Mergers and Innovation

• Author: Pierre Régibeau,Katharine E. Rockett
• Published date: 01 March 2019
• Date: 01 March 2019
• DOI: http://doi.org/10.1177/0003603X18822576

Article

Mergers and Innovation

Pierre R´

egibeau* and Katharine E. Rockett**

Abstract

Do mergers raise substantial additional issues when the parties have significant innovation programs?

To answer this, we examine the merger-related efficiencies that arise only with substantial innovation,

arguing that innovation-intensive mergers should be treated more leniently than mergers without this

dynamic dimension. We provide guidance on evidence that might determine the magnitude of such

efficiencies. Next, we argue that where innovation is “directed” towards a product market, dealing

with product line overlap should allay concerns about postmerger innovation. If research is not

directed, we argue that theories of harm linked to the product market are unconvincing. Instead, one

should look at theories of harms in the innovation market, which stem from the advantage in being first

to innovate. Such first-mover advantages can be rooted in patent protection, switching costs, or

network effects. This approach helps explain some of the remedies recently imposed on transactions

such as Dow-Dupont and Bayer-Monsanto.

Keywords

merger, innovation, evidence, policy algorithm

I. Introduction

The goal of encouraging technological progress and the diffusion of knowledge across the Single

market has always been part and parcel of European Union (EU) competition policy.

1

However, the

interpretation of this mandate and the weight given to innovation considerations has varied over time,

as reflected most recently by mergers in mobile telephony and chemicals.

2

Until the mid-1990s, the

*Vice President, Charles River Associates, and Honorary Professor, University of Essex, London, UK

**University of Essex, London, UK

Corresponding Author:

Pierre R´

egibeau, Vice President, Charles River Associates, and Honorary Professor, University of Essex, Charles River

Associates, 8 Finsbury Circus, London EC2M 7EA, UK.

Email: Pregibeau@crai.com

1. See Article 85(3) of the Treaty of Rome, or Article 101(3) of the Treaty on the Functioning of the European Union, O.J. (C

115, 2008), http://ec.europa.eu/competition/antitrust/legislation/articles.html.

2. See Massimo Motta & Emanuele Tarantino, The Effect of Horizontal Mergers When Firms Compete in Prices and

Investments (CEPR Disc ussion Paper No. 11550 , 2017), for a review of th ese cases. Examples inc lude Dow/Dupont

(COMP/M.7932, OJ C297, Aug. 17, 2016, a t 8, and Commission Decision Mar. 27 , 2017), Bayer/Monsanto (COMP/

M.8084, OJ C286, Aug. 30, 2017, at 1, and Commission Decision Apr. 11, 201 8), Pfizer/Hospira (COMP/M.7559 OJ

C324, Aug. 2, 2015, at 2, and Merger Procedure Aug. 4, 2015), GE/Alstom (COMP/M.7278 OJ C139, May 4, 2017, at

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2019, Vol. 64(1) 31-53

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DOI: 10.1177/0003603X18822576

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dominant view was that innovation incentives were enhanced by treating intellectual property (IP)–

based market power more leniently and by accepting restrictive licensing clauses as long as they were

seen as necessary to ensure the distribution of technological knowledge. While this had implications

for Article 101 (then 81) and 102 (82) cases, innovation was not a material factor in merger reviews.

The last twenty years have seen a notable shift in the antitrust treatment of intellectual property

rights (IPRs).

3

Until a recent declaration,

4

the consensus seemed to be that, while competition policy

should not expropriate IPRs, IP-based dominance should be treated just like any other type of dom-

inance. At the same time, innovation has slowly crept into merger review

5

in a series of cases,

becoming more recently a full-fledged aspect of the process, reflecting the European Commission’s

(EC’s) concerns that mergers might have material systematic negative effects on innovation. In

particular, the EC decision in Dow-Dupont has created a vigorous controversy.

A. The Current Controversy

The nature of the controversy has been fleshed out in a number of recent academic papers, authored by

both academic observers and those involved in the EC’s decisions. It is useful to start with a paper by

the former Chief Competition Economist at the EC, Massimo Motta, and his coauthor Emanue le

Tarantino.

6

These authors draw several points out of a model that envisages a merger as a combination of assets

among firms that can set both prices and investment levels. The merged firm offers multiple differ-

entiated products upon combining the operations of multiple single product firms, whereas the

“outsider” firms that do not participate in the merger continue to produce a single (differentiated)

product. This structure attempts to capture the asymmetric nature of merger, in contrast to the stream of

work that investigates changes in overall industry concentration and innovation investments.

7

This structure also implies that innovation by one firm hurts other firms in the market. As such, they

find that the internalization of such a negative externality means that a merger reduces incentives to

innovate. As we discuss further below, this can be seen as the mirror image of the reason why mergers

put upward pressure on prices so that the observation effectively translates a well-understood effect

into a new setting. The second point is that, because a merger leads to higher price-cost margins, it also

2–13, and Commission Decision Sep. 8, 2015), Hutchison 3G Austria/Orange Austria (COMP/M.6497 OJ C224 Aug. 3,

2013, at 8–9, and Commission Decision Dec. 12, 2012), Hutchison 3G Italy/Wind/JV (COMP/M.7758, OJ C391 Oct. 22,

2016, at 3–17, and Commission Decision Sep. 1, 2016), and Novartis/GSK (COMP/M.7872 OJ C23 Jan. 22, 2016, at 2, and

Merger Procedure Dec. 18, 2015).

3. See the technology transfer block exemption regulation, 2004 and revision in 2014, and regulations preceding it, Commission

Regulations EEC 2349/84, EEC 556/89 and EC 250/96. See Robert D. Anderson, Jianning Chen, Anne Caroline Mu

¨ller,

Daria Novozhilkina, Philippe Pelletier, Nivedita Sen, & Nadezhda Sporush, Competition Agency Guidelines and Policy

Initiatives Regarding the Application of Competition Law Vis-a-Vis Intellectual Property: An Analysis of Jurisdictional

Approaches and Emerging Directions (World Trade Organization Staff Working Paper ERSD 2018-02, March 2018) for the

evolution of attitudes over a wide range of jurisdictions, not limited to the EU.

4. Competition Commissioner Margrethe Vestager stated that “when we look at high-t ech mergers, we don’t just look at

whether they may raise prices. We also assess whether they could be bad for innovation.” Referring to the Pfizer/Hospira

case (EUROPEAN COMMISSION, COMP/M.7559, Aug. 4, 2015), the commissioner continued, “one concern was that Hospira

already had a competing drug on the market, and we thought Pfizer might stop work on its own drug if the deal went ahead as

planned. Which would have meant less of the innovation that we depend on as patients.” See Margarethe Vestager,

Competition Commissioner European Commission, Speech delivered at European Commission and Consumer Day,

Competition: The Mother of Invention (Apr. 18, 2016), https://ec.europa.eu/commission/commissioners/2014-2019/

vestager/announcements/competition-mother-invention.en.

5. See id. for a review of attitudes and a preview of upcoming discussions on merger and innovation.

6. See Motta & Tarantino, supra note 2.

7. Xavier Vives, Innovation and Competitive Pressure,56J.I

NDUS.ECON. 3, 419–69 (2008), provides a survey. See also Motta

& Tarantino, supra note 2.

32 The Antitrust Bulletin 64(1)