Antitrust Bull 203

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The Antitrust Bulletin/Spring1996
203
The treatment of oligopoly under the European merger control regulation
BY ELEANOR I. MORGAN*
* Senior Lecturer in Industrial Economics, Centre for International Business Research, University of Bath.
AUTHOR'S NOTE: I wish to thank officials of the Office of Fair Trading, London and of the Mergers Task Force, Brussels, for the provision of information to help in this researchand especially Olivier Guersentwith whom I had a number of useful discussions. I am also grateful to Michael Utton for helpful comments on earlier drafts and to Joel Davidow for raising useful points on the initial submission that stimulated some expansion of the analysis. The views expressed and any errors are the responsibility of the author alone. I am grateful to the Department of Economics, University of Reading for researchfacilities provided while this article was in preparation.The research was supported by a grant from the University of Bath. POSTSCRIPT: Since this article was acceptedfor publication, the European Court of FirstInstance has dismissed the challenge brought by the employees of Perrierand Vittel against the 1992 Nestl6/Perrier decision (infra note 61). Review was limited to the procedurallegality of the decision in so far as employee representatives had a right to request that their views be heard by the Commission and no procedural irregularity was found in this respect. The Court considered that substantive issues relating to possible errors of appraisalor abuse of power by the Commission were outside the scope of the review since the decision had no direct impact on the employees' interests. Unfortunately this means that the power of the Commission to act in cases of collective dominance under the merger regulation has still not been clarified in the Courts (CF1 2CH, April 27, 1995). Q 1996 by Federal Legal Publications, Inc.
HeinOnline -- 41 Antitrust Bull. 203 1996
204 : The antitrust bulletin
I. Introduction Agreement on the adoption of the EEC merger regulation in December 1989 represented a major breakthrough in the development of European merger policy. The Treaty of Rome gave the European Commission no specific powers to control mergers. Both article 85, dealing with restrictive agreements, and article 86, dealing with the abuse of dominant positions, were occasionally invoked in merger cases but the lack of a well-defined merger policy was generally seen as a major weakness in EEC competition policy as 1992 approached.' The Commission first proposed a merger regulation in 1973 but it was only with the added impetus of intensifying merger activity in the run-up to the "single" European market that agreement on a new regulation was finally 2 reached. The merger regulation, which has been in operation since September 20, 1990, gives the European Commission specific power to control the very largest mergers and merger-like transactions. 3 These have to be notified to the Commission within 1 week of a bid or acquisition of control. They are under its exclusive jurisdiction unless the Commission agrees to a request made by a member state under the limited exceptions provided by articles 9 and 21(3) that allow the merger to be referred to the national 4 authorities for investigation.
I
The weaknesses of previous EEC policy toward mergers are dis-
cussed, for example, by K. Banks, Mergers and PartialMergers Under EEC Law, 1986 FORDHAM CORP. L. INST. 373 (B. Hawk ed., 1987). See
also the reply by V. Korah in the same volume. 2 Council Regulation (EEC) No. 4064/89 of 21 December 1989 on the Control of Concentrations between Undertakings, 395 OJ 1989. 3 The mergers and merger-like transactions within the scope of the regulation are termed "concentrations" in the regulation but will generally be referred to here under the general term of mergers. 4 A member state can apply to the Commission for authority to carry out its own investigations if the merger is believed to create or strengthen a dominant position within its borders (article 9) or if there are "legitimate" noncompetition interests; public security, plurality of the media and prudential rules are cited in the regulation (article 21(3)).
Oligopoly : 205
The substantive assessment of mergers is based on a competition test. If there are serious doubts about the effect of the merger after an initial 1-month screening period, full proceedings are opened. These last a maximum of 4 months, after which the Commission has to decide whether the merger is to be permitted or banned, taking into account the opinion of an advisory committee on the draft decision. 5 As with articles 85 and 86, the Commission has wide remedial powers and can, for example, require divestiture, impose conditions on the merger, and levy fines for breaches of the regulation. Appeals against decisions by the Commission can be made to the European courts. The detailed provisions of the regulation, its scope and the procedures involved have been 6 usefully summarized elsewhere. Although the adoption of the regulation was broadly welcomed, there were a number of concerns about its likely effectiveness as an instrument of competition policy. This article examines one of the major areas of concern-the Commission's ability to use the regulation to control mergers that threaten competition through building up or strengthening oligopolistic market structures where no single firm is dominant. 7 The final wording of the
5 The Advisory Committee is made up of representatives of the member states and the Commission is required to take the "utmost account" of the opinion delivered on the draft decision (article 19(6)). 6 See, for example, M. Bishop, European or National? The EEC's
New Merger Control Regulation, in CONTINENTAL MERGERS ARE DIFRENT, STRATEGY AND POLICY FOR 1992, at 105 (J.A. Fairburn & J. Kay eds.,
1990); also 1.0. Schmidt, The New EEC Merger Control System, 6 REv. & V. Korah, Competition, 37 ANTITRUST BULL. 337 (1992) present a concise summary. Reviews of the initial operation of the regulation include the Competition Law Checklist ELR (annually); C. JONES, E. GONZALEZ-DIAZ & C. OVERBURY, THE EEC MERGER REGULATION (1992); E.J. Morgan, Merger Appraisal
INDUS. ORGANIZATION 147 (1991). M. Horspool
Under the EC Merger Control Regulation, INDUSTRIAL CONCENTRATION AND ECONOMIC INEQUALITY: ESSAYS IN HONOUR OF PETER HART, 164 (M. Casson & J. Creedy eds., 1993); and D. NEvEN, R. NUTTALL & P. SEABRIGHT, MERGER IN DAYLIGHT; THE ECONOMICS AND POLITICS OF EUROPEAN MERGER CONTROL (1993).
7 An oligopolistic market is one where a few firms control a large proportion of the activity.
206 : The antitrust bulletin regulation does not explicitly deal with this aspect, leading to considerable legal debate over the Commission's power to act in oligopoly cases. Some experts have contended that in the framework of EC law there is a sufficient legal basis for the regulation to be used to control oligopolies. 8 Others doubt that such a position could be defended in the courts, arguing that if the regulation had been intended to apply to oligopoly, it would have been made explicit. Thus, according to Horspool and Korah, for example, while the regulation does fill an important gap in EC competition policy, The substantive test for control, whether a concentration creates or strengthens a dominant position, however, leaves a lacuna that it will be more difficult to fill. The danger in a Common Market the size that the EEC is likely to become in a few years' time is not so much a single dominant firm with a high market share, as oligopolies. Only the largest firm in a concentrated market is likely to be treated as
dominant. 9
By the end of 1994, after four and a quarter years of operation, some 180 transactions had been notified to the European Commission under the new provisions, of which eighteen went to full proceedings.1 0 It was not until the Nestli/Perrierdecision of July 1992 that the Commission first challenged a transaction on the basis of oligopoly concerns. Of the sixteen stage-two cases now published, only two have been banned, both cases of single-firm dominance." Four were approved unconditionally, including two where oligopoly issues were the concern; 12 and there were two
See, for example, J.S. Venit, Europe Comes of Age. iban's Dinner,27 CMLR 7 (1990).
8
. or Cal-
9 Horspool & Korah, supra note 6, at 343. The text of decisions taken after initial screening procedures are not published in the OJ but were kindly provided by the Mergers Task Force for the purpose of the current research.
10
11
Aerospatiale-Alenia/DeHavilland, Decision of 02.10.91, L 334,
OJ, 42 (1991); MSG Media Service, Decision of 09.11.94, L 364, OJ, 1 (1994). 12 Oligopoly cases approved unconditionally after full proceedings
were Pilkington-Techint/SIV,Decision of 21.12.93, L 158, OJ, 25 (1994)
Oligopoly : 207 oligopoly cases among the ten approved conditionally after full proceedings. 13 The discussion of oligopoly has increasingly featured in mergers cleared at the initial screening stage as well. This article examines the treatment of oligopoly under the EEC merger regulation in the light of the decisions taken up to the end of 1994. Particular attention is paid to Nestlg/Perrieras this was the first case in which serious doubts about oligopolistic dominance led to full proceedings and appears likely to be a landmark case in the treatment of oligopoly. The transaction would have created a tight oligopoly between two market leaders (a "duopoly") in the French bottled water market but it was eventually approved with conditions to reduce the risk of oligopolistic coordination. Both the challenge to oligopoly and the remedy adopted were controversial and resulted in two appeals that await decision by the European Court of First Instance. The article proceeds as follows. Section II outlines the legislative framework within which EU merger appraisal takes place and discusses the reasons for initial concerns about the control of oligopoly under its provisions. Section III briefly considers the Commission's early treatment of mergers involving oligopolistic market structures and then a detailed discussion of the Nestlg/Perrier decision leads on to an examination of the more recent developments on the oligopoly front to shed light on the Commission's evolving policy and the framework likely to be adopted in oligopoly cases in the future. The conclusions are presented in the final section. II. The oligopoly problem The framework for the appraisal of mergers under the regulation is given in article 2(3) which provides that: and MannesmannIVallourec/lIlva,Decision of 31.1.94, L 102, OJ, 15 (1994). 13 Oligopoly cases approved with conditions after full proceedings were Nestli/Perrier,Decision of 22.07.92, L 356, OJ, 1 (1992) and Kali und SalzIMdK/Treuhand, Decision of 14.12.93, L 186, OJ, 39 (1994).
208 : The antitrustbulletin A concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it shall be declared 14 incompatible with the common market. The term "dominance" is not defined in the regulation but dominance had been defined previously in EC competition law under article 86, which regulates the abuse of dominant positions. For example, the European Court in Hoffinann-La Roche considered that dominance: relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on a relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers. 15 It was this definition of dominance that was apparently to apply in the treatment of cases under the merger regulation. 16 The wording makes no explicit reference to the possibility of dominance by more than one firm. In addition, recital 15 of the regulation, which states that a transaction involving a market share of no more than 25% is unlikely to cause concern, appears to relate only to the concept of single-firm dominance as even the creation of a market share of less than 25% could give cause for concern in the context of an oligopoly. The main aim of the regulation is the maintenance of effective competition. Economic theory suggests that competition can be Under the terms of the European Economic Area agreement, signed on 5/2/92, the scope of the EEC merger regulation did not change in assessing the thresholds for investigation but in assessing compatibility, the Commission now takes into account not only the situation in the EU but also in the territories of the EFTA states as well (under article 57 of the EEA agreement). Further details are given in J. Stragier, The Competition Rules of the EEA Agreement and their Implementation, 14 ECLR 30 (1993).
14
15 Hoffmann-La Roche v. Commission, Judgment of 13.02.79, 3 CMLR 211 (1979). 16 Sir L. Brittan, The Law and Policy of Merger Control in the EEC, 15 ELR 351 (1990).
Oligopoly : 209
jeopardized not only by the market power of a single firm but also by the avoidance of active competition by two or more oligopolistic firms. Such behavior may be due to a formal anticompetitive agreement (e.g., a cartel) or may result from informally coordinated parallel behavior. If the control of mergers involving oligopolistic dominance is judged outside the scope of the EC 7 regulation, it would leave a gap in European competition policy.' Formal collusive agreements or concerted practices based at least on a reciprocal exchange of information can be dealt with ex post under the more lengthy and cumbersome procedures of article 85, but other informal parallel pricing behavior that falls short of this but still results in a lack of effective competition cannot subsequently be remedied by action under either article 85 or 86.18 Recent developments in both oligopoly theory and the evidence suggest that this gap in the Commission's powers would be a serious one. 19 To take an extreme example, this would apparently leave the Commission unable to act in the face of a merger between two firms with 26% and 24% of the market respectively if the other company had a 51% share; the merged entity would not dominate the market because it would not be the largest supplier yet its position would raise severe concerns about the effect on competition. See D. Ridyard, Joint Dominance and
17
the Oligopoly Blind Spot Under the EC Merger Regulation, 13 ECLR,
161 (1992). 18 It seems likely, particularly following the recent Wood Pulp decision, that the European Court will require a high standard of proof in terms of documentary evidence of concentration in article 85 cases. See
G. van Gerven & E.N. Varona, The Wood Pulp Case and the Future of ConcertedPractices,CMLR 575 (1994).
19 Useful reviews of the developments in the context of the implications for U.S. antitrust policy are given in J.B. Baker, Two Sherman Act
Section 1 Dilemmas: ParallelPricing,the Oligopoly Problem and Contemporary Economic Theory, 38 ANTrrusT BULL. 143 (1993) and in F.M. Fisher, HorizontalMergers: Triage and Treatment, J. ECON. PERSPEC'nVES
23 (1987). The importance of preventing mergers that may facilitate concerted action in view of the difficulties of dealing with them retrospectively is discussed in a U.S. context in W.E. Kovacic, The Identification
and Proof of Horizontal Agreements Under the Antitrust Laws, 38 ANTRUST BULL. 5 (1993).
210 : The antitrustbulletin
There has been considerable controversy in the economics literature about the likelihood of oligopolists exercising monopoly power by coordinating their behavior, so raising prices and profits above competitive levels and a number of different schools of thought can be distinguished. The traditional view held by the "concentration school" was that collusive price behavior is to be expected in highly concentrated industries, resulting in higher profits to the detriment of the consumer.20 However, this view was challenged by Stigler who identified three problems firms must solve in order to coordinate their behavior successfully-establishing the terms of the cooperative understanding, detecting "cheating" from those involved, and credibly threatening to punish deviation in order to avoid cheating in the first place.2 1 Following this approach, the "coordination school" identified structural features likely to enable oligopolists to overcome the difficulties and avoid active competition whether by formal or informal means. These include inelastic demand and market transparency, homogeneous products, symmetry of market shares among the industry leaders and relative weakness of any fringe producers, similarity of cost conditions, the absence of rapid technical change, the existence of barriers to entry and lack of monopsony power on the buying side. 22 Subsequently the "contestability school" has laid particular emphasis on entry and exit conditions as determining the ability of oligopolists to exercise long-run monopoly power in the light of work by Baumo1 23 and others while the "cross parry school" has drawn attention to the effects of multimarket contact among diversified oligopolists in dulling the incentive for vigorous competition. 24
20 21 22
J.S.
BAIN, INDUSTRIAL ORGANIZATION
(2d ed. 1968).

