The Political Economy of EU Merger Control: Small vs. Large Member States

• Date: 01 April 2007
• DOI: https://doi.org/10.1016/S0573-8555(06)82010-9
• Published date: 01 April 2007
• Pages: 259-285
• Author: Henrik Horn,Johan Stennek

CHAPTER 10

The Political Economy of EU Merger

Control: Small vs. Large Member States

Henrik Horn and Johan Stennek

Research Institute of Industrial Economics, Stockholm, and CEPR, London

10.1. Introduction

The European Commission has recently intervened against a number of mergers

and acquisitions in small Member States arguing that the mergers would reduce

competition in nationally defined markets within the Union. For instance, in

March 2000, the Commission prohibited Volvo’s acquisition of Scania, arguing

that Volvo/Scania would have an adverse effect in e.g. Sweden and Finland.1

These interventions triggered a political debate about EU merger control and

market definitions in several Member States. Representatives of smaller coun-

tries have declared that, in effect, EU merger policy makes it impossible for

companies in small countries to merge and obtain a leading global position. Fol-

lowing the Volvo/Scania decision, there was almost complete consensus among

the political parties in Sweden on this view, with only the Liberal party express-

ing support for the Commission’s decision.

These claims have been rebutted by EU officials, who argue that companies

in smaller countries can expand by merging with companies operating in other

countries. According to this line of reasoning, the Volvo/Renault operation and

the strategic partnership concluded by Scania/Volkswagen, following the pro-

hibition of the Volvo/Scania merger, clearly showed that there were alternative

ways for these companies to merge.2

There are several possible interpretations of this critique against EU merger

control. It could be seen as a “national champion”-type argument, based on the

notion that competition authorities should allow mergers that hurt domestic con-

sumers if domestic firms thus gain a sufficient competitive advantage over for-

eign firms in foreign markets. The argument against this from EU officials would

be that the purpose of merger control is only to protect European consumers.

1COMP/M.1672 Volvo/Scania.

2It is also maintained that several other alternatives are open to firms from small member states

in addition to international mergers, for example internal growth and the possibility of adequate

remedies (e.g. selling off parts of the assets to reduce concerns for competition). Although these pos-

sibilities are important strategies for the firms, these issues are not addressed in the present analysis.

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DOI: 10.1016/S0573-8555(06)82010-9

260 H. Horn and J. Stennek

And, while there may be efficiency gains related to firm size and therefore to

mergers, those gains can be achieved with less impediments to competition, for

example through international mergers. Moreover, experience shows that com-

panies that are successful abroad are, in most cases, those facing a competitive

environment back home.

But the critique has also taken other forms. It has been acknowledged that in-

ternational mergers may indeed constitute alternatives to domestic mergers. The

problem is instead that international mergers may be less advantageous from the

point of view of smaller countries. These worries seem to be at least partly based

on the possible effect of international mergers on employment and the location

of R&D units and head quarters. In response to these worries, EU officials only

concede that EU merger control does not take into account a possible move of

firms abroad.

It is evident from this discussion that the issues involved are highly com-

plex. Therefore, it is natural to seek guidance in the economic literature on the

merits of the arguments put forth in the policy debate. Tothe best of our knowl-

edge, there does not exist any research that can be directly applied to this end.

Nevertheless, the economic literature has provided us with a number of useful

analytical tools, and the purpose of this chapter is to employ these, to discuss the

validity of some of the main claims in this debate on EU merger control rules.

The structure of the chapter is as follows. In next two sections, we demon-

strate why and how EU merger control treats companies from small and large

states differently and discuss whether the whole idea of merger control is well

founded: Do we really need to control mergers? The rest of the chapter discusses

various proposals suggested to reduce this asymmetry.These ideas include fight-

ing market segmentation (Proposal 1), or that the Commission should change its

principles for geographical market delineations (Proposal 2). Still others argue

that the root of the problem is the “skewed” goals of competition policy,i.e. that

only consumer welfare is considered (Proposal 3). Such issues as the appropriate

goal for competition policy, whether efficiencydefenses should be allowed, etc.,

have of course been intensively discussed before. The distinguishing feature of

the discussion here is that we reexamine these questions from the point of view

of the debate about the alleged asymmetry in EU merger control.

Most of the space, however, will be devoted to two related claims, which we

feel to be more central to the policy discussion (referred to as Proposals 4 and 5).

One is a refutation of the argument that firms in smaller countries are at a disad-

vantage, even if treated asymmetrically, since they can instead choose to merge

internationally. Implicitly, this thus suggests that the Commission should take

into account the possibility for alternative mergers. The second claim, which is

a counter-argument to the first, is that international mergers may be worse than

for Member States domestic mergers, due to adverse implications for the lo-

cation of production following international mergers, and that the Commission

should take these effects into account in its assessment. The chapter ends with a

section summarizing the main findings.