arsenal – the relevant timeframe for analysis, the relevance of available historical data concerning more stable market conditions, or the standard to establish the relevant counterfactual – may need to be tweaked.
This links to a second challenge, concerning the criteria to determine whether a merger poses competition issues. Some have argued that the concept of efficiencies traditionally deployed in merger control is too narrow. Resilience, environmental and social cohesion considerations should be taken into account. Such arguments are closely linked to the role that public interest considerations may play in merger control. In particular, governments might undertake or encourage mergers in order to pursue public policy objectives such as employment protection, to rescue strategic companies, or to increase production and storage capacity of specific goods. Governments might also try to prevent companies of strategic importance that are facing liquidity shortage from being prey to acquisitions by foreign firms. However, achieving these goals may have detrimental effects on market concentration and market power levels. Best practice during the last crisis required competition authorities to use their advocacy tools to alert to the dangers of undermining market processes and ensuring that mergers (even if anticompetitive) are proportionate and necessary to achieve the other policy objectives that the State is pursuing. This may include the imposition of remedies that minimise the anticompetitive effects of mergers approved to support public policy goals.
In effect, another challenge for competition authorities is how to design merger remedies. The COVID-19 crisis might not only increase the importance of remedies – given the expected increase in the number of mergers, market concentration and firm exit – but also raise issues regarding their design and implementation. In markets affected by the crisis, structural remedies may not always be a viable option due to (i) deteriorating performance of merging assets, (ii) difficulties in identifying suitable buyers, and (iii) ineffectiveness of responses to the rapid evolution of market circumstances. Consequently, competition authorities may need to be creative to prevent structural remedies from becoming less effective due to the crisis’ impact. Moreover, competition authorities will have to be more alert to the risks of such remedies not being as effective as during normal times. On the other hand, rapid changes in some markets may trigger parties’ (motivated) request – in jurisdictions where this is contemplated – to re-consider the scope of (both structural and behavioural) remedies already imposed due to a “change of circumstances”. Such requests often require an ex novo competition assessment, increasing the burden on competition authorities. In this regard, for the review or adjustment clauses to be effective it would be important to determine in advance the trigger events that would automatically modify the remedy provisions or fully release the parties from the obligations imposed by the remedy – but this may be difficult during a crisis.
An important driver of merger activity in a crisis is the increased number of firms going under. In parallel, the failing firm defence is expected to be invoked more often. The rationale of the failing firm doctrine is that, if an asset would inevitably exit the market, the merger may have no less anti-competitive alternative despite the increased market power of the resulting entity. There is general consensus that this defence should only be accepted when three cumulative conditions are met: (i) absent the merger, the failing firm would exit the market in the near future as a result of its financial difficulties; (ii) there is no feasible alternative transaction or reorganisation that is less anti-competitive than the proposed merger; and (iii) absent the merger, the assets of the failing firm would inevitably exit the market. In the aftermath of the 2008 financial crisis, competition authorities found no justification for relaxing the standards applicable to this defence, and held that there are other policy instruments available (e.g. bankruptcy law and State interventions such as subsidies) to help failing firms through the crisis. Nevertheless, they recognised that procedural changes might be justified to ensure speedier review. Similar considerations are likely to also apply now.
An important challenge for merger control during a crisis is to ensure that the merger review is timely. As an immediate reaction to the COVID-19 outbreak, many competition authorities issued guidelines on practical aspects of merger notification and review. In the medium/long term, the COVID-19 crisis may increase the pressure on competition authorities to speed up their merger review and to deploy sufficient resources to ensure that review is timely.
Further, financial distress situations might increase the merging parties’ incentive to engage in conduct in violation of standstill obligations. This may lead to sanctions, but competition authorities are also empowered to grant derogations from such obligations exceptionally. A derogation may prove a useful tool, especially where it is not possible to speed up the review process. While the requirements for granting a derogation remain quite strict, derogations from the standstill obligation may be limited in scope, allowing only for the partial implementation/acquisition of control prior to clearance, if sufficient to prevent the irreparable damage to the viability of a merging party and, consequently, to the feasibility of the transaction.
A second paper looks at co-operation between competitors in the time of COVID-19.
