Innovation Competition and Innovation Effects in Horizontal Mergers: Theory and Practice in the United States and European Commission

• Published date: 01 September 2023
• DOI: http://doi.org/10.1177/0003603X231182500
• Author: Marcos Puccioni de Oliveira Lyra,Camila Cabral Pires-Alves
• Date: 01 September 2023
• Subject Matter: Articles

https://doi.org/10.1177/0003603X231182500

The Antitrust Bulletin

2023, Vol. 68(3) 460 –476

© The Author(s) 2023

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DOI: 10.1177/0003603X231182500

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Article

Innovation Competition and

Innovation Effects in Horizontal

Mergers: Theory and Practice in

the United States and European

Commission

Marcos Puccioni de Oliveira Lyra* and Camila Cabral Pires-Alves**

Abstract

This article discusses the assessment of potential negative effects on innovation in horizontal

mergers within the United States and the European Commission Merger Control. It explores the

theoretical background and practice. First, the article draws principles from the literature review

on propositions to assess innovation competition cases. Second, it presents official documents and

literature on the case law to study the jurisdictions’ experiences. In addition, selected case studies are

analyzed, establishing connections to the theoretical principles and practice. The case studies include

(1) Takeda/Shire (EC-2018), (2) AbbVie/Allergan (EC-2020), and (3) Sabre/Farelogix (DoJ-2019). The

article concludes that there have been improvements, particularly in the assessment of overlaps in

firms’ capabilities.

Keywords

competition policy, mergers, innovation, United States, European Commission

I. Introduction

Competition encompasses various dimensions including price, quantity, product differentiation, quality

improvement, and innovation. This article focuses on innovation competition in horizontal mergers.

Although competition authorities worldwide have well-defined procedures for assessing price compe-

tition, the evaluation of innovation competition and its potential impact on innovation have presented

challenges. Each case of innovation competition is unique and diverse, making it difficult to apply a

uniform procedure that adequately captures harm to innovation.

*Assistant Professor, Fluminense Federal University, Niterói, Brazil; Researcher, Research Group on Law, Economics and

Competition, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil; Industrial Economics, Innovation, Territory and

Energy Study Group, Fluminense Federal University, Niterói, Brazil

**Associate Professor, Institute of Economics, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil; Coordinator,

Research Group on Law, Economics and Competition, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil

Corresponding Author:

Marcos Puccioni de Oliveira Lyra, Assistant Professor, Fluminense Federal University, Niterói 24210-201, Brazil.

Email: marcoslyra@id.uff.br

1182500ABXXXX10.1177/0003603X231182500The Antitrust BulletinLyra and Pires-Alves

research-article2023

Lyra and Pires-Alves 461

1. Richard Gilbert & Steven Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation

Markets, 63 Antitrust LAw J. 569 (1995).

2. Michael L. Katz & Howard A Shelanski, Mergers and Innovation, 75 Antitrust LAw J. 1 (2007).

3. Giulio Federico et al., Antitrust and Innovation: Welcoming and Protecting Disruption, 20 Econ. innov. nEw tEchnoL. 125

(2020).

4. Another important disclaimer is that this article considers innovation efforts that result in vertical differentiation, that is,

new or improved products that differ in terms of their quality.

5. Richard J. Gilbert & Willard K. Tom, Is Innovation King at the Antitrust Agencies? 69 Antitrust LAw J. 43 (2001).

6. Marcus Glader, Innovation Markets And Competition Analysis (2006).

7. Wolfgang Kerber & Benjamin R. Kern, Assessing Innovation Effects in US Merger Policy: Theory, Practice, Recent

Discussions, and Perspectives, ssrn ELEct J. 1 (2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2983098.

8. Wolfgang Kerber, compEtition, innovAtion, And compEtition LAw: dissEcting thE intErpLAy, 42-2017 Joint Discussion

Paper Series in Economics (2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3051103.

U.S. and European jurisdictions have changed their approaches to innovation competition in merger

analyses. For example, while the U.S. Horizontal Merger Guidelines address innovation effects, their

European counterpart primarily considers the role of innovation in assessing price effects. However,

the European Commission (EC) developed a case law procedure that investigates different forms of

innovation competition. Given the relevance of assessing innovation effects, jurisdictions must be

more assertive on the subject and incorporate proper assessments into their guidelines.

The goal of this article is to investigate how the assessment of potential negative innovation effects

in horizontal merger control policies of the United States and the EC has been undertaken, considering

the lesson taken from the theoretical background and practice. The article draws from propositions and

principles suggested in the antitrust literature by various authors such as Gilbert & Sunshine,1 Katz &

Shelanski,2 and Federico et al.3 to discuss how jurisdictions have considered these cases. Considering

as potential negative innovation effects post-merger lessening of innovation incentives, the article con-

cludes that the cases may be grouped into three categories and explores the mechanisms, theories of

harm, and some of the evidence used to evaluate these cases.

While efficiency considerations in merger assessment are important, as the evaluation follows the

rule of reason and a merger may increase the incentives and ability to innovate, the discussion in this

article primarily centers on potential negative effects on innovation and applicable theories of harm

in horizontal mergers. It does not mean a defense that the potential positive effects on innovation

should be neglected, but rather that this side of scale is not where the greatest gaps in the antitrust

debate are.4

The practice is examined through a review of the U.S. and EC Merger Control by considering

authors such as Gilbert & Tom,5 Glader,6 Katz & Shelanski, Kerber & Kern,7 and Kerber,8 as well as

official documents. Recent selected cases are presented as examples. The ultimate goal of the article is

to provide recommendations for improving the merger analyses.

The article is structured into five sections. After this introduction, the second section presents the

theoretical background. The third section debates the U.S. and European Union (EU) experiences, and

the fourth examines the selected cases. The final section presents concluding remarks.

II. Assessing Innovation Competition in

Horizontal Mergers: Theoretical Aspects

Innovation competition is inherently complex, making assessment challenging compared with tradi-

tional price/product competition. Gilbert & Sunshine, Katz & Shelanski, and Federico et al. are identi-

fied as the main contribution to the recent debate on innovation effects. This section presents the

literature review and lessons learned from this contribution, building three guiding principles for the

assessment: business-stealing effects, capabilities, and dynamic effects.