New Commission, new approach to merger control
Telefónica has long advocated for a review of the European merger control framework, right from its very cornerstone: the EU Merger Control Regulation. Although the opportunity to review the Regulation itself was missed this time, Telefónica welcomes that both the Mission Letter addressed to EVP Teresa Ribera, and the Competitiveness Compass explicitly call for a revision of the Merger Guidelines.
Ursula Von der Leyen has entrusted the competition chief with a very straight forward task: to modernize competition policy. To achieve this, Ursula von der Leyen has asked for a review of the Horizontal Merger Control Guidelines “to give adequate weight to the European economy’s most acute needs in respect of resilience, efficiency and innovation, the time horizons and investment intensity of competition in certain strategic sectors, and the changed defence and security environment”.
The Competitive Compass also highlights that a fresh approach, better geared to common goals should be reflected in revised guidelines for assessing mergers “so that innovation, resilience and the investment intensity of competition in certain strategic sectors are given adequate weight in light of the European economy’s acute needs”.
Ongoing review of the Merger Guidelines
The Directorate-General for Competition (DG COMP) has followed its mandate by launching a call for evidence to initiate the review process. This includes (i) a general consultation and (ii) a targeted consultation on seven critical areas that DGCOMP considers relevant to enhance EU companies’ capacity to innovate, compete, and grow, as requested by the President of the European Commission.
In view of the consultation, there is a legitimate concern that the proposed revision may amount to little more than an extension or minor adjustment of DG COMP’s existing merger assessment methodology. Importantly, the questionnaire fails to challenge the most fundamental aspect of the review and does not invite general stakeholders to provide evidence on merger control’s core premise: the economic framework.
In this post, we try to show why a shift in economic approach is a necessary first step for a meaningful review of merger control in the EU. Only such a shift would allow DG COMP to pursuit consumer welfare in the wider sense, as should be the ultimate objective of merger control. We begin by revisiting the concept of consumer welfare and then outline our proposal for rethinking the economic framework that underpins merger analysis.
Starting from the basics: the new Guidelines must properly reflect all dimensions of consumer welfare
The Commission has traditionally assessed mergers with a strict focus on preserving market structures, primarily through the lens of price effects. However, according to competition and merger control practice, consumer welfare comprises four key dimensions: price, quality, choice, and innovation. All four parameters have been recognised and embraced by the Commission -at least formally-.
As already said above, the task assigned to DG COMP is undoubtedly complex, as it requires considering concepts such asresilience, efficiency, innovation, or a new defence and security environment. However, all these objectives emphasized in the Mission Letter are actually included under the definition of consumer welfare.
Because of this, we believe that as a starting point for the revision of the Guidelines, the Commission needs to recognize and apply the full scope of consumer welfare, which encompasses much more than price effects. We do not think this is possible with the traditional static efficiency model, which narrowly interprets competition through price-cost relationships. In our view, this makes a change in economic approach not just desirable, but necessary.
The Commission should adopt an approach capable of capturing the broader and more dynamic dimensions of competition in markets. These dimensions—such as innovation, quality, and choice—have a more profound and lasting impact on consumer welfare than price alone.
A comprehensive review of the Guidelines requires a shift in economic approach
An alternative approach to understanding the market is the dynamic efficiency approach. Although there is not a synthetic definition, this approach considers that competition occurs across all dimensions of a product or service—not just price. This view is clearly more consistent with the empirical evidence and with the experience of most people, who normally value goods and services based on different dimensions, not just the price
On top of that, there is a broad consensus among economists on the importance of innovation as a foundation of competition, and about the effects of innovation on consumer welfare being orders of magnitude larger than those that are achieved by competing merely on prices.
Telefónica’s economists have been analyzing the economics of antitrust for years and have concluded, in line with many other scholars, that the dynamic efficiency approach is the best to incorporate the four parameters of consumer welfare and ultimately the objectives set out by the Mission Letter. A dynamically competitive market will naturally contribute to other European Union objectives, to the extent that these objectives are demanded and valued by society.
How can this approach be implemented? It is not an easy question, but Telefónica thinks the following should be taken into consideration:
- Proper assessment of the supply side of markets i.e. what is the function of production of each market? The Nobel Price Ronald Coase highlighted this lack 50 years ago in a classic paper and it still lacking. Competition authorities need to better understand the production function of the industries in which they intervene. For example, in the telco industry, take-up in the covered areas plays a fundamental role. A low take-up will make an operator unsustainable; only if take-up ratio is increased will returns on investment justify reinvestment and innovation in new deployments.
- Closer to a business view of competition: corporate decision-making typically involves a degree of risk uncertainty that is incompatible with the level of certainty the Commission requires from them—for instance, in efficiencies. Corporate managers do not know the future; however DG COMP requires absolute certainty about the effects their complex decision may have.
- Innovation cycles and long–run increase of consumer welfare: each sector has its own innovation cycles which need to be acknowledged in the analysis.
Telefónica is conscious of the challenge this supposes and is ready and willing to cooperate with the Commission to find the best economic and legal approach to ensure that the Guidelines are fit for the needs of consumers, companies and public administrations in Europe.
In the next post we will delve deeper into the details of Telefónica’s response to the public consultation of the Merger Guidelines.