Co-operation between private firms may be one of the simplest and fastest way to address one major short-run market failure characterising this particular crisis: the sudden and severe disconnect between demand and supply. In addition to overcoming demand and supply shocks, co-operation may allow the private sector to temporarily pool resources and join investment efforts for research & development (R&D) projects in the health industry to develop a new vaccine, new treatment or medical equipment to treat severe and urgent cases.
An important question is how such cooperation arrangements should be treated given the applicable analytical framework. In effect, the traditional antirust framework remains valid throughout the COVID-19 crisis. Many competition authorities have stated that co-operation involving co-ordination or discussion on future prices, costs and wages are unlikely to be lawful or justified by pro-competitive effects. On the other hand, many competition authorities also have suggested that temporary measures adopted to address specific short-run market failures arising from the current crisis are unlikely to constitute a restriction of competition or, if they do, they are likely to generate efficiency gains apt to outweigh their potential harm.
As a result, competition authorities have provided multiple examples of lawful cooperation during Covid-19. This includes the coordination of purchases by groceries’ retailers, of logistics services, of the cross-supply of active pharmaceutical ingredients, or of financial services to provide supplementary relief packages for individuals and businesses affected by COVID-19 and to assist smaller lenders to maintain liquidity and issue loans to consumers and small businesses.
These examples reflect a number of common criteria to identify lawful cooperation agreements. One can identify some common elements in the initiatives already taken by competition authorities and governments to distinguish between lawful and unlawful co-operation during the current crisis. First, many competition authorities deem co-operation agreement lawful when they are needed to address a specific market disruption due to the COVID-19 crisis. All competition authorities insist that cooperation must be restricted to those elements essential to achieve its goal. Further, many competition authorities condition the lawfulness of the agreement on its positive impact of consumers. Finally, many competition authorities have also highlighted that any co-operation must be strictly limited in time, and usually last only until the exceptional circumstances of the crisis in the specific sector will subside.
The paper then turns to the challenges faced by competition authorities in determining the lawfulness of cooperation agreements during COVID-19. These include the need for prompt guidance to businesses and speedy decision-making; determining the necessity of the agreement; and determining the correct timeframe.
Regarding guidance and decision-making, competition authorities will be required to react extremely quickly to requests for guidance by businesses. This can be achieved, for instance, by way of general guidance to help companies determine ex ante whether a proposed collaboration may raise issues, or by adopting block exemptions to preclude the application of competition law to a given sector for a period. Another alternative is to allow or require private companies to notify the cooperation agreement to the competition authority, allowing the agency to verify the lawfulness of the cooperation ex post without creating an ex ante barrier to the implementation of the agreement. Finally, to ensure that their response is timely, many authorities have put in place mechanisms for speedy ad hoc guidance, in the form of comfort letters or similar means.
The second challenge concerns the assessment of the necessity of the agreement, which can be difficult given the resource constraints and time pressure under which competition authorities will be operating. Agencies may want to analyse the necessity criterion by making a comparison with the ‘but for’ scenario i.e. by considering the legal and economic context in which the business operates to determine what would have happened or what would happen in the absence of the collaboration. An important consideration in this regard is the need for companies to find solutions in the short timeframe imposed by the COVID19 crisis – i.e. the counterfactual needs to be evaluated by the competition authorities relative to the possible alternatives available at the specific time of when the agreement was being entered into. If sensitive information needs to be exchanged, and in order to ensure that the exchange is kept to the strictly necessary, competition authorities may consider adopting procedure analogous to those used in merger control for the exchange of information pre-merger, such as the use of clean teams, strict confidentiality clauses, “Chinese walls” to business activities that are not closely related to the co-operation, and independent monitoring trustees.
Lastly, regarding the duration of the cooperation arrangement, competition authorities should be vigilant and act promptly to limit or withdraw an authorisation or to start antitrust actions when the negative impact of the crisis subsides and the collaboration is no longer strictly necessary. It should be borne in mind that innovative co-operation may require a completely different timeframe than co-operation aimed, for instance, at addressing the issues arising out of lockdown periods.
Finally, a last paper focuses on exploitative pricing in the time of COVID-19. I am afraid that here I will be describing my own work, so be warned.