SCHERER
G.J. Stigler, A Theory of Oligopoly, 72 J. POL. ECON. 44 (1964). Such factors are usefully summarized in F. & D. Ross,
235 (1990)
INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE
and
D. (1990).
23
CARLTON & J. PERLOFF, MODERN INDUSTRIAL ORGANIZATION
208
W.J. Baumol, Contestable Markets: An Uprising in the Theory of Industry Structure, 72 AM. ECON. REv. 1 (1982). 24 B.D. Bernheim & M.D. Whinston, Multimarket Contact and Collusive Behavior, 21 RAND J. ECON. 1 (1990).
Oligopoly : 211
The possibility of coordinated behavior has received considerable attention from theorists recently, and a wide variety of models have since been developed using the newer game theoretic framework. 25 Although no generally accepted model has emerged, the resulting insights into the nature of oligopoly interactions reinforce early concerns about the importance of oligopolistic coordination and suggest the need to address it through competition policy using a case-by-case approach. So far, game theoretic models of oligopoly have been relatively little tested. Attempts to test for an empirical relation between market concentration and profitability across industries, following the intellectual tradition of the "concentration school," have had mixed results and show a tendency for price-cost margins to increase with concentration but reveal little relationship between concentration and profits. 26 More recent studies, which investigate single industries or closely related markets using new These are surveyed in C. Shapiro, Theories of Oligopoly Behavior, 329 (R. Schmalensee & R.D. Willig eds., 1989). A useful overview of the possible implications of game theory for the study of tacit collusion and for antitrust policy is given in D.A. Yeo & S.S. DeSanti, Game Theory and the Legal Analysis of Tacit Collusion, 38 ANTITRUST BULL. 113 (1993) and in R. Rees, Tacit Collusion, 9 OXFORD RV. ECON. POL. 27 (1994). See also D. Ridyard, Economic Analysis of Single Firm and Oligopolistic Dominance under the EuropeanMerger Regulation, 5 ECLR 255 (1994) that includes a discussion of three oligopoly merger cases against the background of game theory. 26 For useful surveys of the earlier interindustry empirical work see particularly R. Schmalensee, Inter-industryStudies of Structure and Performance, in HANDBOOK OF INDUSTRIAL ORGANIZATION (R. Schmalensee and R.G. Willig eds., 1989) and J. Fairburn & P. Geroski, The Empirical Analysis of Market Structure and Performance, in MERGERS AND MERGER POLICIES 175 (J. Fairburn & J. Kay eds., 1990). Two major schools of thought have interpreted the results of these studies differently. One, associated with the Chicago school, believes that any effects attributed to concentration are merely indications that the more efficient companies are able to expand market share and earn higher profits. The second school interprets the results as showing that firms do jointly exercise power with significant consequences for prices and profits.
25
in
HANDBOOK OF INDUSTRIAL ORGANIZATION
empirical techniques, show that there is a great deal of market 27 power in some concentrated industries. Interpretation of the studies has been controversial but it is now generally accepted that, on the one hand, a low level of concentration is a fairly accurate indicator of reasonably competitive behavior and that on the other hand, oligopolists in highly concentrated industries do not always exercise monopoly power in their pricing although the possibility of oligopolistic coordination may be a real concern in some such industries. Recognizing the possible threat to competition posed by the build up of oligopoly structures, established merger policies both within EU member states and outside the EU generally include the control of oligopolies within their scope. A detailed comparative review of policy toward oligopoly in other merger control regimes has recently been published elsewhere so only brief comment is pro28 vided here. The U.K. statute under which mergers are controlled is formulated by reference to conduct rather than structure, and contains no explicit guidelines about levels of industrial concentration that might lead to a merger being challenged. However, the Monopolies and Mergers Commission can recommend a merger be blocked on the basis of the adverse effects expected from increased concentration even in the absence of a single market For the results of the later empirical studies of intra-industry studies see T. Bresnahan, EmpiricalStudies of Industries with Market Power in HANDBOOK OF INDUSTRIAL ORGANIZATION 1011 (R. Schmalensee & R. Willig eds., 1989) and J.B. Baker & T. Bresnahan, Empirical Methods of Identifying and Measuring MarketPower, 61 ANTITRUST L. J. 3 (1992). 25 A fuller review is provided in P.J. Williamson, Oligopolistic Dominance and EC Merger Policy, EUROPEAN ECONOMY 57 (1994). This study, that was sponsored by DGII (rather than the Competition Directorate, DGIV) reviews merger control policy in the U.S., France, Germany, Italy and the U.K. to see what insights this (together with economic theory) gives into the possible development of guidelines to assess oligopoly in the EU. A suggested methodology is then applied to two U.S. and two U.K. merger cases involving questions of oligopolistic dominance that the national authorities had investigated previously.
27
Oligopoly : 213
leader. 29 Both the U.S. and German policies refer to the marketwide effects of mergers through their influence on industrial concentration. In the U.S. the likelihood of coordinated interaction after merger is one of the factors evaluated by the Department of Justice in deciding whether to open a full inquiry; the existing level of market concentration and the impact of the merger on this (as measured by the Herfindahl-Hirschman index) along with other structural features that might facilitate or limit the opportunities for coordinated behavior are important considerations 30 here. In Germany, merger control was initially based on a market dominance standard whereby two or more enterprises were jointly held to dominate the market if they together satisfied the conditions for single-firm dominance and if there was no competition between the oligopolists themselves.3 1 An amendment in 1973 expressly authorized the attack on oligopoly by setting out structural conditions for the presumption of oligopolistic dominationnamely that the five leading firms have two-thirds or more of the market or the leading three firms have half or more (subject to a turnover threshold). 32 This change, which was intended to help in the assessment of whether an oligopoly is dominant in nature,
29
U.K. Fair Trading Act 1973 6(2).
30 Note that the 1992 Guidelines softened the effect of the concentration presumptions compared with the previous version. They also introduce the term "coordinated interaction," that is arguably more inclusive than the term "collusion" used in the previous 1984 Guidelines. See D.
Leddy, The 1992 US Horizontal Merger Guidelines and Comparisons with EC Enforcement Policy, 14 ECLR 15 (1993) and W.F. Mueller & K.J. O'Connor, The 1992 Horizontal Merger Guidelines: A Brief Critique, 8 REv. INDUS. ORGANIZATIOM 163 (1993). Also see C.F. Rule & D.L. Meyer, Toward a Merger Policy That Maximizes Consumer Welfare: Enforcement by Careful Analysis, Not by the Numbers, 35 ANTrTRUST BULL. 251 (1990) and M.B. Coate & F.S. McChesney, Empirical Evidence on FTC Enforcement of the Merger Guidelines, 30 ECON.
INQUIRY
31
32
277 (1992). German Act Against Restraints of Competition (GWB) 24. GWB 22(3).
proved to be of limited practical significance as the firms usually succeeded in rebutting the presumptions by showing the existence of substantial competition between the oligopolists. The 1978 proposal to strengthen merger control by abolishing the possibility of rebuttal and introducing per se rules on market dominance was rejected and instead a special oligopoly presumption was introduced in 1980. This effectively shifted the burden of proof so that the participating enterprises had to demonstrate that the market structure prevailing after the merger would lead to substantial competition among the oligopolists. 3 3 In the great majority of cases, however, the firms have successfully rebutted the oligopoly presumptions and increasingly the Bundeskartellamt has relied on 34 a finding of "superior market position" instead. The lack of reference to market concentration and oligopoly concerns in the EC merger regulation may have been unintentional, the narrow drafting a result of a preoccupation of the German and U.K. governments with insuring that the regulation could not become an instrument of industrial policy and other wider noncompetition concerns. It is difficult to determine the legislative intent, but arguably it is unlikely that the national delegates would have planned to pass power for controlling substantial mergers to the EU without providing a system for controlling oligopolistic dominance to substitute for the existing national provisions. It also seems unlikely that the Commission planned to forego such powers as the danger that the unchecked build-up of oligopoly structures through merger would jeopardize the beneficial effects of European integration on competition was well rec33
GWB 23a(2).
34 For useful reviews of German policy development see K. J. Hopt, Merger Control in Germany: Philosophies, Experiences, Reforms, in EUROPEAN MERGER CONTROL 1, 71-99 (K. J. Hopt hain & H. Schneider, GERMAN ANTITRUST LAW
ed., 1982), M. Heiden-
(4th ed. 1991); K. E. 1990 FORDHAM CORP. L. INST. 149 (B. Hawk ed., 1991); and E. Kantzenbach, The Treatment of Dominance in German Antitrust Policy, in MAINSTREAMS IN INDUSTRIAL ORGANIZATION 273 (H.W. de Jong & W. G. ShepMARKERT, MERGER CONTROL IN GERMANY: SUBSTANTIVE ASPECTS, in
herd eds., 1986).
Oligopoly : 215
ognized in official reports.3 5 The Commission had stated in 1986 that one of the main aims of the merger regulation proposed at the time was to prevent situations resulting in stable collusion among oligopolists. 36 It had also attempted several times to extend the concept of dominance under article 86 to include joint dominance within oligopolistic markets.3 7 When the regulation was introduced it remained to be seen whether the Commission would try to tackle oligopoly problems using this device. HI. The assessment of oligopoly
Assessment of dominance under the merger regulation is more difficult than under article 86. This is because in appraising a proposed merger, the Commission has to make a prospective assessment of the likely effects of the merger on market power against a backcloth of changing competitive conditions, while the assessment of dominance under article 86 occurs retrospectively. As a result, the Commission can only predict whether the proposed merger is likely to create or enhance the opportunity for raising prices and profits rather than basing its decision on firm evidence provided by historical data. The appraisal criteria in the merger regulation and the framework the Commission has adopted for its case analysis suggest a largely structural approach to assessing dominance. The starting point in the appraisal is to define the relevant product and geo35 P. CECCHINI, with M. CATINET CHALLENGE (1988).
36
& A.
JACQUEMIN, THE EUROPEAN

