The enforcement of EU competition rules is essential in supporting the integration of European markets and the enhancement of economic growth in the EU. Indeed, EU member states have granted substantial authority to the European Commission in the field of competition (Neven 2006).
The established wisdom among economists and policymakers is that competition matters when it comes to economic efficiency and innovation. Furthermore, by producing consumer savings through lower prices and higher quality products, competition can stimulate demand, lower inflation, and lead to concrete improvements in the purchasing power of consumers. Finally, competition also reduces price levels in the wholesale and intermediary markets – markets that fundamentally affect other markets and the greater economy.
While there is a wide consensus that competition is welfare enhancing, it is more controversial to state that competition policy actually does a good job of effectively stimulating competition. In light of this uncertainty, a number of scholars have called for more research on whether and how competition is influenced by competition authorities (Buccirossi et al. 2013).
Merger policy in the EU: New research
Among the different areas of competition enforcement, we focus on merger policy in this column. Merger control plays a crucial role because it is the only instrument via which authorities can engage in ex ante prevention of anti-competitive situations. Given that it is much harder to intervene ex post, competition policy has not been extremely successful at preventing existing firms from abusing any dominance they hold in a market or at hindering the occurrence of collusion (Kovacic 2009). Consequently, effective merger policy represents a pivotal component of a well-functioning competition policy.
Despite the significance of merger policy, recent studies indicate that the Commission’s merger control enforcement is far from perfect.1 The EU courts have likewise agreed that a number of errors have been made in the conduct of merger policy. Namely, four prohibition decisions (Airtours/First Choice, Schneider/Legrand, Tetra Laval/Sidel, and GE/Honeywell) from the early 2000s were appealed by the merging parties, and in all four cases the EU courts identiﬁed problems with regard to the rigour of EC economic analysis.
While policy debates and academic studies focusing on the effectiveness of EU merger policy are often based on the rulings with regard to the actual mergers proposed by firms, merger policy entails more than just the direct effects from enforcement. In essence, the direct effects from merger control might represent the ‘tip of the iceberg’ when it comes to the overall impact of merger control. Namely, indirect deterrence effects have been considered to be important, as firms are likely to internalise merger-policy rules in their decision making by altering the mergers they propose to competition authorities; i.e. changes in the tenor of merger policy can alter both the number and type of mergers which are actually proposed (Davies and Majumdar 2002). Hence, an effective merger policy should create incentives that shape the behaviour of firms (Eckbo 1992). Thus, the effects of merger policy are not limited to the specific firms targeted by merger-control actions, but should surely also include firms whose behaviour and performance might be affected – i.e. deterred – in the future by specific decisions and specific policies (Sørgard 2009, Salop 2013).
Deterrence effects of the merger policy of the European Commission
The principal aim of our project is to investigate the deterrence effects involved with the Commission’s merger policy over the past two decades.2 For that purpose, we gathered information regarding all mergers notified to the European Commission from 1990 until 2009 – over 4,200 mergers – and regarding the type and frequency of the various merger-policy actions taken by the EC: i.e. clearances, remedies, prohibitions, and withdrawals. We are able to distinguish whether these merger-policy actions took place in initial or secondary phases of the Commission’s merger-review process. The ability to differentiate between different types of merger-policy actions and the different timings is helpful, as these differences may involve different costs for firms and, therefore, generate distinct deterrence effects (Seldeslachts et al. 2009).
- The consistent finding from our empirical results is that phase one remedies uniquely involve deterrence in the European context, while other actions do not.
A potential explanation exists as to why phase one remedies yield deterrence effects. The European Commission has higher bargaining power in the initial stage of the merger-review process since merging firms are generally eager to avoid the costs involved with waiting for the consummation of the merger.3 Given that merging firms have a large interest in getting their transaction approved as quickly as possible, they are likely to agree to more substantial remedies in the early stages of the review process (Dertwinkel-Kalt and Wey 2016). Following this logic, the remedies agreed to during the initial stage should be remedies that involve a considerable cost to merging parties. Thus, an increase in these types of remedies will represent a deterrent to future merger behaviour.
- Phase two remedies, however, do not indicate deterrence effects.
This result could be based on a similar logic as above. Once a merger has reached the secondary phase of the merger-review process, then much less scope exists for the Commission to delay the onset of the merger. Instead, the only recourse at this stage given to the EC is the ability to threaten a potential prohibition. However, the EC rarely employs prohibitions as an instrument of merger policy and they have become increasingly rare in the EC context after several setbacks in the courts in the early 2000s. In fact, for quite some time the Commission has been quite reluctant to employ prohibitions as a merger policy tool.4 This suggests then that the bargaining power of the Commission will be severely curtailed in the secondary phase. In essence, the only ‘real’ option for the EC in these later stages of the merger-review process is to accept the less-substantial remedies being offered up by merging parties before the negotiation phase ends. Consequently, the remedies offered up by merging parties in the secondary phase will be generally less substantial than those offered up in the initial phase. Thus, these phase two remedies will be less likely to represent a deterrent.5
In addition to phase two remedies, withdrawals and prohibitions also do not involve substantial deterrence effects. This seems somewhat surprising, as they impose the highest possible cost on merging firms.6 However, the fact that these actions have been seldom employed by the Commission over the last 20 years potentially explains why our analysis is unable to detect significant deterrence. Furthermore, the lack of substantial deterrence effects for phase one withdrawals may be due to the fact that these withdrawals do not send a clear signal about the EC’s stance in the particular industry. Withdrawals in the initial stage of the merger-review process may be due to internal reasons to the merging parties—rationales that are independent of EC merger policy. Accordingly, phase one withdrawals might very well be a noisy signal that does not provide clear information to firms about the actual costs involved with navigating the merger-review process.