The brutal disruption caused by the pandemic has led to difficulties in the production and distribution of a number of essential products. This, in turn, creates opportunities for companies to increase the prices of these products significantly. While rising prices can reflect increases in the costs of market participants, and provide essential market signals to increase production and stimulate new entry, they can also reflect exploitative business practices without objective justification. Some competition agencies are empowered to act directly against exploitative pricing abuses under competition law. However, bringing excessive pricing cases is challenging even in normal times. Before bringing such cases, competition authorities should consider whether antitrust enforcement against high prices is needed, proportionate and effective. Agencies should also take into account whether alternatives such as consumer protection, price gouging rules or even price regulation are preferable.
In other words, competition authorities should consider whether and when to pursue excessive pricing cases during this crisis. Applying competition law to address exploitative pricing practices directly during a crisis may prove even more challenging than in normal circumstances – in particular, intervention may not be timely – and come with the risk of unintended consequences. For example, intervention against price increases can lead to products being diverted to places where prices are not regulated. Further, prices act as signals, and limiting price rises can reduce incentives to increase production, thereby delaying market entry or production increases that would lower prices faster in the medium-term. At the same time, bringing excessive pricing cases may well be justified, and the best available alternative to address the challenges caused by significant price increases of essential goods during a crisis.
Even during a crisis, competition authorities must apply the analytical framework for excessive pricing, which poses two main challenges in this context.
First, the investigated company must have sufficient market power to trigger control over its unilateral conduct. Establishing market power is challenging in the best of times, and these challenges are exacerbated during a crisis, where market power may disappear as suddenly as it appeared, and where evidence of matters such as market shares, entry barriers, buyer power, etc., may be difficult to come by. On the other hand, markets may be narrower than usual during a crisis – limitations in supply and stringent restrictions of circulation may prevent effective ‘chains of substitution’ within the relevant product markets; and confinement may severely limit the ability of consumers to move around to purchase goods and services. Another challenge relates to the temporary nature of market power. Competition authorities may identify ‘situational monopolies’, i.e. situations where a firm holds significant market power during a very narrow amount of time. However, this concept is broadly untested under competition law, and competition authorities will likely face significant challenges in identifying evidence to support such a conclusion.
A second challenge concerns the identification of exploitative prices. Over time, competition authorities and courts have made use of different methods to determine whether a price is excessive. In the context of international products and a global crisis, international price comparisons may prove useful, even if it must be ensured that the comparators are selected in accordance with objective, appropriate, and verifiable criteria. On the other hand, all the methods to determine whether a price is excessive under competition law have weaknesses, and price increases may be justified – e.g. companies may be reacting to increases in their own costs.
In short, excessive pricing cases are extremely data intensive and unavoidably fact-specific, operate ex-post, hard to build and often difficult to prosecute. This leads to delays and to risks of the case failing to succeed at court. As such, it is important to find ways to ensure that enforcement is effective. One option that could preclude the need to start formal proceedings consists of competition authorities making it clear that they are closely monitoring the market and ready to intervene promptly. This could take a number of forms. Competition authorities may issue general warnings that they are monitoring the market, or issue individual informal warnings to specific companies. Agencies can also consider issuing interim injunctions, but this still requires in-depth work to establish a prima facie exploitative practice and may face challenges regarding demonstrating that the conduct will cause irreparable harm. A third alternative is to take into account the role that other regulatory tools, and regulators, can play in addressing exploitative pricing practices – e.g. consumer protection, public tender rules or price gouging laws. In effect, this may be the only avenue available in those jurisdictions where exploitative abuses are not prohibited under competition law. Even where they are prohibited, an important preliminary question is whether competition authorities or other regulatory authorities have the most appropriate combination of tools and expertise to address excessive prices.
A last topic concerns price regulation, which provides an alternative to competition law enforcement against exploitative abuses in certain cases. Both seek to address the market’s failure to deliver goods and services to consumers in an efficient manner at competitive prices, and may be deployed where prices become too high and there is no timely prospect of the market correcting. Further, to be fully effective both price regulation and excessive pricing enforcement may need to be coupled with additional action to address the source of the market failure. Finally, both options can lead to similar pernicious outcomes: reducing incentives to increase production, delaying market entry or production increases that would lower prices, and leading to products ending up in places where prices are not regulated. As a result, competition agencies should flag the risks of price regulation to governments, and play a role ensuring that, where used, price regulation is limited in scope – both in terms of coverage and time.