PART 4: THE SUBSTANTIVE TEST |
98. Currently, the ECMR uses a 'dominance' test
to judge whether a merger is "compatible with the common
market." Under Article 2 of the Merger Regulation, the Commission
blocks those mergers that it determines would "create or
strengthen a dominant position as a result of which competition
would be significantly impeded in the common market or a substantial
part of it". The Green Paper instigates a debate on whether
it might be appropriate to substitute for this 'dominance test'
a different test, namely, will the merger substantially lessen
competition. This test, commonly known as the SLC test, is used
in many other jurisdictions, including the USA, Canada, South
Africa, Japan, Australia and New Zealand. Given that the Government's
Enterprise Bill would replace the existing United Kingdom 'public
interest' test with one based on SLC, it came as no surprise that
the Government saw "real benefit in moving to such a test
under the ECMR" (p 153).
99. The Commission has stressed that it is not "wedded
to the current wording" and has "no prejudice in favour
of one formulation or another." Commissioner Monti has said
that he is not expecting to reach definite conclusions on the
substantive test within the time available for this review as
this is a subject he would like "further discuss[ed] with
Member States before deciding what course of action to take".
When we met with the Commission, it emphasised that it was "looking
into this issue carefully" and was doing so "with an
open mind" (Q 402).
100. This section deals with the advantages and disadvantages
of both tests, as well as the question of the proper role of efficiencies
in merger assessment.
In it, we weigh up the array of arguments for and against changing
the current substantive test.
Are we playing with semantics?
101. We were keen to discover what the differences
were between the two tests. For some witnesses, it was a mere
matter of semantics that distinguished the two tests. However,
we received conflicting opinions on this issue.
NO REAL DIFFERENCES?
102. Some witnesses, such as Dr William Bishop, Chairman
of Lexecon Limited, thought that there was "very little difference
in practice between the two tests" (Q 57). He did not see
"major differences" between SLC and dominance in the
way that the latter had been developed and applied by the Commission
(Q 68). The Government said that a change from dominance to SLC
would not be "a fundamental change" to how the ECMR
functioned (Q 411). The Confederation of British Industry (CBI)
accepted that "real differences" between the tests were
"difficult to pin down". Nonetheless, the CBI claimed
that a move away from the dominance test would bring with it "certain
risks": businesses were concerned that the rules on merger
control might "significantly change" as a result of
a change of substantive test (Q 24).
THE CURRENT ECMR TEST COULD BE CALLED 'DOMINANCE
103. Several witnesses said the differences between
the two tests were minimal because the Commission's current test
was 'dominance plus'. They argued that the existing test, properly
construed, involved two elements, namely (i) "creating or
strengthening a dominant position" and (ii) "as a result
of which effective competition would be significantly impeded
in the common market or a substantial part of it." The Union
of Industrial and Employers' Confederation of Europe (UNICE) claimed
that the ECMR test as drafted required the Commission to demonstrate
both the creation or strengthening of dominance and a significant
impediment to competition in the common market before a merger
could be prohibited (Q 306).
The CBI also argued that a switch was unnecessary as the concept
of SLC was already incorporated into the dominance test (Q 40).
The Commission too emphasised that, in the Regulation, dominance
was "surrounded by other wording" which was "quite
similar to the SLC test" (Q 399).
104. The National Consumer Council (NCC) argued that
a move to the SLC test would remove "the distracting need
to demonstrate dominance." Instead, the immediate focus of
the authorities would be on the competitive conditions in the
relevant market, which was "the key issue for consumers".
Because of the order of the wording in Article 2, at present the
Commission had to find a dominant position as "a pre-condition"
before it could examine the competition effects of the proposed
merger. Yet the notion of dominance did not, of itself, say "anything
about the effects on competition that might take place" (pp
105. There clearly are similarities between the wording
of the two tests. However, some witnesses, such as the TUC, held
that the two tests were "clearly different" and would
lead to "different decisions being made" (QQ 132, 150).
