“Portfolio Effects” in Merger Analysis: Differences between EU and U.S. Practice and Recommendations for the Future

• DOI: 10.1177/0003603X0404900103
• Author: Eric R. Emch
• Published date: 01 March 2004
• Date: 01 March 2004
• Subject Matter: Antitrust in the U.S. and the EU: Converging or Diverging Paths?

The Antitrust Bulletin/Spring-Summer 2004

"PortfoIio effects" in merger

analysis: differences between

EU

and U.S. practice and

recommendations for the future

BY ERIC R. EMCH*

I.

Despite

convergence,

significant

differences

remain

55

The past decade has seen an enhanced vigor of antitrust enforcement

within the European Union (EU), and an increasing convergence

between its enforcement practices and those of the United States.

Recent enforcement decisions by the respective agencies for the most

part have reflected a consensus among enforcers on both sides of the

Atlantic on the proper goals of antitrust and the appropriate analytical

methods.' At the same time, however, perhaps thrown into relief by

*Economist, U.S. Department of Justice, Washington, DC.

AUTHOR'S NOTE: I thank the University

of

Chicago Law School

for

sup-

port during the writing

of

this article via the Victor Kramer Foundation

Fellowship. Ialso thank Norman Familant, Kenneth Heyer,

Robert

Majure, Russell Pittman, and Gisle Torheim

for

helpful conversations

and comments on various aspects

of

this article during its evolution, and

the editors, Gunnar Niels and Adriaan ten Kate, for numerous valuable

suggestions

for

the final version. The views expressed in this article are

not purported to represent those

of

the U.S. Department

of

Justice, nor

those

of

any

of

the individuals thanked above.

See Antitrust in the U.S. and Europe: A History of Convergence,

Speech by European Commissioner Mario Monti Before the General

©2004 by Federal Legal Publications. Inc.

56 The antitrust bulletin

agreement

on the

broad

contours

of

antitrust policy, astrain

of

argument in merger decisions by the European Commission has

emerged that signals important differences in philosophy between it

and the enforcement agencies

of

the United States.

The set

of

concerns articulated by the Commission, sometimes

labeled as "portfolio," "range," or "conglomerate" effects but not

always assigned aparticular label.? generally lies outside of current

merger enforcement practice in the United States. Indeed, while there

is some debate over what "portfolio effects" actually means and when

a merger is or is not a "portfolio effects" case, for the purpose of this

article the term will refer to broad concerns raised by the Commission

in nonhorizontal, nonvertical mergers that usually appear as a group

and are for the most part outside U.S. merger enforcement practice.

The

purpose

of

this

article

is to

identify

more

clearly

the

differences between the jurisdictions in their treatment of portfolio

effects and to outline a path toward greater convergence. It examines

in detail European Commission, U.S. Department of Justice (DOJ),

and Federal Trade Commission (FTC) enforcement decisions in cases

that have raised portfolio effects or similar concerns, and also studies

the economics

of

an important subset of portfolio effects

concerns-

anticompetitive

tying-with

an eye toward reconciling U.S. and EU

positions with the lessons

of

economic theory.

The fundamental concern raised in portfolio effects cases is that a

merger

of

firms without a direct horizontal or vertical relationship (or

aspects

of

a merger that do not involve direct horizontal or vertical

connections)

will

harm

consumer

welfare

by

enhancing

the

Counsel Roundtable

of

the American Bar Association, Nov. 14, 2001

(text available at European Commission Web site europa.eu.int), Interna-

tional

Antitrust

in the 21 st Century: Cooperation

and

Convergence,

Speech

by

the

then-U.S.

Assistant

Attorney General Charles James

Before the OECD Global Forum on Competition, Oct. 17, 2001 (text

available at U.S. DOJ Web site www.usdoj.gov/atr).

2

For

instance, the October 2001 Commission decision in Tetra-

Laval/Sidel (Case No. COMPIM.2416) outlines many concerns that in the

past

have been labeled portfolio/range/conglomerate effects, without

labeling them as such.

Portfolio effects :57

"dominance toolkit" of the merging firm, which now produces a wider

range of goods than had been produced by either firm premerger,' The

enhanced power that the merging firm derives from producing an

expanded

range

of

goods is in some

circumstances

seen as so

debilitating to the prospects of the firm's rivals that the competitive

constraint offered by rival firms will be

reduced-either

they will be

forced to exit the marketaltogether or they will reduce ongoing R&D

or other spending required to remain effective competitors. This

reduction in competition drives the ultimate harm to consumers.

The European Commission has focused on various mechanisms

behind these effects, often within the same merger. A common story is

that the merger will give the new firm an increased scope for tying

products in a way that will force competitor exit or pullback. Another

is that the merger will allow the firm to offer a low-priced bundle of

goods that competitors cannot replicate. Another that cost reductions

from economies of scale or scope on the demand or supply side will

give

the

merged

firm

a

large

and

lasting

advantage

over

its

competitors. Finally, some cases add to this mix a general fear that a

larger firm will be more powerful due to its size, through an increase

in its access to capital or bargaining power,for example. This is seen,

for instance, to enable predatory strategies that were previously

unavailable to the independent firms.

Each mechanism of harm that has been raised in portfolio effects

cases has a different implication for consumers. A tie supported by

monopoly power that would stifle competition in an emerging market,

for example, has a quite different impact on consumer welfare than

supply-side scale or

scope

economies

or

"one-stop

shopping"

The phrase "dominance toolkit" is taken from the GElHoneywell

decision,

footnote

101

(Case

No.

COMP/M.2220).

Though

some

European Commission officials have argued that the GElHoneywell case

was

not

technically

a

"portfolio

effects"

case

(see

Unbundling

GE/Honeywel1: The Assessment of Conglomerate Mergers Under EC

Competition Law, Address by Gotz Drauz Before the Fordham Corporate

Law Institute's 28th Annual Conference on International Antitrust Law

and Policy, Oct. 2001), it fits the pattern of many past portfolio effects

cases, and falls within the definition of a portfolio effects case used in

this article.