In terms of policy prescriptions, our results indicate that maximising deterrence requires the use of phase one remedies. The Commission’s behaviour does tend to partially conform to these priors, as phase one remedies are employed more than twice as frequently as phase two remedies. Furthermore, the application of more prohibitions may lead to greater deterrence effects for phase two remedies. Indeed, if firms believe that prohibitions are a relatively likely outcome when negotiations break down during the secondary phase, then perhaps these firms would be more willing to accept tougher remedies during these later stages of negotiation. In addition to this indirect effect regarding phase two remedies, an increase in prohibitions would also, of course, impose the highest possible cost upon merging firms. Thus, it would likely induce more deterrence in a direct manner. Accordingly, the recent turn in EC merger policy to re-embrace the employment of prohibitions (Aegean Airlines/Olympic Air in 2011, Deutsche Börse/NYSE Euronext in 2012, TNT express/UPS in 2013, and Ryanair/Air Lingus in 2013) might represent a healthy practice in terms of generating increased deterrence effects.
Bergman, M, M Jakobsson, and C Razo (2003), “An Econometric Analysis of the European Commission’s Merger Decisions, ” International Journal of Industrial Organization, 23.9-10: 717–737.
Buccirossi, P, L Ciari, T Duso, G Spagnolo, and C Vitale (2013), “Competition Policy and Productivity Growth: An Empirical Assessment,” The Review of Economics and Statistics, 95(4), 1324-1336.
Clougherty, J A (2005), “Antitrust Holdup Source, Cross-National Institutional Variation, and Corporate Political Strategy Implications for Domestic Mergers in a Global Context,” Strategic Management Journal, 26, 769-790.
Clougherty, J A, T Duso, M Lee and J Seldeslachts (forthcoming), “Effective European antitrust: Does EC Merger Policy Generate Deterrence?”, Economic Inquiry.
Crandall, R W, C Winston (2003), “Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence,” The Journal of Economic Perspectives, 17(4), 3-26.
Dertwinkel-Kalt, M, C Wey (2016), “Merger Remedies in Oligopoly under a Consumer Welfare Standard,” Journal of Law, Economics and Organization 32(1), 150-179.
Davies, S and A Majumdar (2002), “The Development of Targets for Consumer Savings Arising from Competition Policy,” Working Paper No. 4, Office of Fair Trading, UK.
Duso, T, D J Neven, L.-H Röller (2007), “The Political Economy of European Merger Control: Evidence Using Stock Market Data,” Journal of Law and Economics, 50(3), 455-489.
Duso, T, K Gugler, B Yurtoglu (2011), “How Effective is European Merger Control?” European Economic Review, 55(7), 980-1006.
Duso, T, K Gugler, and F Szücs (2013), “An Empirical Assessment of the 2004 EU Merger Policy Reform,” Economic Journal, 123(572), F596-F619.
Eckbo, B E (1992), “Mergers and the value of antitrust deterrence,” The Journal of Finance 47.3: 1005-1029.
Kovacic, W (2009), "Assessing the Quality of Competition Policy: The Case of Horizontal Merger Enforcement," Competition Policy International, 5: 129–150.
Neven, D J (2006), “Competition Economics and Antitrust in Europe,” Economic Policy, 21(48), 741-791.
Ormosi, P (2012), “Claim efficiencies or offer remedies? An analysis of litigation strategies in EC mergers,” International Journal of Industrial Organization, 30, 578-592.
Salop, S C (2013), “Merger Settlement and Enforcement Policy for Optimal Deterrence and Maximum Welfare,” Fordham Law Review, 81, 26-47.
Seldeslachts, J, J A Clougherty, and P P Barros (2009), “Settle for Now but Block for Tomorrow: the Deterrence Effects of Merger Policy Tools,” Journal of Law and Economics, 52(3), 607-634.
Sørgard, L (2009), “Optimal Merger Policy: Enforcement vs. Deterrence,” The Journal of Industrial Economics, 57(3), 438-456.
 For the 1990-2002 period, Duso et al. (2007) find that about one-quarter of the mergers and acquisitions (M&As) approved by the EC were actually anti-competitive in nature. Using the same data, Duso et al. (2011) found that remedial actions – the most commonly employed merger intervention tool – only partially help in restoring effective competition.
 See Clougherty et al. (forthcoming) for the research paper on which this article is based.
 As Clougherty (2005) notes, a delay represents a holdup to the intended strategy of the merging firms, hence higher levels of scrutiny that push off the benefits of the transaction reflect higher costs for merging firms. Salop (2013) also argues that delays are costly as they increase the likelihood of failure for merging firms. See further Ormosi (2012) on the role of ‘bluffing’ remedy offers in phase 1 to escape the possibility of a lengthy phase 2 investigation.
 In recent years, this has changed again. But these years are not included in our dataset.
 In line with these priors, Duso, Gugler, and Yurtoglu (2011) find that remedies negotiated by the EC in the initial investigation phase tend to be more effective at reducing anti-competitive effects than phase-2 remedies.
 Commentators (e.g. Bergman et al. 2003) have often argued that merger withdrawals during the second investigation phase can be interpreted as virtual prohibitions.