Professor John Kay saw the SLC test as "both different and
preferable" to the dominance test (Q 174).
A MOVE TO SLC WOULD LEAD TO MORE INVESTIGATION
106. One area where many witnesses did perceive a
difference between the two tests was in the number of mergers
that might be subjected to serious scrutiny in Phase II. Witnesses
were agreed that under SLC more cases would be taken to Phase
II (and so possibly prohibited unless acceptable remedies could
It was suggested that mergers involving companies in oligopolistic
markets would be particularly affected (see below paragraphs 142-51).
Witnesses disagreed over whether or not such an increase would
be a good thing.
107. For some witnesses, an increase in the number
of mergers prohibited or subjected to commitments was certainly
not desirable. The Competition Law Association (CLA) thought there
was "a risk" that under the SLC test there would be
"a great deal more intervention" under "a far stricter
policy". It feared that the Commission, "as it did with
Article 81(1) and the concept of appreciability," would apply
SLC with "a very wide scope" and as a result take many
more cases to Phase II and possibly even prohibit "significantly
more cases based on the SLC test than it could do on dominance"
(Q 97). The Joint Working Party of the Bars and Law Societies
of the UK (JWP) confirmed that it was a "genuine concern"
that there would be a greater number of Phase II investigations
108. From industry, UNICE signed up to the proposition
that SLC was "a broader test" and "stricter"
than dominance. The American Chamber of Commerce (ACC) also saw
SLC as "marginally less permissive" and thought that
it would probably lead to "more transactions being prohibited
or subjected to remedies". Both organisations were unsurprisingly
against greater intervention by the Merger Task Force (MTF), with
UNICE arguing that oligopolistic markets were not "wrong
or bad per se". As a switch to SLC would probably
lead to more intervention, the ACC deemed this "to a certain
extent" to be "a political decision".
109. Dr Derek Morris, the Chairman of the Competition
Commission, was absolutely clear that a switch to the SLC test
would lead to more cases being tackled by the MTF than under the
dominance test. However, he considered that this was a good thing:
"if there is a substantial lessening of competition, that
is something that should be investigated" (Q 264, 276-77).
110. The Commission appreciated that "arguably"
SLC could be "interpreted in a wider way than dominance".
However, Commissioner Monti rejected the idea that "it is
easy to make a link between the substantive test and the degree
of rigour or of toughness in the outcome" (QQ 397, 399).
111. The evidence suggests that, despite the similarity
between the wording of the two tests, there are differences between
them. In particular, it would seem that the SLC test will lead
to more investigation by the Commission and that this would particularly
affect oligopolistic markets, where it might be difficult for
the Commission to find dominance. We return to this issue below
Arguments for retaining the dominance test
112. The CBI and Mr Nicholson, of Slaughter &
May, put the case for retaining the dominance test as "if
it is not broken, why fix it?" (QQ 21, 472) Taking the position
that, due to the current test being dominance plus, the differences
between the tests were not that great, they considered that the
current test was already an effective instrument of merger control.
Moreover, witnesses who wanted to retain the dominance test claimed
that there were a number of risks involved in a switch to SLC.
THE LOSS OF JURISPRUDENCE
113. One argument frequently cited against a move
away from the dominance test was based on the fact that, in the
time since the ECMR had been adopted in 1989, the Commission and
the Community courts had generated a considerable amount of case
law on the dominance test. Some witnesses feared that this would
be lost in a move to SLC and that a change of substantive test
would give rise to legal uncertainty for merging parties (Q 308).
After any change of test, it would take time for a body of precedent
to develop. As European merger law has already undergone substantial
changefirst by the recognition that Articles 81 and 82
of the EC Treaty applied to concentrations,
and then by the adoption of the ECMR and subsequent amendments
to itlawyers and representatives from industry were, unsurprisingly,
reluctant to see another change.
