VoxEU Column Competition Policy

Assessing merger control decisions: The role of competitors

How do we know if EU competition authorities are approving the right mergers? This column presents research that tracks how competitors’ stock prices react to merger news to infer when the authorities err. The European Commission is not doing badly, but it has room for improvement.

During the last decade, discussion of competition policy’s effectiveness and its value to society has crept into the spotlight both in the academic literature (e.g. Crandall and Winston, 2003 and Baker, 2003) and in the policy debate (FTC, 1999; DG COMP, 2005; PricewaterhouseCoopers, 2005). While the social value of fighting cartels and abusive conducts seems to be less controversial, the role of merger control has been much criticised. The intense policy discussion and new developments in the academic debate have spurred significant institutional changes in merger policy on both sides of the Atlantic. Hence, the development of tools for an economic evaluation of merger control seems particularly important and timely.

The empirical assessment of the economic effects of mergers is a difficult task per se that has attracted much interest in the economic, finance, and management literature over the last four decades. Several tools and methodologies have been developed, ranging from pre- and post-merger market share and profit analyses based on accounting data to stock market-based event studies to structural econometric models and simulations. Given the difficulties of estimating the merger’s initial impact on the market, assessing the economic impact of merger control decisions, which are often a modification of a proposed merger, is even more problematic, as it requires singling out how the policy decision changed the potential merger effect. Essentially, as for most other policy evaluations, the crucial element is the definition of the right counterfactual(s), which should be derived from economic theory (Buccirossi et al, 2006).

Merging firms, competitors, and the competitive effects of a merger

The most problematic effect of mergers is that they increase market power and hence reduce welfare. The rationales behind this result are the elimination of competitors and the facilitation of collusion amongst the remaining firms. The core dynamic behind these mergers is that the unilateral incentive for merger insiders and their competitors to increase prices and/or reduce output pushes up the overall price in the market and reduces total quantity consumed. Hence, market-power-driven transactions are potentially beneficial not only to merging firms but also to their competitors – such mergers come at the expense of consumers. A first useful theoretical insight is therefore that, absent efficiency gains, horizontal mergers benefit the competitors of the merging firms, the so-called merger paradox.

Yet, mergers can also be beneficial through the realisation of synergistic efficiency gains, which give the merging firms a competitive advantage over their rivals. If the efficiency gains outweigh the market power increase, then only merging firms profit from the merger, while their competitors lose. From a welfare perspective, the fact that merging firms become more efficient might make the merger socially desirable under a total welfare standard and, if some of the efficiencies can be passed on to consumers, also under a consumer surplus standard.

Merger taxonomy

The crucial point I want to stress here is that considering the impact of the merger on competitors alongside its effect on the merging firms gives more information on the types of mergers being proposed and hence on their social desirability. For instance, and most crucially, the researcher or the policymaker can distinguish between market-power and efficiency-enhancing mergers when competitors’ effects are considered. The distinctions are summarised in the following table, which looks at the joint reactions of the merging firms and their competitors to infer the competitive effect of a merger (see Duso, Gugler, and Yurtoglu, 2007 and Clougherty and Duso, 2008 for deeper discussions).

Table 1 Merger taxonomy

  Merging Firms Gain Merging Firms Lose
Competitors Gain Market Power Mergers Efficiency Reducing Mergers
Competitors Lose Efficiency Enhancing Mergers Pre-emptive Mergers
Event studies

To use the proposed taxonomy, one has to be able to measure changes in profitability. One strand of the literature, rooted in the finance tradition, has used stock market reactions to assess the impact of the merger on merging firms’ and competitors’ profitability. The method is grounded in the idea that if the share price of a firm reflects its expected flow of profit, then a change in this price in response to a specific event reveals the event’s effect on future profits. This approach was first proposed to assess US merger policy several decades ago (Eckbo, 1985). More recently, it has been adopted to evaluate the merger control decisions by the European Commission (Aktas, de Bodt, and Roll 2006; Duso, Gugler, and Yurtoglu, 2006; Duso, Neven, and Röller, 2007).

Two empirical studies of European merger control

Over the past few years, together with several co-authors, I have developed a database of mergers notified to the European Commission in the period 1990-2002 and used stock market event studies to infer the nature of these mergers and the effectiveness of merger control decisions.