SIXTEENTH REPORT ON
COMMISSION OF THE EUROPEAN COMMUNITIES,
EUROPEAN COMPETITION POLICY,
331-33 (1986).
37 These attempts have been usefully summarized in J.S. Venit, The Evaluation of Concentrations under Regulation 4064/89; The Nature of the Beast, in 1990 FORDHAM CORP. L. INST. 519 (B. Hawk ed., 1991) and A. Winkler & M. Hansen, Collective Dominance Under the EC Merger Control Regulation, 30 CMLR 787 (1993). The latter also contains an interesting legal discussion of whether the Commission's position regarding joint dominance is tenable on the basis of the wording and history of article 2(3).
216 : The antitrustbulletin graphical markets. Four other main features of the market are then assessed, viz., the position of the new entity in these markets, the position of competitors, the bargaining power of customers, and 38 the threat of potential entry. The Commission's assessment of the market share of the merged enterprise in light of the position of the other competitors in the market has played a central but changing role in the decisions to date. As far as oligopolistic market structures are concerned, four separate phases in the Commission's approach can be distinguished. In the first year, a number of cases suggested either a lack of awareness of the oligopoly problem or an unwillingness to examine the full implications of mergers leading to highly concentrated market structures rather than single-firm dominance. In the second phase, there appeared to be a growing recognition of the oligopoly problem and of the need to address it under the regulation when there was a suitable test case. In the Nestli/Perrier case of July 1992, the Commission first challenged a merger on oligopoly grounds, although the admissibility of its interpretation of the regulation to include joint dominance awaits judicial decision. In the current phase, there is evidence of continuing oligopoly concerns but, although several cases have been investigated fully, the Commission appears to be treading cautiously while its powers to act are under legal review. The first two phases will be briefly examined as background to a more detailed discussion of the landmark NestlM/Perriercase and current policy. Phase 1: Ignoring the oligopoly problem In the first year, the existence of competitors with similar shares to the merged firm was regarded as an indication of their ability to influence its behavior and prevent independence of action; the possibility of collusive behavior resulting in higher profitability to the detriment of the consumer was ignored. Dominance was treated as characteristic of a single firm, in line with existing practice under article 86, and the implications of
38 COMMISSION OF THE EUROPEAN COMMUNMS,
XXII
REPORT ON COM-
PETITION POLICY
T 246 (1993).
Oligopoly : 217 oligopoly structures and market concentration were rarely mentioned. The existence of this oligopoly loophole seems to have weakened the potential power of the merger regulation in a number of the early cases. 39 For example, in Renault/Volvo, the first case the Commission considered, there were a number of significant competitors and the merger added appreciably to Renault and Volvo's combined share in some markets. 40 The main reason for clearing the merger in the truck market was the existence of other wellestablished suppliers such as Mercedes and Iveco with their own distribution and service networks. This was seen as making it unlikely that Renault and Volvo will have the power to behave to an appreciable extent independently of these competitors or to gain an appreciable influence on the determination of prices without losing market shares. So despite the oligopolistic structure of the national markets, with three-firm concentration ratios well over 50%, and the fact that the merger would reduce the number of significant suppliers from four to three in some submarkets, the transaction was cleared after initial scrutiny. A number of other cases can be cited that involved high levels of market concentration and were cleared in the first year without detailed assessment. The joint venture proposed in Mitsubishi/UCAR had a 35%-40% share in the EC market for graphite electrodes and graphite specialties through the established position of UCAR both in the EC and worldwide. 4 1 Other major competitors including Sigri, a subsidiary of Hoescht, and Pechiney had market shares of between 15% and 25% suggesting a three-firm concentration of at least 65% with no other large competitors. The Commission investigated whether the market share of UCAR, its distribution network and its technological
39
See also Ridyard, supra note 17 for comment on some of the early Renault/Volvo, Decision of 07.11.90. Mitsubishi/UCAR, Decision of 04.01.91.
cases.
40
41
expertise gave it a dominant position but this was dismissed after initial screening largely because "the technological expertise of the competitors proved by their durable and important market position in the EC as well as in the different member states is also significant and insures competitiveness." The possibility of oligopolistic coordination was not explicitly considered despite the lack of potential competition, the existence of excess capacity in both markets and the maturity of the market for graphite electrodes where no major new technology was likely to be introduced. Elf/BCICepsa proposed to combine the activities of two Spanish producers of various refined oil products. There was a very high concentration ratio in a number of the markets considered but the new entity would not have been the market leader. For example, its postmerger share in the petrol market would have been 20.7% and 25.3% in diesel fuel, but the market leader, Campsa, supplied two-thirds of each of these markets. In the Spanish market for asphalt there was a three-firm concentration ratio of 98.5% (Cepsa Ertoil 42.5%, Repsol 43.2%, and Petromed 12.8%). Despite this, the decision makes no reference to the possibility of coordinated behavior among the oligopolists in any of the prod42 ucts investigated, and the merger was allowed after screening. The acquisition of Continental Can, a leading manufacturer of cans and plastic containers, by VIAG, a producer of glass packaging products, was also cleared after initial scrutiny despite the high degree of market concentration. 3 The oligopoly problem also appeared in Varta/Bosch, a concentrative joint venture affecting the market for starter batteries in Spain and Germany.44 The market share in Spain would be 44.5% and the Commission noted the "the existence of an equally strong competitor, Tudor SA, could lead for several reasons to alignment of the behaviour of both competitors." There were no other large
42
Elf/BCICepsa, Decision of 18.06.91. Continental Can/VIAG, Decision of 06.06.91. Varta/Bosch, Decision of 31.07.91, L 320, OJ, 26 (1991).
43 44
Oligopoly : 219
competitors in the Spanish market, but after an oral hearing (of which no details are given in the decision) the Commission withdrew its objections. It did open full proceedings to investigate the position of VartalBosch in the German market where the joint venture would have almost the same share as in the Spanish market (44.3%) but a lead of more than 25% over the next largest competitor. A number of changes occurred in the German market during the inquiry, including an increase in the market potential of Fiat, which through acquisition became the next strongest competitor with more than 10% of the German market, and an agreement by Varta to end the cooperative relationship with Delta-Mareg, the strongest of the existing competitors. The Commission concluded, rather cautiously, that "as a result it is now at least doubtful if a market share of 44% and the current lead over the next competitor is sufficient to prove a dominant position. ' 45 Yet it is at least possible that the structure of the Spanish market posed a greater threat to effective competition than had the German one that was more fully investigated. Phase 2: Recognizing the oligopoly problem The possible application of the regulation to oligopoly structures was explicitly mentioned in Alcatel/AEG Kabel (December 1991), but the issue remained unresolved. 46 The German market for power cables was one of the markets affected by the purchase by Alcatel of AEG's cable business in Germany. On the German market, the parties combined market share would be 25% (Alcatel 12% and AEG 13%) and the three largest firms including Siemens (3%) and Folten Guilleaume (10%) would account for 58% of total sales. Fears about uncompetitive behavior with this level of industrial concentration prompted the German Bundeskartellamt Their analysis was challenged by a minority of the Advisory Committee who did not feel that the structural changes in the German market were sufficient to alleviate the competition concerns. See Varta/Bosch, Opinion of the Advisory Committee of 17.07.91, C 302, OJ, 6 (1991). Alcatel/AEG Kabel, Decision of 18.12.91. 46
45
to ask for the merger to be referred back under article 9 of the regulation so that it could be investigated under German law. This request was rejected and the merger was cleared by the Commission after initial scrutiny as it found no evidence of a lack of 47 effective competition despite the oligopolistic structure. The Commission decided that there had been effective competition in the supply of power cables before the merger due to the strength of the major buyers. A price fall of 20% in the previous 10 years was taken to indicate effective competition in the past, although no comparative information on prices or costs was given in the decision to allow the importance of this price fall to be assessed. The strength of buyers and forthcoming changes in procurement policies were regarded as sufficient to safeguard competition in the future despite other features of the market that might be regarded as facilitating oligopolistic collusion, namely the standardization of the product, the maturity of the market, stagnant demand, the limited possibilities for technical innovation, and the high degree of market transparency. The Commission made it clear that it would not seek to apply a German-style presumption against oligopoly but the decision referred to the possibility of extending the interpretation of dominance in the regulation to include joint dominance so that oligopoly situations could be dealt with under the current wording of the regulation. This was apparently felt not to be a suitable test case and the question was left open.
47 In the first four and a quarter years, six requests have been made under article 9. Full proceedings were opened by the Commission in two of these, viz., Varta/Bosch and Mannesmann/Hoesch. The three successful cases were Tarmac/Steetley (UK), McCormick/CPC/Rabobank/Ostmann (Germany), and Hodercim/Cedest (concrete market, France). The request by Germany to investigate Alcatel/AEG Kabel was refused. This case should not necessarily be interpreted as suggesting a major difference between the approaches of the EC Commission and German authorities toward oligopolistic dominance; the presumption of oligopolistic dominance in the German legislation may be rebutted after preliminary investigations and in this case the Commission had longer under the regulation for initial screening than the Bundeskartellamt (see JONES, DIAz & OVERBURY, supra note 6, at 173).
Oligopoly : 221 The decision on Thorn EMI/Virgin Music taken at the end of April 1992 suggested a greater willingness to consider possible cases of collective dominance. 48 This case concerned the acquisition by Thorn EMI, a major vertically integrated record company competing on a worldwide basis, of Virgin, one of the few independent record companies in a market dominated by large companies. The main effects of the merger were in music recording and music publishing. The small market share of the merged firm, which would not exceed 25% in any of the main markets, and the existence of other large firms meant that there was no question of single-firm dominance. However, the Commission felt that "the structural features of the market(s) for recorded music could indicate a situation of collective dominance." The recorded music market was already highly concentrated, and with the acquisition of Virgin, the share of the five leading firms rose from 77% to 83% for the EC as a whole and the range from 70%-80% to 70%-95% in the individual member states. The high market concentration and the previous stability of market shares led the Commission to consider whether the merger would create or strengthen a dominant position among the five companies taken together. The market shares of the five major companies were similar and had been relatively stable in the past, showing a tendency to increase at the expense of the smaller record companies. The scope for competition appeared limited, the barriers to entry were high and there were a number of cooperative agreements relating to record compilation, distribution, ordering, and rack jobbing involving the major companies. The Commission carried out "a certain number of inquiries in order to evaluate the market behaviour of the main participants" but unfortunately the decision gives no details of these. The merger was cleared after initial scrutiny as, although the structural features of the market favored large companies, the Commission found no evidence that the market was performing anticompetitively or that this acquisition would fundamentally alter the conditions of competition. Nevertheless this decision is important as it was the first time that the Commission had evaluated the possibility of