114. The CBI said that people knew where they stood
with the dominance test, although it might not be "the perfect
test" (Q 21). The uncertainty and unpredictability that would
result from any change was the main concern of the CBI (QQ 30,
37, 38). The TUC also took this line, arguing that the dominance
test should be retained "for the sake of certainty and clarity"
(QQ 126, 131). The European Consumers' Organisation (Bureau Européan
des Unions de ConsommateursBEUC) also expressed some concern
about the "confusion" there would be in forecasting
results under the ECMR if the present case law were to become
Even advocates of the change to SLC, such as Dr Bishop and the
ACC, acknowledged that associated with a switch there would be
costs in terms of precedents being devalued and some uncertainty
being created (QQ 57, 60, 369).
115. However, the Commission said that the effect
of such a loss "should not be exaggerated" (paragraph
161). Some witnesses suggested that this short-term loss of certainty
could be lessened by the Commission issuing clear guidelines on
how it would interpret and apply the SLC test.
116. The JWP did not think that the loss of jurisprudence
would matter "enormously" as long as the SLC test was
"clearly described and set out in guidelines" (Q 100).
It pointed out that the value of precedents was "limited
because each case turns so much on its facts" (Q 109). The
Office of Fair Trading (OFT) also explained that "much of
the case law would still be relevant", for example, where
it was to do with defining the relevant market and market power
117. Witnesses were against changing the substantive
test because they were worried about uncertainty; they argued
that the change would render it more difficult to forecast the
outcomes of cases. That the dominance test has a long antecedence
in EC law and there is a considerable body of jurisprudence on
the meaning of 'dominant position' is a strong argument in favour
of not changing the test. Once SLC was well established, however,
there would be no reason why that test should be any less certain
than dominance. The argument is about the transition costs of
any change of test and whether the switch warrants the confusion
of going from one to another. We note that the Government considered
that, in the long term, the advantages of a change of test would
"outweigh the loss of case history" in the short term
MANY DOMESTIC SYSTEMS OF MERGER CONTROL IN THE MEMBER
STATES HAVE ADOPTED DOMINANCE AS THEIR SUBSTANTIVE TEST
118. Many witnesses claimed that a change to SLC
in the ECMR might be controversial for the Commission, as many
domestic systems of merger control in the Member States and the
applicant countries applied dominance under their national law.
Moreover, some of these countries had only recently adopted dominance
as their substantive test in order to mirror the test in the ECMR.
The CBI argued that it would be unwise for the ECMR to change
to SLC when the SLC test was not widely applied elsewhere in Europe
(QQ 21, 30). Mr Van Gerven, of the ACC, thought that this was
"very important". He believed that the Member States
would block a move to SLC (Q 377). The concern about the disparity
between EU legislation and that of its Member States was also
shared by the International Chamber of Commerce (ICC) (p 190),
the TUC (Q 131) and the BEUC.
Dr Bishop thought that the resulting lack of co-ordination between
the Commission and those Member States who operated a dominance
test would be the "main disadvantage" of switching to
SLC (Q 60).
119. The JWP recognised the potential political difficulty
of the Commission proposing a shift to SLC and appreciated that
it might be not be easy to persuade the Council of the benefits
of changing to SLC. However, this difficulty, in itself, did not
"justify the retention of the dominance test" if the
SLC test was a better test (p 34; Q 106).
120. The short-term discrepancy between regulation
at a national and EU level obviously had not been viewed as a
persuasive argument by the Government, who have proposed a change
to SLC in its Enterprise Bill, despite the difference that would
arise as a consequence between the United Kingdom on the one hand
and several other Member States and the Community on the other.
Although it would be "helpful", the Government did not
consider it "crucial" to share the same substantive
test as the other Member States and the Commission. So long as
there were two tests operating internationally there would always
be some differences between different jurisdictions. The Government
considered themselves to be moving into the "mainstream"
by switching to SLC and thereby aligning themselves with other
jurisdictions. But of greater importance for the Government was
the fact that they saw the SLC test as "the better test"
121. Changes to the ECMR require unanimity. It has
been suggested, however, that if the Commission led the way in
changing to SLC, Member States would follow. Furthermore, in its
Green Paper, the Commission briefly mentions that, as well as
Ireland and the United Kingdom planning to introduce the SLC test,
"other Member States are interested in evaluating the possible
advantages of moving to such a test."