In a first study (Duso, Neven, and Röller, 2007), we use the basic idea developed above to identify anti-competitive mergers. These are cases where the stock market reaction to the merger’s announcement for competitors is positive, i.e. the merger increases competitors’ profits. By comparing the stock market reactions to the actual European Commission decisions, we first identify whether the EU Commission made systematic errors in its merger decisions. We classify type I errors as those mergers that the market considered to be pro-competitive but were blocked or remedied by the European Commission and type II errors as those anti-competitive mergers that were unconditionally cleared. In a second step, we use regression analysis to study the determinants of these errors. We show that procedural issues and the market definition (as well as the country and the industry to which the merging firms belong) play a crucial role in predicting both kinds of errors. We do not find any significant evidence that firms’ lobbying, measured by the rents that accrue due to the merger, determines such mistakes.

While this first study sheds some light on the working of the EU merger control institutions, the next and perhaps more crucial question is whether merger control decisions are effective or not. In a paper I co-authored with Klaus Gugler and Burcin Yurtoglu (Duso, Gugler, and Yurtoglu, 2006), we focus on this question and try to assess the effectiveness of different merger policy tools by distinguishing between prohibitions, remedies (either behavioural or structural), and outright clearances. The intuitive idea of our approach is that any anti-competitive rents generated by the merger should be dissipated by the antitrust authority decision, if this is effective. The advantage of using event studies is that, by looking at the stock market reactions to both the merger announcement and the Commission decision, we are able to identify and measure both effects. Hence, in the case of effective antitrust, one should expect a negative correlation between rents generated by a merger’s announcement and rents generated by the authority’s decision.

Reassuringly, we find all rents generated by the merger are dissipated by a prohibition. This result can be seen as a robustness check for the approach: outright prohibitions must be “effective” in restoring competition by re-establishing the pre-merger situation. Our findings also suggest that remedies are, on average, not effective in solving anti-competitive concerns. Yet, we can qualify this result: remedies are fairly effective when the anti-competitive concerns are not too severe and when applied during the first rather than the second investigation phase. Moreover, the European Commission appears to have learnt over time, since remedies are effective when applied in “remedy-intensive” industries, i.e. industries where many remedies have been applied before.

Assessments of competition policy are needed to inform the intense policy debate on its overall use to society and to guide possible reforms. A method based on the careful use of theoretical models combined with empirical tools might be used as an instrument to evaluate the quality of policy intervention. Our work suggests that the enforcement of merger control by the European Commission has been only partially effective. This is to some extent due to the fact that the Commission made mistakes, especially by allowing anti-competitive mergers, but also due to remedial actions’ limited effectiveness, despite their increasing use over the past decade.


Aktas, N., E. de Bodt and R. Roll, 2007, “European M&A Regulation is Protectionist,” The Economic Journal, 117, 1096-1121.
Baker J.B., 2003, “The Case for Antitrust Enforcement,” Journal of Economic Perspectives, 17, 27-50.
Buccirossi, P., L. Ciari, T. Duso, S.-O. Friedolfsson, G. Spagnolo, C. Vitale, 2006, “Ex-post Review of Merger Control Decisions - A study for the European Commission prepared by Lear
Clougherty, J. and T. Duso, 2008, “The impact of Horizontal Mergers on Rivals: gains to be left Outside a Merger,” CEPR Discussion Paper 6867.
Crandall, R. W., and C. Winston, 2003, “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence,” Journal of Economic Perspectives 17, 3-26.
Directorate General Competition - European Commission (DG COMP), 2005, Merger Remedies Study.
Duso, T., Gugler, K. and Yurtoglu, B., 2006, “How effective is European Merger Control?”, WZB Discussion Paper SP II 2006-12.
Duso, T., Gugler, K. and Yurtoglu, B., 2007, “EU Merger Remedies: An Empirical Assessment,” in J. Stennek and V. Ghosal Eds., The Political Economy of Antitrust, Contributions to Economic Analysis, North-Holland, 2007, 302-348 .
Duso, T., Neven, D. and L.-H. Röller, 2007, “The Political Economy of European Merger Control: Evidence Using Stock Market Data,” The Journal of Law and Economics, 50, 455-489.
Eckbo, B. E., 1983, “Horizontal mergers, collusion, and stockholder wealth,” Journal of Financial Economics, 11, 241-273.
Federal Trade Commission (FTC), 1999, A Study of the Commission's Divestiture Process.
PricewaterhouseCoopers (2005), “Ex post evaluation of mergers,” A report prepared for the Office of Fair Trading, Department of Trade and Industry and the Competition Commission, London.

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