48
Thorn EMI/Virgin Music, Decision of 27.04.92.
coordination between firms in any detail by reference to market behavior. By this time, the extension of the interpretation of article 2(3) to include multifirm or joint dominance was clearly on the agenda. For example, the then Competition Commissioner, Sir Leon Brittan, said in his October 1991 address to the Centre for European Policy Studies in Brussels: It is my belief that the concept of dominance in Article 2 of the Regulation covers joint dominance. If a merger or acquisition creates or strengthens a market structure in which price collusion or price parallelism between competitors is highly likely, that concentration should 49 be considered incompatible with the Common Market. It was perhaps hoped that the European Court might extend the interpretation of dominance to joint dominance under article 86 in the appeal case brought in Italian Flat Glass, so paving the way for this interpretation of dominance in the treatment of mergers. The case involved three producers controlling more than 80% of the Italian market for flat glass. They allegedly colluded over prices and conditions of sale so infringing article 85 and were, as a result, said to have abused a jointly held dominant position under article 86 by eliminating price competition between suppliers and fixing quotas in the automobile market.5 0 The producers appealed to the Court of First Instance which found in their favor and annulled the decision in March 1992.51 The Court did not Sir L. Brittan, Competition Policy and Mergers, Address to the Centre for European Policy Studies, October 1991 (mimeo). 50 Italian Flat Glass, L 33, OJ, 44 (1990) 4 CMLR 535 (1989). See also Comitis armatoriauxFrance-Afrique de l'Ouest L 134, OJ, 1 (1992) and CEWAL, L 20, OJ, 6 (1993) for the application of article 86 to oligopoly. Note that both of these cases involved links between the oligopolists as they were members of shipping conferences resulting in a common policy toward outsiders. 51 Italian Flat Glass, Judgment of the Court of First Instance in Cases T 68, 77 and 78/89 10.03.92 (report kindly provided by the European Commission). The Commission's arguments were not well developed; as the article 86 case was an adjunct of proceedings under article 85, it was affected by the Court judgment against the latter. Also see D. Pope, Some Reflections on Italian FlatGlass, 14 ECLR 172 (1993).
49
Oligopoly : 223 exclude the possibility that independently controlled firms could exert dominance jointly in the context of article 86, but this was interpreted very narrowly as involving economic links between the firms; the example of agreements or licenses that might safeguard the participants' technological lead over their competitors was cited. Phase3: The challenge to oligopoly dominance Nestlid/Perrier,notified on February 25, 1992, appears to be a landmark in the treatment of oligopoly.5 2 It concerned a public bid by Nestl6, the large Swiss food multinational, for Source Perrier, a French company that manufactures and distributes bottled water. Nestl6 had previously agreed with the French food manufacturer, BSN, that Volvic, one of the main Perrier brands, would be sold to BSN if Nestl6 successfully acquired Perrier. The merger was challenged on the ground that it would give Nestl6 and BSN a jointly held dominant position (a "duopoly") in the French bottled water market that was likely to harm the interests of consumers. The Commission also examined the effect the merger would have if the Volvic agreement was not implemented and concluded that, in this case, the proposed merger would create a single-firm dominant position for the new entity that would prevent effective competition. As this decision represents a radical departure in the application of the merger regulation, it is worth examining in detail. Both the product and geographical market definition were controversial. Nestl6 argued that the relevant product market should include both bottled water and soft drinks. However, evidence of differences in demand conditions and of differences in production and marketing on the supply side supports the Commission's conclusion that the relevant product market was bottled still and sparkling water, both mineral and spring. The most telling part of the argument was that, over the past 5 years, the national suppliers of bottled waters had been able to increase their prices substantially in real terms and enjoy increased demand despite the
52
Nestle/Perrier,supranote 13.
224 : The antitrustbulletin decreasing trend of soft drinks prices over the same period. The Commission's concentration on France as a separate geographic market, excluding Belgium and certain German Lander that Nestl6 wished included, also seems justified in view of the limited scope for cross-border trade. Once the market had been defined, the analysis of the likely effects on competition within it was more straightforward. The French bottled water market was highly concentrated before the merger with only three national producers. Perrier, the leading firm, BSN and Nestl6 between them accounted for 82% of the total market by value and 56% by volume with nearly 95% of mineral water sales. The Commission stopped short of claiming that the market was jointly dominated by Nestl6, Perrier and BSN before the merger, although the evidence does seem to suggest the leading suppliers were already exercising substantial market power. Prices of the major brands had risen steadily in close step over the previous 5 years with Perrier as the apparent price leader; market shares of the leading firms were relatively stable, despite market growth; the major brands were highly profitable, with prices well above those of small local springs, and there was also evidence of joint entry deterring behavior to protect the established oligopoly. The Commission focused instead on the likelihood that the elimination of the leading firm by Nestl6 and its possible division with BSN would further weaken competition in this highly concentrated market. The Commission at last had a strong case on which to base an extension of its use of the regulation to mergers involving collective market power. Its analysis focused on the effect of the merger on competition in still water as Nestl6 had a relatively small presence in sparkling water which, in any case, only accounted for 16% of the total bottled water market. A number of structural conditions suggested the likelihood that there would be collusion between the duopolists that would be detrimental to competition. These were investigated by the Commission to see how easy it would be for the duopolists to avoid competing between themselves and to act independently of their competitors and customers.
Oligopoly : 225 Collusion is generally thought to be easier when the market is highly concentrated and the number of firms involved is small. The proposed bid would increase concentration, which was already high in this market, by eliminating the largest operator in terms of sales and capacity, with two suppliers instead of three accounting for more than three-quarters of the bottled water market and all but 5% of still mineral water. Symmetry of market shares, together with similar capacity and cost structures, is generally regarded as making it easier to set a common price because the firms' interests, and their views of the market are more likely to coincide. In this case it appeared that the market shares and capacity of the duopolists were very similar and both firms had similar cost structures. The Commission noted that these firms were likely to find cooperation easier because they were both long established in the French bottled water market; both were active in the wider food industry and they already had experience of cooperation elsewhere in the wider industry. The incentive for coordinated pricing is greater in markets with low price elasticity of demand (where price increases are met with a smaller than proportionate fall in quantity demanded resulting in higher revenues for producers). In defining the market, the Commission found a low cross price elasticity of demand between natural mineral water and other drinks in France; customers drink mineral water daily because of its perceived purity and relation to healthy living and soft drinks are not regarded as close substitutes. Brand loyalty, encouraged by the heavy advertising and promotion by the leading suppliers, further decreased the importance of price in purchasing decisions. The Commission noted that the past behavior of prices suggested that the mineral water suppliers had already recognized the possibility of increasing profits by jointly increasing prices, and the merger was seen as increasing the likelihood of Nestl6 and BSN jointly maintaining high prices or even raising them further. Firms trying to coordinate their behavior often have problems both in introducing an effective system of communication allowing prices to be set cooperatively and then in maintaining an
226 : The antitrustbulletin effective monitoring system to prevent secret price cutting. The Commission found that there would be no such difficulties in the mineral water industry. Although in other circumstances the existence of branding might decrease transparency, the size and packaging of the main products were the same and retail prices could easily be checked. Perrier, Nestle and BSN each published their list prices on a comparable basis giving a useful reference point in pricing. The behavior of firms was easily monitored both because the leading firms all supplied the same customers so they could easily obtain feedback about their competitors, and because they already had arrangements to exchange information about quantities sold on a monthly basis. The ability of oligopolists to coordinate their behavior is affected by cost conditions; differences in average and marginal costs make it difficult to agree on a common price and the existence of unexploited scale economies may encourage aggressive price cutting. The Commission found that cost structures among the leading competitors were similar and the need to bottle water at source reduced the scope for scale economies in production. Rapid changes in technology tend to increase the level of uncertainty in the industry and destabilize existing agreements making it difficult for firms to coordinate their pricing. The Commission found that the main technology involved in this industry, namely bottling, is mature with no major changes on the horizon. There was little scope for product innovation, and expenditure on R and D as a proportion of turnover was relatively low. In this industry technological change seemed unlikely to dislodge established leaders or make continued price coordination among them difficult. Oligopolistic price coordination among the market leaders is more likely to break down the greater the proportion of industry capacity accounted for by fringe suppliers and the more likely such firms are to expand in response to high prices charged by the leading firms. There were a large number of local water sources in France exploited by companies competing on a local and regional basis. The Commission examined the threat posed by these fringe
Oligopoly : 227