Likewise, the OFT suggested that a number of the European the
National Competition Authorities (NCAs) currently apply a dominance
test were receptive to the idea of the SLC test, although OFT
pointed out that it would be the governments who would make the
decision whether to switch (Q 222). The extent of any trend towards
SLC will be a relevant factor in the decision on the substantive
Arguments for switching to the slc test
'INTERNATIONAL' MERGERS AND THE CONVERGENCE OF SUBSTANTIVE
122. The increasing globalisation of markets has
led to an increase in the number and scale of large cross-border
mergers. This has meant that such mergers often have to be examined
by numerous separate NCAs across the world. Consequently, international
co-operation between competition authorities is increasing in
importance (p 153). In view of the fact that the main merger control
regimes outside Europe use the SLC test, some witnesses said that
changing the substantive test in the ECMR could improve co-operation
between competition authorities and the handling of international
or global mergers that have substantial effects outside the EU.
This was one of the Government's two main reasons for arguing
that "a move to SLC would be beneficial in the ECMR context"
(p 153). The JWP also considered that adopting the SLC test would
be a "helpful move towards the international harmonisation
of merger control systems" (p 34).
123. However, some witnesses pointed out that, even
if the same substantive test were applied across the different
jurisdictions, the way in which the test was applied could give
different results. For the CBI, harmonising the legal test in
the legislation would not "in and of itself lead to a more
consistent approach" because, however the test was phrased,
the regulators would retain "a broad margin of discretion".
Differences in the way in which a substantive test could be applied
meant that it would be necessary to go "much further than
simply harmonising the basic legislation" to obtain convergence
of international standards (Q 26).
124. The two different tests have been working side
by side for some time and some witnesses observed that there had
not been a great deal of difficulty between international regimes
because of the different tests. When invited, the CBI was unable
to name any cases where different jurisdictions using different
tests had come to different answers that were attributable to
the substantive test used. Even with the GE/Honeywell case
as a possible example, Dr Bishop was amongst those who did not
think the difference of substantive test between the US and EC
had had any impact on the outcome of a case (Q 60).
125. Discussions between US and EU case handlers
have frequently focused on the definition of the relevant product
market. Where the authorities have formed different views on market
definition (e.g. American Home Products/Monsanto, Hoffmann-La
Roche/Boehringer Mannheim) the reasons for the divergence
have been explained by other factors and are rarely attributable
to different substantive tests. In a relatively small number of
instances, differences in analytical approach and substantive
conclusions have led the EU and US authorities to seek different
remedies in respect of the same transaction. For example, in Glaxo/Wellcome,
the US agencies required complete divestiture of Wellcome's
R&D activities in a certain field, whereas the EU conditioned
approval on the license of only one of the parties products. Up
to GE/Honeywell, the most notable example of the Commission
and its US counterpart failing to reach agreement occurred in
Boeing/McDonnell Douglas, where the Department of Justice
viewed the transaction as benign and concluded that no remedy
was necessary, while the Commission challenged the transaction
and ultimately required a package of remedies to address their
126. Derek Morris agreed that problems caused by
the difference of substantive tests had been "relatively
rare." Nonetheless, he stressed that in individual cases
the distinction could be "significant". Moreover, he
saw this as "an increasing problem" with the situations
in which differences would occur becoming "more prevalent".
Consequently, he thought that harmonising the substantive test
with that of other countries was "certainly an important
reason" for the Commission to switch to a SLC test (QQ 264,
127. The OFT also argued that this potential "transatlantic
harmony in terms of language" would be one of the benefits
of switching. It too was keen, however, to point out that differences
in how some mergers had been handled were "relatively rarely"
to do with differences in the substantive test; the test had not
been "a significant factor" in the exceptional cases
where there had been disagreements. The OFT suggested that there
was already "considerable" convergence between the way
in which mergers were handled in Brussels and the US (for example,
in the methodological analysis of market definition, market power,
and barriers to entry). The major differences were procedural
(QQ 223, 236).
