Europe is looking for how to make its model more flexible with industrial growth and global competitiveness, while remaining vigilant with innovation and the power of platforms. On this path, it has embarked on the process of reforming the rules that have governed community competition in the last two decades. This Thursday, the European Commission has made public the draft that will be submitted to public hearing on the new guidelines to prevent consumers from being harmed in the long term.
In matters of competition, the Commission maintains exclusivity when reviewing those mergers that, by their nature, have a "European dimension". The Community services thus seek to determine whether the operations will cause a significant obstacle to competition, especially if they create or strengthen a dominant position. Now, Brussels has introduced what they call "a more balanced view".
The truth is that the cabinet of the community president, Ursula von der Leyen, could have pressured to introduce new flexibilities in the controls of these operations under the justification of "resilience". This Thursday, the German defended the proposal as "an ambitious approach that will allow us to face the reality of the highly competitive global economy".
An adaptation to a more complex economic environment
For Teresa Ribera, this update represents an adaptation to a more complex world with the objective of supporting the “long-term prosperity of Europe”. “This helps us to support operations that strengthen our Single Market, allow innovative companies to grow, and reinforce Europe’s position,” she expressed in a statement distributed after the publication of the new rules.
The Community Executive will look favorably upon mergers that allow European companies to gain scale to compete globally, provided they maintain internal competition. In this way, the weight and importance are placed on factors such as security of supply, technological autonomy, and critical value chains in the face of geopolitical shocks.
New criteria for evaluating risks in mergers
To be able to prohibit a transaction, the Commission must demonstrate that it is likely to cause harm to competition. The draft, which will now be submitted for further consultation, establishes new types of risks.
For example, the loss of direct competition will be considered when two companies that compete “face to face” merge. In these cases, the proximity between them will be analyzed: the more their products resemble each other, the greater the risk.
The loss of innovation is one of the most detailed points in the internal documents of the Community Executive. It will be monitored whether a merger eliminates the incentive to research and develop new products, including so-called “killer acquisitions”, where a large company buys a start-up solely to curb its innovation. Likewise, in vertical mergers —such as when a chip manufacturer buys a computer manufacturer— it is feared that the merged company will block its rivals' access to critical components or important customers.
It will also come into play how large digital platforms can use their power in one market to dominate other connected markets, creating barriers to entry that are difficult to overcome.
How will companies be able to defend their operations?
Now, companies will be able to defend their merger by arguing that it will generate benefits that will offset the risks. Of course, the Commission does not accept just any promise: these efficiencies must meet three strict requirements:
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Verifiable: must be able to be demonstrated with precise evidence and data.
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Merger-specific: must be benefits that can only be achieved with that union and not in other ways that are less harmful to competition.
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Consumer-beneficial: cost savings or quality improvement must be passed on to customers, not just remain as company profits.
The new concept of “innovation shield”
The new regulation introduces the concept of a “innovation shield”. This means that, in certain cases, the acquisition of small and innovative companies will not be considered harmful if enough independent competitors remain researching in the same field.
This point seeks to balance the protection of competition with the need to foster business growth in emerging sectors, especially in those linked to technology and digitalization.
Despite Brussels having the final say on Community competition, Member States can intervene to protect their own legitimate interests, provided they are proportional and non-discriminatory. Recognized interests range from public safety to prudential rules such as the stability of the banking system, including media plurality.
More tools to analyze the market
The new guidelines empower the Commission to use any type of evidence, from internal company documents and emails to complex mathematical models and artificial intelligence algorithms to predict future prices. The most important thing for the Executive is the "credibility" of the evidence, whether technical or qualitative.
On this line, the technical services of the Executive acknowledge that this type of advanced technology allows both companies and the Commission itself to have a much clearer view of what is happening in the market. The draft known this Thursday highlights that the dependence on large datasets, artificial intelligence, and machine learning technologies improves companies' ability to monitor the market.
This type of tools are aimed at forecasting prices and firm strategies, which increases “market observability”. However, special attention will be paid to cases where companies use common external providers for price-setting decisions through algorithms, as this could facilitate tacit coordination between competitors.
A system that rarely blocks merges
During the last decade, more than 99% of the Commission's decisions on mergers were authorizations, of which 95% were unconditional authorizations. Throughout the process of drafting the current draft, the Executive has promoted various participation initiatives "to foster debate on the key issues of the review and gather the opinion of the various relevant stakeholders".
Community sources affirm that “the contributions received during these and other participation initiatives have been incorporated into the drafting of the new draft of the Merger Guidelines”. Furthermore, an economic study on the dynamic effects of mergers has been commissioned, which will also serve as a basis for the review process. With this step, Brussels is opening a new phase in European competition policy, marked by the search for a balance between consumer protection, the promotion of innovation, and the need to compete in an increasingly demanding global scenario.