firms and concluded that they would not constrain the ability of the market leaders to coordinate their activities as Nestl6 had claimed. Previous pricing behavior suggested that the pressure from local producers had not been sufficient to prevent coordinated pricing behavior by the market leaders in the past. The Commission identified a number of structural features that put the local spring water suppliers at a competitive disadvantage. They were too small and dispersed geographically to present a significant alternative to the national brands; the largest two of these fringe suppliers (Papilland and CGES) had only 9% of sales volume and 4% of the market by value. They had to charge substantially lower prices than the national brands and the resulting small margins meant that small producers could not generally afford to distribute their products over more than about 200 kilometers. With smaller sources, less developed distribution systems and less well-known brands, they also lacked the resources to invest heavily in marketing and promotion, unlike the would-be duopolists. In addition, Nestl6 would acquire a number of local spring water sources through the merger, allowing it to compete across a full range of products. In some previous cases, the Commission had relied on the buying power of customers to constrain monopoly power on the selling side. 53 However, although the ten largest buyers represented 70% of the turnover of the largest firms, none had more than 15% of the custom. The Commission concluded that the buyers would, if anything, be weakened by the merger, as it increased the number of major brands held by BSN and Nestl6 and reduced the choice of retailers from three to two sources of supply. Concentrating on local spring waters could not be considered a realistic alternative for the retailers to stocking the well-known brands. Following work by the "contestability school," recent theory has laid considerable emphasis on the importance of entry conditions, and the bottled water market raised considerable concerns in this respect. The threat of new entry seemed unlikely to act as a
53 See, for example, Alcatel/Telettra, Decision of 12.04.91, L 122, OJ, 48 (1991); Continental Can/Viag, supra note 43 and Alcatel/AEG
Kabel, supra note 46.
disciplining force from the supply side. The market was relatively mature in terms of growth rates, the proliferation of products and the degree of product differentiation, and there appeared to be little scope for technical innovation. It would take time for a new firm to be able to establish a significant operation from scratch and, with the acquisition of Perrier, the possibility of buying an existing major water source had been effectively foreclosed. New entry would be risky because of the established reputation of Nestl6 and Perrier and the heavy sunk costs required to advertise and promote new products. The Commission also pointed out that after the merger, there would be no other firm in the EC of a size, range of products and reputation of either Nestl6 or BSN. In addition to the structural entry barriers, there was a danger of joint action to deter entry, signaled by the previous combined opposition of Nestl6 and BSN to a bid by Ifint (controlled by the Italian family, Agnelli) for Exor (a French holding company that held nearly 29% of Perrier) that had threatened to upset the existing market structure. The two suppliers would have considerable spare capacity after the merger but the implications of this in terms of the possible threat to new entrants resulting from the ability of the incumbents to respond without capacity constraints or the possible incentive for price cutting were not explored. The high entry barriers had already led to the failure of past attempts to enter the market and the perceived risks of entry were felt likely to increase as a result of the merger. The analysis points to the existence of many of the classic conditions facilitating oligopolistic (or, in this case, duopolistic) coordination. As no structural features tending to limit collusion were identified, there was no need for the Commission to weigh the importance of the different factors against each other.5 4 The Commission also highlighted the weakness of competition in the market premerger with reference to pricing behavior and profitability and concluded: The maintenance or development of whatever competition there remains on that market therefore requires particular protection. Any
54 This was fortunate as economic theory gives no clear guidelines on the relative weights to apply. See Fisher, supra note 19.
Oligopoly : 229
structural operation restricting even more the scope for competition in such a situation has to be judged severely (T 118). In practice, the Commission appears to have been far from severe in its remedies. Instead of banning the merger outright, it approved the transaction conditionally in July 1992. 55 Nestl6 agreed to sell a number of brands and water sources representing about 20% of the total capacity previously held by the three national suppliers to a suitable buyer in order to create a viable competitor and prevent Nestl6 and BSN having a position of collective dominance. The sale of Volvic to BSN was to be delayed until the other remedies had been implemented. In addition to this structural remedy, there was also a behavioral requirement: Nestl6 was not to provide data on sales volumes to any organization that might make them available to competitors until the data were at least a year old. Nestl6 agreed to the conditions negotiated with the Commission and the merger was cleared. Various aspects of the decision attracted criticism both from two separate minorities in the Advisory Committee and more widely.5 6 Some of the criticisms centered on the leniency of the outcome. These criticisms have considerable force. The decision effectively appears to allow the disappearance of a third competitor in the market and then to impose conditions to try to recreate one. However it is questionable whether the market power of Nestl6 and BSN, and particularly the likelihood of the firms avoiding competition between them, will be satisfactorily curbed There was much speculation about the reasons for this, highlighting a lack of transparency in the decision and the perceived political nature of the Commission. Some commentators suggested that, bearing in mind the furor over blocking ATRIDe Havilland that involved a French firm, the Commission was attempting (unsuccessfully as it turned out) to avoid the possibility of legal challenge in this case that involved BSN, a national food champion in the French food industry, so near to the September referendum on Maastricht. Others suggested that there was a quid pro quo between the Commission and the parties with the Commission allowing BSN to acquire Volvic in return for a chance to try out the collective dominance doctrine. 56 Opinion of the Advisory Committee on Nestle/Perrier given on 03 and 14.07.92, C 319, OJ, 3 (1992).
55
by the presence of this "third force." The decision still leaves more than two-thirds of mineral water sales under the control of Nestl6 and BSN. Market shares are not given in the decision, but industry sources suggest that BSN would increase its share of the market to 30.9% with Volvic, and Nestle would retain nearly 37% of the market for still and fizzy water before other divestments, so the shares of the market leaders would be more symmetrical than previously.5 7 The new entrant would gain 20% of the capacity previously held by the three main suppliers but the current sales of the brands to be divested were described in the decision as "still very low" and it is surprising that the decision was based on future capacity rather than existing market sales, especially in view of the difficulties the Commission had identified of building up a position in this market. Although the case centered on the still mineral water segment of the market, two of the four named brands to be divested, namely Vichy (Perrier), and St. Yorre (Perrier) were sparkling waters and Nestl6 was able to keep the bestknown brands. Nestl6 could select the buyer of the brands and had an obvious incentive to choose a firm that would not be likely to be strongly competitive. In addition, the brands were likely to be worth more to a buyer that anticipated a degree of coordination with Nestl6 and BSN. The ban on Nestl6 providing sales information was an attempt to reduce market transparency but appears unlikely to prevent collusion by inhibiting communication between the firms as price data are readily available and information flows between Nestl6 and BSN appeared well established. Although Nestle was not allowed to repurchase any of the assets sold off under this arrangement for 10 years, and must inform the Commission of future purchases in the market, the Commission appears legally unable to prevent the buyer from selling them, unless this deal also falls within the scope of the merger regulation; such a transaction could defeat the object of the commitment that NestI6 had to make to secure clearance.
57
See Nestli is Poised to Win Perrier,FINANCIAL
TiMEs, July 18,
1992.
Oligopoly : 231
In February 1993, Nestl announced that it had reached agreement to divest assets as required by the Commission. The buyer was Castel, a French company engaged in the brewing industry, owned by the holding company Soci6t6 d'Investissement d'Aquitaine.5 8 This company already had a presence in the market, as one of the two larger fringe suppliers (GCES) named in the decision.5 9 Its products were already stocked in French supermarkets, so it has experience in dealing with such buyers and it will benefit from an established distribution network. As part of a large group, it has the financial capacity to develop the brands acquired and, indeed, it may be argued that it has more incentive to develop them than would Nestl6. Whether these advantages will be sufficient for the firm to emerge as a new third force and will prevent tacit collusion in the industry in the future is a matter for conjecture, and the outcome will only become clear after several years. If Castel does not succeed in establishing itself as a major competitor in the French mineral water market, the market will still be dominated by two suppliers. Some critics were concerned that the decision was more interventionist in terms of dictating the future structure of the market than earlier cases, and felt that the remedy proposed in this case was outside the competence of the Commission.6 0 It could be argued that the Commission had simply required a certain amount of divestment by the acquiring company as a condition of accepting a merger that might otherwise have been anticompetitive. Such undertakings are a feature of current U.K. merger policy, for example, although in the U.K. there is a right for third parties to be consulted, unlike the EU position where negotiation takes place exclusively between the Commission and the parties to the proposed merger.
5S See Disposal by Nestli close to EC Compliance, FINANCIAL TIMES, Feb. 10, 1993. Nestl6 had reportedly attempted to get approval for a sale excluding the Perrier Pierval brand but the Commission insisted that the full terms of the clearance conditions were met. 59 Nestlo/Perrier 72, see supra note 13. 60 A similar type of remedy was adopted in ICIIDu Pont, Decision of 10.09.92, L 7, OJ, 13 (1993).
The power of the Commission to apply the regulation to situations of collective dominance was challenged by a minority in the Advisory Committee, another minority felt that it could only have been applicable if there had been proven links between undertakings (in the light of the recent ItalianFlat Glass case). The Commission justified its use of the regulation to deal with joint dominance on the basis that article 3(f) of the EC treaty and article 2(3) of the merger regulation requires "the maintenance of effective competition" and claimed that "the correct interpretation of the Merger Regulation leads to the conclusion that article 2(3) has always covered dominance which significantly impedes effective competition independently of whether such situation is the result of one or more than one firm." This interpretation awaits legal decision by the Court of First Instance in two appeal cases. 61
Phase 4: Furtherapplicationsof "collective dominance"
Despite the criticisms leveled at it for allegedly exceeding its powers in Nestli/Perrier,the Commission's intention to continue
61 Following clearance of the merger, the Perrier workforce brought an application for judicial review. The applicants' main grounds for ask-
ing the Court to annul the Commission's decision included alleged infringements of the procedural rights of recognized employee representatives of the companies involved, and the failure of the Commission to protect fundamental social rights recognized by Community law. They also challenged the decision on the grounds of failure to maintain effec-
tive competition in France and the introduction of the concept of

