This relatively old paper – which can be found here – argues that the Commission makes all the right sounds on innovation, but it is not putting its “talk” into practice. Few cases have been actually examined for their innovation effects, and even in these few cases innovation effects have not been decisive for the ultimate competition assessments. In particular, verifiability seems to be a major constraint for DG COMP, preventing it from fully incorporating innovation effects into its analyses.
The paper begins with a review of how the Commission took innovation claims into account in merger control assessments up until 2012. This section concludes that, while the Commission can take efficiencies into account as part of its substantive analysis of the consequences of a merger – usually to counterbalance perceived anti-competitive effects –, the evidence is that the Commission has made little use of this option. On the basis of the limited sample of cases where efficiencies were explicitly considered by the Commission in merger decisions, dynamic efficiencies (of which innovation is usually one) have a very low probability of being accepted. In only one case up to 2012 was an efficiency claim based on innovation accepted – the Metso/Aker Kvaerner merger– , but even in that case it was not determinative (NB: more recently a similar claim was also accepted in the UPS/TNT merger, which was nonetheless prohibited).
The paper then moves on to try to determine why the analysis of innovation effects is so difficult in merger control. It is argued that consumer-surplus effects from merger-induced innovation effects are difficult to verify immediately, since the success of innovative efforts is highly uncertain and usually only becomes apparent in the medium or long term. Because of their higher uncertainty, efficiencies that come into effect in the longer term will be more likely to fail the ‘verifiability’ condition (think of it as a duty to meet a burden of proof) which must be met in order for innovation claims to be accepted.
In section 4, the author briefly reviews the most relevant insights emanating from both the theoretical and empirical literature regarding how to assess the likely impact of a merger on innovation. Theoretical studies on industrial organisation provide arguments for both positive and negative effects on the technological activities of firms after they merge:
- when the merger allows for the elimination of duplicated R&D, R&D inputs will decrease after the merger, but R&D efficiency will increase;
- a merger might realise scale and/or scope economies and/or synergies in R&D by combining the R&D capabilities of both merging parties, in which case merged firms have a bigger incentive to perform R&D than before their merger. This can, however, be counteracted by increased organisational complexity
- A merger might reduce R&D competition. The possibility of better coordination of R&D investment after a merger will typically lead to lower R&D expenditures, unless technology spillovers take place, in which case a merger will lead to higher R&D expenditures. I
In the light of this, it is no surprise that earlier empirical studies into the impact of mergers on innovation have generated mixed findings: sometimes positive, sometimes insignificant, and often negative effects on the R&D input and output of merging firms have been observed post-merger.
Lastly, the paper provides some recommendations. These are, basically, that authorities should investigate efficiencies independently of whether they have been submitted by the parties, and should be willing to assess the potential verifiability of efficiencies in the light of the available literature on the topic.
I’m not really on-board with these recommendations; but the paper provides a good overview of EU practice and of the theoretical and empirical literature on the impact of mergers on innovation, and deserves to be read on that account alone.