A Legal and Economic Consensus? The Theory and Practice of Coordinated Effects in EC Merger Control

• Published date: 01 March 2004
• DOI: 10.1177/0003603X0404900106
• Date: 01 March 2004
• Author: Simon Bishop,Andrea Lofaro
• Subject Matter: Antitrust in the U.S. and the EU: Converging or Diverging Paths?

The Antitrust Bulletin/Spring-Summer 2004 195

Alegal and economic consensus?

the theory and practice

of

coordinated

effects in EC merger control

BY SIMON BISHOP and ANDREA LOFARO*

I. Introduction

Since its introduction in 1990, European Community (EC) merger

control has undergone a number

of

changes.' Of particular importance

has been the use and evolving practice by the European Commission

of

the concept

of

collective dominance. Traditionally, EC merger

control

focused on assessing whether amerger gives rise to the

creation or strengthening of a position of single-firm dominance. This

traditional view meant that EC merger control in its infancy was fairly

formulaic: define the relevant market and calculate market shares to

establish whether dominance was created or strengthened.' However,

in recent years as much prominence has been given to the possibility

*RBB Economics, Brussels and London.

AUTHORS' NOTE: We are grateful to John Boyce, Philippe Chappatte, Henry

McFarland, Kent Mikkelsen and Mike Walker

for

their helpful comments.

Prior to the introduction

of

the EC Merger Regulation, mergers

were in principle handled within the context of article 82 of the EC Treaty

(then article 86) which assesses whether firms are abusing adominant

position. Very few mergers were investigated under this procedure.

2In general, a firm is usually held to be dominant if it has a market

share in excess of 40% or 50%.

© 2004 by Federal Legal Publications, Inc.

196 The antitrust bulletin

that even mergers that did not give rise to single-firm dominance

might still have adverse consequences for competition by creating or

strengthening a position of collective dominance.3

Although the use of collective dominance has been subject to

some legal challenges, from an economic perspective the legal

concept

of

collective dominance is a central element

of

merger

control.

Indeed,

the

potential

competition

concerns

raised

by

horizontal mergers are normally divided into two categories: unilateral

effects and coordinated effects. Since it is natural to equate unilateral

effects with single-firm dominance and coordinated effects with

collective dominance,' it is clearly appropriate for EC merger control

to cover such potential competition concerns.

However,

in its

short

history,

there

appear

to

have

been

divergences between the economic concept of coordinated effects and

the legal interpretation of collective dominance. Although lip service

was often paid to it, the practice of the European Commission was

often at odds with the underlying economic theory of coordinated

effects. This article reviews the economic theory

of

coordinated

effects and the changes in the Commission's practical assessment of

coordinated effects, and assesses the extent to which its decisions

have been consistent with the underlying economic theory. We also

Recent

years

have

also seen the

Commission

refine its

analysis

of

single-firm

dominance

to

reflect

the

possibility

that

market

shares

overstate

or

understate

the

strength

of

competitive

constraints

by

applying

the

notion

of

closeness

of

competition.

4

There

are

some

commentators

who

believe

that

the

concept

of

single-firm

dominance

does

not

capture

all

unilateral

effects.

See,

for

example,

Lorenzo

Coppi

&

Mike

Walker,

Substantial Convergence or

Parallel Paths? Similarities and Differences in the Economic Analysis

of

Horizontal Mergers in U.S. and EU Competition Law, in

this

issue

of

The

Antitrust Bulletin. We disagree and

indeed

believe that attempts to

plug

the

so-called

gap

will actually lead to

much

greater

(and

unwarranted)

intervention.

See

S.

Bishop

&D.

Ridyard,

Prometheus

Unbound:

Increasing the Scope

for

Intervention in EC Merger Control, 8

EUR.

COMPETITION

L.

REV.

357 (2003);

and

M.

ALFfER

UNTERSAGUNGSKRITERIEN

IN

DER

FUSIONSKONTROLLE-SLC-

TEST

VERSUS

MARKTBEHERRSCHENDE

STELLUNG?

(Wirtschaft

und

Wettbewerb 2003). It is notable

that

the list

of

cases that proponents

of

the alleged gap point to is negligible.

Coordinated effects :197

provide a comparison of the European practice with the approach

taken by the U.S. antitrust authorities. Being economists, throughout

the remainder of this article we use the term "coordinated effects"

rather than the legal term "collective dominance" (unless in the

context of commenting on the Commission's decision).

The article is organized as follows. Section II provides a brief

overview of the economic theory of coordinated effects. In particular,

this section explains that despite the fact that firms may have an

incentive to engage in a collusive agreement, there are always short-

run gains to be made by deviating from that agreement. Hence, in

order for coordinated behavior to be successfully established and

sustained, the firms in the coordinating group must be able to observe

whether the other firms are abiding by that agreement. We then

discuss the different forms that tacit coordinated behavior might take.

Although most of the economic discussion involves coordination over

price, there are other parameters over which firms might coordinate

their behavior. Finally, we discuss the economic relationship between

coordinated effects and unilateral effects.

Section

ill

sets out analytical approaches to assessing whether a

merger is likely to give rise to coordinated effects. We consider two

approaches. First, we consider the traditional checklist approach. This

approach assesses whether the characteristics

of

the industry are

conducive to reaching and sustaining tacit coordinated behavior.

However,

although

the

checklist

approach

identifies

industry

characteristics that facilitate or hinder tacit coordination, it neither

providesa systematic framework for assessing the relative importance of

the various factors nordoes it addresshow the merger affects the mode

of competitionother than in the obvious sense of reducing the number of

suppliers and changing the distribution of market shares. To remedy

thesedeficiencies, we present an analyticalframework that organizes the

competitive assessmentinto three categories: examination of the ability

of the firms in the coordinating group to reach and sustain atacit

understanding assuming that these firms face no other competitive

constraints (internalfactors); examination of the competitive constraints

provided by firms outside the coordinating group, including potential

new entrants and the possible reactions of customers (external factors);

and assessinghow the mergeraffects the likely mode of competition.