oligopolistic dominance without legal basis into the regulation. Applica-
tion for interim measures was refused in this, the first Court ruling involving the EC merger regulation, although it conceded that the claim
for review was admissible (Case T-96/92 Comitd Centrald'Enterprisede la Socidtj G6ndrale des Grandes Sources et al. v. Commission, Order of
15.12.92). A further Court action was brought by the employees of Vittel

and Pierval directly challenging the Commission's use of the concept of joint dominance. The transfer of Pierval was temporarily suspended pending the provision of further information by the Commission about the likelihood of the other conditions attached to the original decision being fulfilled, but the application for interim measures was rejected by the Court of First Instance. See Comitj Central d'Enterprise de la S A Vittel, the Comitd d'Etablissement de Pierval and the Fiddration Gdndrale Agroalimentaire v. Commission, Case T-12/93 Order of 02.04.93, C 70, OJ, 12 (1993). Decisions on these appeals are not yet available.
Oligopoly : 233 to apply the regulation to oligopoly market structures is confirmed by the increased interest shown in this aspect of merger regulation in subsequent cases. The likelihood of oligopolistic dominance is now discussed as a matter of course in cases where previously no such concerns would have been raised and, in the 2 years followthe ing Nestl/Perrier, oligopoly question has been examined in some detail in eight cases for which decisions are now available. All these transactions were eventually approved, and in only two of the fully investigated cases since Nestlg/Perrierhave conditions been agreed first with the Commission to allay the concern 62 about possible anticompetitive effects. The Commission has not codified its merger procedures in terms of any guidelines (such as those issued by the U.S. Department of Justice) or checklist of factors that will be considered in assessing oligopoly cases (as has the Bundeskartellamt in Germany). This is hardly surprising as, whatever the eventual merits of codification, the Commission is still gaining practical experience in the different issues involved in assessing oligopoly as compared with single-firm dominance, and its powers are, in any case, under review. 63 Its developing approach is best inferred by examining the actual decisions and this section considers the main developments in the Commission's policy since Nestli/Perrier, Cases in which a final decision was reached after initial stage-1 62 screening were Rhbne-PoulencISNIA (1) and (II), decisions of 10.08.92 and 08.09.93, Allied Signal/KnorrBremse, 15.10.93, Rhbne-PoulencSNIAlNordfaser, 03.02.94 and Holdercim/Cedest,06.07.94. Cases subject to full proceedings were Kali und SalzlMdK/Treuhand, PilkingtonTechint/SIV and Mannesmann/Vallourecllva,supra notes 12 & 13. 63 Policy reviews appear in the annual reports on competition policy and, in addition, two recent papers published by members of the Mergers Task Force in a personal capacity have offered brief overviews of the Commission's approach to oligopoly. See J.F.B. Alonso, Economic Assessment of Oligopolies under the Community Merger Control Regulation, 3 ECLR 118 (1993) and 0. Guersent, L'Application du Contrble Communautaire des ConcentrationsAux Oligopolies Dominants, EC COMPETITION POLICY NEWSLETTER (1994); also P. Lowe, Un Contr~le des Positions Dominantes Oligopolistic. Pourquoi? Comment? REVUE DE LA CONCURRENCE (forthcoming).
particularly as revealed by the three cases of joint dominance that were fully investigated. Unlike the NestMI/Perriercase, where all the structural features appeared to point toward's oligopolistic dominance to the detriment of effective competition, the later cases show the Commission having to balance conflicting influences. In addition, the later cases include features that played little or no part in the Nestli/Perrierdecision such as the sensitivity of the industry to capacity utilization, the pattern of orders, cost differences, and vertical integration. They have primarily dealt with industrial goods, including a number of basic commodity industries that are the more usual setting for concerns about anticompetitive oligopolistic behavior than branded consumer goods markets such as featured in NestI/Perrier. Market definition is an important first step in the analysis; in Nestl/Perrierthe definition, although controversial, was not left open. The Commission does not always reach a definite decision especially in first stage inquiries but, in such cases, one would expect the effects of the merger to be examined against the narrowest possible market boundaries in the course of the analysis. Three cases where oligopoly concerns were raised concerned nylon, in the second of these, Rhbne-PoulencSNIA(HI), the Commission left open the possibility that subdivisions of nylon textile filament activity constituted markets in their own right. Despite this, market shares were not presented at a more disaggregated level to help show that the conclusions reached would hold even if a narrower definition of the market had been taken. In three of the recent cases (Rh6ne-Poulenc/SNlA (I), Pilkington-Techint/SIV, and Holdercim/Cedest), the Commission has examined the possibility of the market being dominated by more than two producers after the merger. The more usual concern, as in Nestlg/Perrier, been with duopolistic dominance and in the has five duopoly cases it was estimated that the two market leaders would account for over 60% of the market after the merger. The Commission has examined the possible impact of transactions in oligopoly markets leading the merged entity to have less than
Oligopoly : 235 25% of the market-e.g., the carpet fibers market in Rh6nePoulenc/SNIA(I) and cement in Holercim/Cedest; only 9.8% of the market was involved in the latter case. Although full proceedings were not opened in these two cases (primarily due to the importance of nonprice competition in the carpet fibers market and to increased import competition, buyer power, and asymmetrical cost conditions in the cement market), the decisions do appear to have been drafted to leave open the possibility that transactions involving small market shares might give the Commission cause for serious concern in other circumstances. As in the Nestli/Perrier case, the assessment of market shares is only a first step and a variety of qualitative factors have been investigated to assess first, the likelihood of the members of the oligopoly acting together both in terms of the ease of coordination and the incentives to act in parallel, and second, whether this dominant group would be able to act independently of possible competitive constraints. The Commission has continued to adopt the view, in accordance with economic theory, that collective dominance can exist in the absence of any structural links among members of the oligopoly. However, any such links or agreements among members of the oligopoly, where they exist, are taken into account as part of the analysis. Corporate and commercial links played an important role in the Commission's decision in Kali und Salz/MdK/Treuhand. The case involved the privatization of the loss-making East German potash and rock salt activities of MdK by its parent, Treuhandstalt, through a joint venture with Kali und Salz, a subsidiary of the BASF group. The decision concentrates on the potash market. The Commission concluded that single-firm dominance would exist on the German market (where the combined enterprise had a 98% share of the market) but this was allowed using a "failing firm" defense. In the rest of the EU, it found that the joint venture and SCPA, a French company, would form a dominant duopoly with a combined market share of some 60%. In view of the concern about the likely anticompetitive effects, it was felt necessary to agree upon conditions before approval.
236 : The antitrustbulletin A number of features of the case support the Commission's duopoly concerns, including the small market shares and relative weakness of the other competitors, the maturity of the market producing relatively homogeneous commodity products, the degree of market transparency, and the stability of market shares. The main reason for the Commission's concern, however, was the existence of strong links between Kali und Salz and SCPA, and the parties gave undertakings to end these as a means of securing approval. First, Kali und Salz undertook to adapt the structure of a Canadian joint venture with SCPA so that each partner could market its production from the jointly owned Canadian mine independently. Second, Kali und Salz agreed to set up its own distribution arrangements in France so that it would no longer need to use SCPA's sales organization. Finally, Kali und Salz agreed to withdraw from an export cartel serving non-EU markets in which SCPA was also a member, and to establish its own distribution arrangements instead. Allowing the joint venture only on the basis of undertakings in the non-German market while accepting a failing firm defense in the German market suggests that the Commission was trying to safeguard competition as best it could without blocking the merger in view of the adverse effects this might have on the former East German economy; unusually, this decision refers to the need to strengthen the Community's economic and social cohesion.6 4 However, Kali und Salz's withdrawal from the export cartel was suspended by the Court of First Instance as an interim measure after a challenge from SCPA on the ground that this step would effectively end the export joint venture to the detriment of SCPA's interests. 65 The clearance of the transaction itself was not
64 The majority of the Advisory Committee agreed with the decision as regards the Community market outside Germany and considered that, as long as the rights of third parties were not prejudiced, the commitments offered would meet the concerns about collective dominance. However a minority felt that these concerns about collective dominance were unjustified. Opinion of the Advisory Committee of 3.12.93, C 199, OJ, 5 (1994). 65 Socidte Commerciale des Potasses de l'Azote (SCPA) and Enterprise Minidre et Chimique v. Commission (Case T 88-94). As the deci-
Oligopoly : 237 suspended as a result, highlighting the apparent lack of a provision for this kind of eventuality in the regulation, and the deal has been completed without all the safeguards seen as necessary in the decision to protect effective competition against the dangers of duopolistic dominance. In Pilkington-Techint/SIV, the initial evidence suggested the presence of oligopoly problems and also led to full investigation. The merger did not create or strengthen the leading firm in the market but instead consolidated Pilkington's position as the second largest float glass producer by the take-over of SIV, Europe's smallest producer. The merger would not alter the structure of the market significantly but would increase concentration in an already highly concentrated market. Five producers including St Gobain, which would remain the market leader, and Pilkington, together with three significantly smaller but financially strong competitors, would account for 96% of the market, and this was an important factor leading to concern about the possible exercise of collective dominance. The Commission noted the previous evidence of cartelization in the industry and a number of structural characteristics that might be expected to encourage parallel behavior, especially at the primary stage of production on which the decision focuses. The product was standardized at this level, the process was capital intensive and the market was mature with growing excess capacity. The deal was cleared, however, as various features of the market were expected both to discourage the oligopolists from acting together and to provide a strong incentive to break any agreement. These included disparities in market shares of the competitors (although little evidence was given of any corresponding cost disparities that would encourage the firms to adopt different strategies), lack of price transparency, variations in vertical integration, and the combination of high fixed costs and excess capacity that it was felt would lead to a strong incentive to break any agreement, as well as the aggressive behavior of Guardian, one of the smaller European producers (but a major U.S. firm). sion has also been challenged by the French state, both appeals are to be heard by the European Court of Justice.
238 : The antitrustbulletin Numerous legal and commercial links were noted in the discussion of price transparency that made the companies very dependent on one another, but the Commission judged that "whilst these could enhance market transparency, their overall contribution is insufficient or irrelevant in creating collective dominance." Apart from product license agreements and cross supply links, four joint ventures were identified. One was ruled out because it involved only two of the five oligopolists; two were discounted because they had irretrievably broken down, and the final one caused no concern because it involved joint research and development activities alone. Some of the grounds on which Pilkington-Techint/SIV was cleared were not entirely convincing and there appear to be inconsistencies with other cases. In particular, the Commission viewed the combination of low variable costs and excess capacity as a strong temptation to individual producers to undercut their competitors' pricing (an argument that also features in RhOne PoulencISNIA (II) and Holdercim/Cedest); in practice, as the history of cartel regulation has shown, anticompetitive behavior tends to be common in such markets as no firm wishes to jeopardize large sunk costs by acting aggressively and risking retaliation. It may have been the recent aggressive investment by Guardian that led the Commission to treat excess capacity as a positive feature in Pilkington-Techint/SIV Similarly, the discussion of price transparency leaves some unanswered questions. For example, the Commission found that the market was not transparent partly due to substantial discounting on an individual basis but there is no analysis of the extent to which suppliers monitored their competitors' discount levels, which could be a means of maintaining transparency. In this case, different degrees of vertical integration among the major firms was treated as another feature reducing transparency and hence the risk of collusion, in the earlier Rhbne PoulencISNIA (II) decision the lack of long-term contracts between producers and customers was rather surprisingly seen as reducing the likelihood of cooperative behavior. Although the Commission apparently relied heavily on the structural features of the industry and the predicted behavior of
Oligopoly : 239
