In July, we launched the EU Merger Control series, outlining Telefónica’s position on the review of the EU Merger Guidelines, and welcomed this as an opportunity to strengthen Europe’s competitiveness and build a framework that supports innovation, resilience and strategic autonomy.
The first post examined why the Commission’s economic assessment approach must evolve ahead of any reform of EU merger control rules. The second post provided an overview of Telefónica’s response to the consultation. The third post set out the sector’s call for an in-depth review of the merger guidelines to ensure they are fit for today’s EU challenges. This fourth post relates to the analysis of market power based on structural features and other market indicators.
Limitations to the traditional static approach
As everyone knows, competition rules can be complex. Here´s why Telefónica believes the framework set out in the Guidelines for the assessment of market power and dominance that could lead to coordination and foreclosure theories of harm relies on obsolete parameters such as structural indicators.
This static and narrow approach comes from an unsound economic theory (the so-called Structure-Behaviour-Performance paradigm). It assumes companies act determined by their market share. In reality, it´s the opposite: behaviour shapes market share. Structural indicators are inherently static, whereas markets are dynamic.
As a result, these indicators often fail to capture the realities of how competition operates in the real world. Think of it like football: judging a team only by the number of players on the pitch ignores how they actually play. If they were to be judged by only this number, all teams would look the same here as the relevant features are the actual skills of the players in each team. In markets, it’s the same, performance matters more than static numbers.
What does this mean in practice?
As a result of this distorted view, transactions that, in fact, do not pose a real risk to consumer welfare and to effective competition can be prohibited. This is particularly relevant for mergers which are not as hypothetically problematic as to create dominant positions (the so-called in Competition law jargon, “gap cases”).
Such approach overlooks key factors like closeness of competition, potential for entry and expansion, repositioning, efficiency gains, innovation and other factors that promote competition. For this reason, Telefónica advocates for the abandonment of these metrics, aiming to better align them with economic reality and to ensure that merger control assessment is not mainly based on prices and market shares.
Instead, such analysis should appropriately recognize the production function of the affected market to understand incentives for investment and innovation. Take telecoms as an example: high market share doesn’t always mean low competition. This situation is due to the indivisibility of the assets required to provide telco services which in turn, makes necessary a minimum take up to achieve profitability. Indeed, in industries where some level of concentration is needed for efficiency, applying strict structural tests can be harmful. It might stop companies from reaching the scale they need to compete globally or keep investing.
The Commission should embrace a dynamic vision of competition
Considering the need to depart from rigid and outdated criteria, Telefónica proposes a paradigm shift: adopting a dynamic efficiency model that values competition not only across the four traditional parameters—price, quality, choice, and innovation—but that also considers broader objectives such as efficiency, resilience, sustainability, strategic autonomy within defence and security.
As outlined in the Mission Letter issued by Von der Leyen to Teresa Ribera, this model recognizes that competition is not only about prices, but also about the ability of companies to invest, innovate and adapt to changing market conditions. It needs to be based on a forward-looking review whereby the Commission assesses mergers in a holistic way, not looking only at short-term price effects, but focusing on the likelihood of the merging companies producing benefits in relation to the characteristics of each industry.
This change should be reflected in all stages of the merger control process, so that the analysis of the transaction’s effects, efficiencies and eventual remedies, as mentioned, also takes into consideration all aspects of consumer welfare.
Likewise, the standard of proof applied by the Commission should enable effective assessment of efficiency claims submitted by the merging parties, recognizing a degree of uncertainty involved in business decision-making.
The Commission should consider efficiencies based on innovation or investments increases (not only on costs earnings) and also out-of-market efficiencies that indirectly benefit a wider number of consumers and not just those present in the markets affected by the merger.
Relevant indicators for the future: case-by-case assessment and good knowledge of the production function
Telefónica sees as essential that the evaluation of mergers is conducted on a case-by-case basis, avoiding legal and economic presumptions based solely on structural indicators . It is key to analyse the sector’s production function, investment capacity, technological innovation, and real competitive pressure, including from players outside the traditional market.
Applying a dynamic efficiency perspective enables to distinguish cases where post-merger entities achieve greater efficiency or innovation despite higher concentration.
Key elements of an updated merger control assessment leaving the old structural indicators and other market features model behind
It is true that introducing legal presumptions based on structural indicators—such as market shares and concentration levels– could be appropriate for assessing non-problematic transactions and serve as preliminary screening tools to filter deals and flag areas that might need a deeper look. However, for complex mergers, it would risk circumventing the intricate legal, economic and factual assessment underpinning merger review.
Thus, a forward-looking, dynamic efficiency approach grounded in a coherent economic framework that considers all relevant competitive parameters and all dimensions of consumer welfare is required. In addition, a case-by-case assessment where the Commission has a good knowledge of the production function would help achieve a more adequate review of mergers, fostering greater competition and enhancing market contestability.
All in all, a change that takes all the above into account is needed because in today’s markets, playing by yesterday’s rules, just doesn’t work.
In the next post we will present our position paper on the Merger Control Guidelines review.
