Telefónica welcomes the report “A Dynamic Framework for the Assessment of Horizontal Mergers” prepared by the prestigious economic consultancy firm BRG for the telecommunications operators’ associations GSMA and Connect Europe, and presented on 5 February at the event The Next Chapter in Merger Control: Towards a Dynamic Competition Framework in Brussels.
This report is consistent with Telefónica’s recent position on dynamic efficiency. In it, Telefónica advocated for a regulatory framework based on the dynamic efficiency of markets, understood as their ability to generate innovation, attract investment and adapt to technological transformations, in order to return the European Union (EU) to a path of sustained economic growth and social welfare improvement such as that achieved with the Single Market policy.
This position outlined how sectoral regulatory frameworks, and the current application of competition policy have focused on consumer price as the sole indicator of welfare, which economists refer to as static market efficiency, in almost all cases. This has led to the neglect of strategic considerations that would enhance the well-being of Europeans through more innovative, efficient and competitive services that are better adapted to their preferences, and backed by stronger companies.
Based on theoretical analysis and evidence, particularly in the telecommunications sector, the conclusion was clear. When authorities prioritise dynamic market efficiency, the benefits for consumers and society multiply in all relevant dimensions: investment grows, quality improves, innovative products appear, and even product prices fall as they are displaced by others more in line with consumer preferences. Moreover, dynamically competitive markets are essential for achieving the EU’s strategic objectives in areas such as security, resilience, competitiveness and sustainability.
In view of all this, Telefónica recommended promoting dynamic efficiency, both in sectoral market regulation and in the analysis of horizontal mergers. In the latter case, competition authorities were required to make their decisions on the basis of a thorough understanding of the productive structure of the sector concerned.
Reformulating the framework for the analysis of horizontal consolidations
The latter is an issue of high relevance, as the European Commission is currently in the process of redefining the guidelines for merger analysis, following the mandate given by President von der Leyen at the beginning of the new European political cycle.
However, this is by no means an easy task. That is why Telefónica considers the report prepared by BRG for GSMA and Connect Europe to be very timely. The title itself reflects the ambition of the effort: “ A Dynamic Framework for the Assessment of Horizontal Mergers “.
In this report, supported by a rigorous analysis of economic theory, the authors construct a methodology for the analysis of mergers applicable to all sectors, which would allow the competition authority to complement its current practice and include what the authors call dynamic effects. This requires incorporating into the analysis the effects of mergers on other aspects of the market beyond price, which has been the only variable considered relevant to date, thus overcoming an approach limited to static efficiency.
We believe that the methodology proposed by BRG will benefit all economic sectors by providing a merger analysis that identifies the innovation and investment capabilities generated by the transaction. This will ensure that the Commission’s objectives in terms of competitiveness, resilience, efficiency and innovation are present in the process. This vision would be particularly appropriate for a sector such as telecommunications, in a context of profound technological transformation, which requires investment, innovation and adaptability to ensure future well-being.
How to analyse concentrations including dynamic efficiency
The authors of the report establish a three-step methodology, which they consider compatible with the current legal standard, meaning that its application would not require legislative changes. The three steps are as follows:
- Step 1 – Identify the relevant dimensions of competition. Obviously, one of these will be price, but others such as quality, variety of services or investment must be considered with equal, if not greater, weight.
- Step 2.a – Formulate and assess dimension-specific theories of competitive effects. Their exhaustive review of economic theory shows that horizontal consolidations also have effects on other parameters relevant to welfare and that these effects are in many cases positive. Therefore, the European Commission should incorporate these possibilities into its analysis and not limit itself to the price variable.
- Step 2.b – Consider potential efficiencies of the transaction analysed, such as investment and production costs, access to technologies, financing conditions or organisational capabilities.
The implementation of these steps will require competition authorities to have a thorough understanding of the production function of the sector concerned, as explained in section 4.2.3 of the report. This is demonstrated by the authors when they apply the proposed methodology to pharmaceuticals, telecommunications and what they call “local markets”, in the last section of the report.
This report should be invaluable to the European Commission in its review of the Guidelines, given the complexity involved in introducing a dynamic approach to its analysis of mergers. However, this complexity is unavoidable if positive results are to be achieved for the welfare of consumers , as required by the current economic and geopolitical situation in the EU. The authors’ own work demonstrates that this complexity is manageable, and we are therefore confident that the authorities will take note of such a sound and practicable proposal.
The benefits that await European society from adopting this approach make it essential. Telefónica welcomes the report by GSMA, Connect Europe and BRG that opens this window of opportunity, and is confident that it will be fully exploited.