Guardian in reaching its decision in Pilkington-Techint/SIV, the report documents significant changes in market shares and a halving in the real price of glass over 20 years (as well as the aggressive behavior of Guardian on entering the market) that run counter to the usual view that collusion is endemic in this type of industry. Although the price falls are difficult to interpret in the absence of cost data, they suggest that the consumer benefited from at least some of the efficiency gains made during the period. The evidence of previous competitive behavior among the firms would seem to strengthen the Commission's case for allowing the transaction to proceed, a decision that was supported the majority of the Advisory Committee. 66 The most recent duopoly to be fully investigated involved DMV, a joint venture in the stainless steel tubes industry, that appeared to contain all the classic features likely to lead to anticompetitive behavior. Market structure would be radically altered by the transaction that combined the stainless steel tube interests of Mannesmann (German), Vallourec (French), and Ilva (Italian), to form DMV. DMV would become the largest producer with 36% ofthe Western European market, followed by Sandvik (33%), and four smaller and much weaker firms with imports, mainly from Japan, accounting for about 8% of the market. The decision rejected the possibility of single-firm dominance by DMV in view of the similar market share and size of Sandvik and focused instead on the likelihood of duopolistic dominance. The evidence suggested that the leading two producers who had largely symmetrical positions, would have a strong incentive to act together. They operated in a mature, largely commodity type market with inelastic demand and chronic excess capacity. The latter was treated as making cooperation among the independent producers more likely and increasing the dangers to any producer pursuing an independent line, unlike in PilkingtonTechint/SIV It could be argued that the production of stainless steel tubes involves a relatively low proportion of fixed costs
66
Opinion of the Advisory Committee of 30.11.93, C 173, OJ, 4
(1994).
240 : The antitrustbulletin compared with float glass that would give the tube producers less incentive than the glass manufacturers had for independent action, however in DMV the likelihood of retaliation is rightly seen as making such behavior unlikely in any case. Prices were found to be relatively transparent despite the variety of products produced, and again unlike Pilkington-Techint/SIVwhere there was also evidence of discounting in the recession, the possibility of suppliers monitoring the discounts offered by competitors was explicitly considered in the decision. Having established that DMV and Sandvik were likely to cooperate, the Commission then assessed whether they would be able to act independently of external constraints. There was no countervailing power on the buying side (in contrast to Allied Signal/Knorr Bremse or Rh~ne PoulencISNIA (II), for example). Unlike Pilkington-Techint/SIV, a detailed analysis suggested the remaining producers on the West European market were relatively weak and would tend to follow the price lead of the market leaders rather than adopt an aggressive stance. These findings suggested a duopoly would be created with an adverse effect on competition, and the draft decision recommended that the merger should be blocked, this view was supported by a majority of the Advisory Committee in their comments on the prepublication draft. 67 However this recommendation was narrowly overturned by the Commission, ostensibly on the basis of a conflicting view about the future role of imports, especially Japanese imports, into the West European market. In its treatment of market definition, the published decision (T 35) states that Japanese imports are not "strongly affected" by the level of prices in Western Europe, however, the last part of the decision refers to the progressive reduction in import duties over a 10-year period as part of the GATT agreement and suggests in a rather opaque sentence that a small but significant price increase by the duopoly would lead to an increase in Japanese imports: Opinion of the Advisory Committee of 17.12.1993, C 111, OJ, 6
67
(1994).
Oligopoly : 241 Although the Japanese producers did not significantly enter the western European market when prices were higher but demand was heavily decreasing, it should be expected that, in view of the future long term stagnant demand, they would adopt different behaviour (T 113). After the well reasoned and thorough analysis that characterizes the decision, it is unfortunate that no additional evidence is offered for this view, which leaves the Commission open to the charge that the case was cleared unconditionally at the end of the day due to political or industrial policy considerations rather than on competition grounds.68 The outcome of this case highlights the lack of transparency in the EU system of merger assessment, a weakness that arises because there is no published report of the analysis of individual cases written independently of the need to justify the final decision. IV. Conclusion By the late 1980s, firms were rapidly restructuring in preparation for the single European market and the number of mergers increased substantially. Although many of these were expected to be procompetitive in nature, it was recognized that firms might wish to merge for defensive reasons, in an attempt to insulate themselves from the increased competitive pressures, thereby preventing the welfare gains from integration being fully realized. In the context of the European market and possible future enlargements, the creation and strengthening of oligopoly positions through merger seemed likely to pose an important threat to competition where other conditions were conducive to oligopolistic coordination.
68 The 17 Commissioners were reportedly split eight to eight on the issue and Mr. Jacques Delors, the then Commission President, abstained. This made it impossible for Mr. Karel van Miert, the Competition Commissioner, to obtain the required majority approval for his proposal to outlaw the transaction (see FINANCIAL TimEs, Jan. 27, 1994). Six of the Commissioners voting against the original conclusion were from France, Italy and Germany, the countries party to the transaction.
The adoption of the EC merger regulation was a comparatively late development and although it was generally welcomed, the final wording led to concern about whether the Commission would be able to deal satisfactorily with oligopoly problems in merger cases falling within its scope. Some of the early merger decisions indicated a lack of awareness of the full implications of substantial mergers in concentrated oligopolies or an unwillingness to grasp the nettle and put its powers in such cases to the test. This is not to suggest that the mergers cited in the discussion of the first two phases in the development of policy toward oligopoly were necessarily anticompetitive in effect, but rather that they raised issues that seemed to require fuller investigation than they apparently received. Nestli/Perrierappears to be a landmark in the treatment of oligopoly. The Commission's objections to the deal whereby Nestl6 acquired Perrier and planned to sell off the leading brand of its own mineral water interests to BSN, the largest French food manufacturer, were clearly based on oligopolistic grounds. The merger was approved conditionally. Although the remedy adopted seemed to leave the market in the hands of a powerful duopoly, at least until the new "third force" is established, the decision showed that the Commission intends to intervene to control oligopoly under the merger regulation using the device of interpreting it to include joint dominance. This interpretation of "dominance" and its applicability where there are no structural links between the parties involved awaits judicial decision, but Nestl /Perrierand subsequent developments give useful insights into the Commission's developing approach toward oligopolies. The Commission's recent analysis of oligopoly cases has focused on two questions. The first, which is specific to the assessment of oligopolies, is whether the members of the oligopoly are more likely to act together to dominate the industry jointly rather than to compete as the result of the merger. Under this interpretation of dominance, a merger that does not involve or create the market leader in the industry can be challenged if (and only if) the merged entity seems likely to coordinate its behavior with other firms in the industry to form part of a dominant
Oligopoly : 243 group. The second question, which also applies to the assessment of single-firm dominance, is whether the dominant group will be in a position to behave independently of other actual and potential competitors and customers to the detriment of effective competition. This interpretation of the regulation is akin to the original German approach toward mergers that used an aggravation of dominance standard; the Commission has not tried to interpret the regulation as giving any presumption against oligopoly structures, and sizable mergers involving high levels of concentration have been cleared without full proceedings if an initial scrutiny of other features suggests that the industry is not susceptible to the independent exercise of monopoly power by a dominant group acting together. It is interesting to note that the difficulties in applying such a standard in the early merger cases in Germany, particularly of showing that the oligopolists were unlikely to compete among themselves, led to the later inclusion of presumptions against oligopoly. However, these oligopoly presumptions appear to have had far less effect than was originally envisaged and, in the vast majority of German cases, the firms involved have successfully defended themselves against them by showing that the market conditions prevailing after the merger would lead to substantial competition so that the presumption is relatively little used. The recent softening of approach toward increases in market concentration in the United States is also noteworthy in this context. The Commission's reluctance to place heavy reliance on quantitative market share indicators in the treatment of either singlefirm or joint dominance at the initial screening stage may be partly due to the difficulty of market definition, which is particularly problematic in the current European context, as well as to the recognition that the relationship between concentration and performance is rather more complex than the results of the early economic studies by the "concentration" school suggested. It would be very inefficient from an administrative point of view to launch full investigations where mergers pose little threat to welfare loss, because the effects of concentration are mitigated by
other factors such cases can be readily screened out. However, when a rich menu of qualitative factors is also admissible at the initial stage, it can easily become a slippery slope toward excessive leniency, and systematic, well argued and consistent cases for nonreferral (or otherwise) are needed, especially when the merger affects a market that is already highly concentrated. Such clarity has not always been evident in the decisions to date. Market share data provides a quantitative starting point for the Commission's assessment of the likely postmerger behavior of the oligopolists, but a great variety of qualitative factors have been investigated to shed light on the possibility of coordinated behavior and their incentive for independent action both briefly at the initial screening stage and more fully in the stage-two investigations. The evidence has included details of past conduct and performance in the industry as well as of its structural features but the latter are the main consideration in reaching the final assessment. as The features of Nestli/Perrier, detailed in the decision, all seemed to point toward oligopolistic coordination, but the structural indicators in the later cases led to conflicting signals, some suggesting the probability of oligopolistic dominance and others giving cause to question how likely this would be to arise. As merger events are inevitably unique, judgments have had to be made on the basis of the individual features of each case and their interactions within the specific industry setting. Predictability of decisions in such circumstances, although desirable, is difficult to achieve. One of the problems faced by all merger control authorities is that different theories of oligopoly give rise to different predictions about likely postmerger behavior to be associated with different aspects of structure; moreover economic theory provides no general guide to the weights to attach to the various features that may affect the likelihood of postmerger coordination. It is therefore not surprising that, following Nestlg/Perrier,the Commission appeared to have some difficulty in assessing the conflicting features of individual cases resulting in some apparent inconsistencies and gaps in the arguments advanced. These problems are likely to decrease with experience and the thoroughness
Oligopoly : 245
of the main body of the analysis in DMV, the most recent transaction to reach full proceedings, is encouraging in this respect (even though the Competition Directorate's proposal to block the merger was eventually overturned). As no merger has yet been blocked by the European Commission on the basis of oligopolistic dominance and all but two oligopoly cases reaching full proceedings have been cleared unconditionally (with one of these deals, Kali und Salz/MdK/Treuhand, being carried through without all the formal obligations of the parties being fulfilled), one might question the real significance of the Commission's emerging policy toward oligopoly. This is particularly so as transactions in industries such as steel, cement, and glass, some of the classic examples of industries found to be prone to cartel-like behavior in the past, have been among the approved cases. The Commission's treatment of oligopolies has, however, progressed substantially in the first four and a quarter years. The existence of firms with similar shares to the market leader is no longer a ground for dismissing fears of market dominance because of the absence of a "competitive gap" but rather a possible cause for concern about oligopolistic independence. It is also clear, following Pilkington-Techint/SIV, that a merger that will not create or strengthen a market leader will be investigated fully if it appears likely that the merged entity will act as part of an oligopoly (or duopoly) group to the detriment of effective competition. As the Commission's power to apply the regulation to such mergers has been operating under the shadow of legal challenge since Nestld/Perrier,it is hardly surprising that its approach has been rather cautious and a high standard of proof has been required before challenging these types of transaction. It remains to be seen whether the Commission's interpretation of the regulation will be upheld in the courts. If so, it is likely that its approach toward oligopoly dominance under the existing wording of the regulation will become less lenient although, as in the case of single-firm dominance, the final outcome of particular cases will also depend to a greater or lesser extent on political and industrial policy considerations that tend to lead in the direction of greater tolerance of market power than decisions based on a
competition test alone. If the Commission's current interpretation of the regulation is not upheld, a change in the wording of the regulation will be needed to tackle the oligopoly loophole. Any proposal to amend the substantive appraisal criteria requires unanimous approval in the EU's Council of Ministers and, in view of the difficulty of getting a merger regulation approved in the first place, and the divergence of views about the appropriate role of competition and industrial policy that has been evident during its operation, this would seem very difficult to achieve. However, unless a firmer stand can be taken toward oligopolistic dominance in future merger cases, it is likely that some of the potential competition benefits of European integration will be jeopardized.