128. Whereas these witnesses presumed that, for international
convergence to occur, the ECMR would have to move to SLC, the
CBI and UNICE hoped for international convergence on the dominance
test (QQ 31, 303, 317).
129. As far as Professor Kay was concerned, these
considerations of international convergence were secondary. He
considered "the only reason" for having convergence
of tests was if one were "converging towards a good policy"
THE SLC TEST IS MORE SOLIDLY ROOTED IN ECONOMICS
130. A number of witnesses claimed that the SLC test
was directly grounded in economic analysis and the impact of a
merger on competition in a way that the concept of dominance was
not. Thus, the Government argued, the SLC test was "fundamentally
better adapted to merger control" (p 153). For Professor
Kay, the dominance test focused too much on "the structure
of an industry"; it was not flexible enough to deal with
differences between industries and did not focus enough on maintaining
competition (Q 183).
131. For the JWP, the SLC test was "a less artificial
notion than dominance," which was "a legal construct"
and was not "rooted in economic theory" (p 34). The
ACC and NCC also believed that the adoption of the SLC test would
result in a more economics based approach in the assessment of
mergers (p 129; Q 372). Dr Bishop thought the SLC test was better
suited to the economic analysis required in merger cases, but
only "to a marginal degree" (Q 58). The CBI, however,
said that, although it recognised that it had been argued that
SLC was a more economics based test, it did not agree (Q 40).
On the basis that the current test was 'dominance plus', UNICE
also rejected the argument that SLC a was a more economics based
test (Q 306).
However, the Commission did concede that 'dominance' was "not
directly an economic term" (Q 402).
THE SLC TEST HAS A COMMON-SENSE RESONANCE
132. Many witnesses explained that the SLC test was
a more straightforward test than the current dominance test, which
could be interpreted as a two-stage 'dominance plus' test (see
above paragraphs 103-04). The regulator, rather than having first
to establish that a merger would create or strengthen a dominant
position and then to examine whether that would result in a significant
impediment to effective competition, could just analyse whether
a merger would significantly lessen competition.
133. John Vickers, the Director General of the Office
of Fair Trading, said that, if the prime purpose of merger policy
was to safeguard against competitive market processes being undermined,
the SLC test was better. "A great attraction" of the
SLC test was its "directness" (Q 218). The NCC agreed
that having to demonstrate dominance was a distraction. The authorities
should focus directly "on the competitive conditions in the
relevant market," which was "the key issue for consumers"
(pp 194-95). BEUC considered that the SLC test would "fit
in more easily with the analytical process" of examining
Derek Morris concurred that, from the regulators' point of view,
the SLC test was superior "just in terms of the very words
and concepts" contained within it (Q 264).
134. Dr Bishop also took the position that the SLC
was a better test than dominance and was linked more directly
in its language to the way in which regulators needed to examine
mergers. There was an "artificiality" in talking about
dominance (Q 57). John Vickers agreed that the SLC test would
bring greater clarity to the substantive test in the ECMR. Even
if the two substantive tests did mean the same thing, it was unfortunate
that that was not clear to everybody (Q 218). However, the Commission
pointed out that although SLC probably had "some conceptual
advantages", it was not completely transparent as the word
'substantial' in 'substantial lessening of competition' did not
have an automatic definition and there would still be borderline
cases (Q 402).