Antitrust Bull 203

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Citation: 41 Antitrust Bull. 203 1996 Content downloaded/printed from HeinOnline (http://heinonline.

The Antitrust Bulletin/Spring1996

The treatment of oligopoly under the European merger control regulation

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204 : The antitrust bulletin

The weaknesses of previous EEC policy toward mergers are dis-

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Aerospatiale-Alenia/DeHavilland, Decision of 02.10.91, L 334,

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the Oligopoly Blind Spot Under the EC Merger Regulation, 13 ECLR,

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210 : The antitrustbulletin

BAIN, INDUSTRIAL ORGANIZATION

(2d ed. 1968).

INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE

CARLTON & J. PERLOFF, MODERN INDUSTRIAL ORGANIZATION

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HANDBOOK OF INDUSTRIAL ORGANIZATION

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212 : The antitrustbulletin

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U.K. Fair Trading Act 1973 6(2).

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ed., 1982), M. Heiden-

herd eds., 1986).

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JACQUEMIN, THE EUROPEAN

COMMISSION OF THE EUROPEAN COMMUNITIES,

EUROPEAN COMPETITION POLICY,

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218 : The antitrustbulletin

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220 : The antitrustbulletin

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Thorn EMI/Virgin Music, Decision of 27.04.92.

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222 : The antitrustbulletin

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Kabel, supra note 46.

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228 : The antitrustbulletin

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See Nestli is Poised to Win Perrier,FINANCIAL

TiMEs, July 18,

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232 : The antitrustbulletin

tive competition in France and the introduction of the concept of

15.12.92). A further Court action was brought by the employees of Vittel

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