135. The Committee shared the concern that proving
dominance might be a distraction for regulators, who are primarily
concerned with maintaining the competitive conditions in the relevant
market. The SLC test might more closely mirror the Commission's
analysis of mergers and could assist them in focussing on the
competitive impact of the merger in question. However, the question
remains whether the issue is one of substance or just language;
that is, whether to some extent the dominance test as applied
by the Commission is indistinguishable in effect from to the SLC
COULD THE COMMISSION ALREADY BE APPLYING THE SLC
136. It has been suggested that a move to SLC would
not significantly change either the way in which the Commission
went about its competition analysis or the outcome of the ECMR
process in the great majority of cases. Nonetheless, some witnesses
argued that the Regulation should be amended so that the substantive
test set out in it and the analytical method applied in practice
by the Commission more closely equate.
137. The Government developed this argument and said
that it could be used as evidence that the risks of a change to
the substantive test in the ECMR were "in practice relatively
limited". They reported that some stakeholders had held that
the Commission's flexible use of dominance meant that the test
in operation was "in practice already very close to SLC and
that a change would lead to the legal text reflecting enforcement
practice more precisely" (p 153). The JWP agreed with this
argument saying that "most cases would be decided in the
same way, whether the test was based on dominance or the substantial
lessening of competition" (p 34).
138. The ACC explained that the way in which the
Commission was now construing dominance had moved towards what
the US did under its SLC test namely, not so much studying the
market structure and applying a structural test based on comparing
market shares, but analysing instead what the effect of the merger
would be likely to be by examining how it would impact on the
conduct of the undertakings involved: "In reality therefore
the two tests have moved together" (Q 371). The ACC also
explained how the Commission had had to "stretch" the
interpretation of dominance in order to carry out investigations
into the cases it wanted to examine (QQ 371, 376). The
dominance test was originally addressed to transactions involving
firms that were individually dominant. The Commission had since
expanded the test to cover situations of 'collective dominance'.
Even witnesses who argued against a change of substantive test,
such as the CBI and the TUC, were concerned that the concept of
dominance was being over-stretched by the Commission (p 2; Q 153).
John Vickers explained that this had led to a "frustrating
uncertainty" about exactly what was meant by the phrase collective
dominance (QQ 219, 224).
139. Mr Götz Drauz, the Director of the Merger
Task Force, admitted that the Commission had "developed and
exploited progressively" its interpretation of dominance
since 1989, when there was a presumption that dominance could
only occur in cases where an individual company had more than
50 per cent of the market. The Commission had since found dominance
in market shares as low as 27 per cent (Q 399).
For Dr Bishop, the uncertainty over collective dominance and the
way in which the Commission had moved the goalposts for the dominance
test was "one of the least satisfactory matters" of
the ECMR and one that had led to a "great lack of clarity"
(QQ 54, 55).
140. Derek Morris agreed that the Commission was
probably applying SLC, but dressed up in the language of dominance.
That was "very confusing" for the parties and introduced
"an element of randomness" into a test that should be
as predictable as possible (Q 265).
141. The benefits associated with the Commission's
practice mirroring the wording of the substantive test in the
ECMR might not outweigh the disadvantages of a change. If the
Commission were to adopt SLC merely as a reflection of its current
enforcement policy, any impact might be restricted to the wording
of the Regulation and not its application. However, that might
be too conservative an assessment; there remain other arguments
for change. For its part, although the Government said that a
move to SLC would "in all probability not alter the way that
the Commission goes about its job in the majority of cases,"
it remained convinced that adopting SLC "could bring real
benefits in certain types of cases" (Q 411). We examine these
THE SLC TEST IS BETTER THAN THE USE OF 'COLLECTIVE
DOMINANCE' FOR DEALING WITH THE PROBLEM OF CO-ORDINATED EFFECTS
142. It was argued that the SLC test was better for
examining mergers that did not give a company a market share that
could be judged to make it individually dominant, but which reduced
the number of companies operating in a market that was highly
concentrated (i.e., that held few competitors). Changing the ECMR
for this reason would only affect a small percentage of mergers,
but, as shown by the Airtours/First Choice case, these
can be very significant.
143. The Committee heard much criticism of the approach
taken by the Commission to cases of collective dominance. It was
said that, in applying the dominance test, the Commission had
failed to articulate a consistent framework for assessing co-ordinated
effects. Dr Bishop was particularly concerned:
"It is not natural to speak of dominance when
you have a leading firmthat is, say, 40 per centand
what you are really worried about is that the second firm will
merge with the fourth firm, and the total concentration will rise.
You have to go through the mental contortions of saying that they
are dominant, and you do that through saying that there is such
a thing as a collectively dominant entity. It would be much simpler
to analyse the likely outcome directly, in terms of whether quantities
will be further restricted and prices rise, and not have to go
through these mental contortions about 'dominance' and describing
a 'dominant' entity, which is a rather artificial construct."
144. Others witnesses also expressed concern about
the concept of collective dominance in the ECMR context. The CLA
thought that it was a "slightly artificial concept"
(Q 97). The Government agreed, considering that the SLC test avoided
"the need to shoehorn assessment of a significant competition
detriment into the artificial construct" of collective dominance
(Q 430). Professor Kay agreed that the dominance test resulted
in the MTF "trying to shoehorn" the decisions they wanted
to make into a framework that was "not really appropriate
for them" (Q 180). He argued that
"it would be a much better structure if one
could get to the right decisions for the right reasons even if
it does not necessarily change the decisions, and it certainly
serves better in future the task of giving people more confidence
in the process and more ability to assess what the outcome is
likely to be" (Q 192).
145. Many witnesses considered that, if adopting
SLC meant losing the case law concerned with collective dominance,
this would not be a cause for concern. Derek Morris was sceptical
of the value of the existing case law (QQ 278-79). Professor Kay
said the loss would not be a problem as he did not feel that there
was "a body of case law that had defined what [collective
dominance] was or applied it in a coherent way" (Q 191).
John Vickers also drew attention to these "ambiguities and
uncertainties" that had arisen, pointing out that there remained
"open questions" on collective dominance "given
the case law to date" (QQ 219-20). It was suggested that
moving to SLC would enable the Commission to establish a clear
framework for evaluating collective dominance and co-ordinated
146. The Commission's application of the concept
of 'collective dominance' in merger cases was recently examined
by the Court of First Instance (CFI) in the appeal over the Commission's
decision to prohibit the merger between Airtours and First Choice.
The ruling by the CFI in the Airtours/First Choice case
clarified the assessment of collective dominance under the ECMR
and the burden of proof required of the Commission to prohibit
a merger in highly concentrated markets.
In the Government's view, although the judgment did "not
undermine the concept of collective dominance", it did "make
clear the very high level of proof" that the Commission was
required to meet in order to block a merger on the grounds of
collective dominance (Q 430).
147. Witnesses not only complained about the lack
of clarity over the concept of collective dominance; they also
argued that there were three types of case with which collective
dominance was incapable of dealing. Each involved companies competing
less vigorously post-merger without necessarily colluding tacitly
and without the creation or strengthening of a dominant position.
148. The first type of case, mentioned by the Government
(Q 429) and Derek Morris, involved small companies introducing
new innovations into a well-established market. Dr Morris painted
the picture of:
"a set of incumbent firms in the market, perhaps
a market in which there has not been any great innovation, and
a new entrant appears with new technology, new ideas, new products,
and it really threatens the existing companies, so one of them
buys it out. It may be a very small company. It may just involve
buying this particular computer specialist or whatever. It is
almost impossible to apply the concept of dominance, and yet it
could very effectively and substantially lessen the competition
that would appear in that market. Indeed, you could have a series
of such innovative entrants emerging and the incumbents just picking
them off one at a time." (Q 264)
149. In the second type of case, which was given
as an example by the Government (Q 429), there might be one very
significant player in the market (with a market share of say 75
per cent) and a merger between the two remaining, more minor players
(who would occupy the other 25 per cent of the market). In this
situation, where the second and third largest firms merge,
it would seem that the dominance test would not allow the Commission
to intervene, despite the substantial lessening of competition.
Commissioner Monti appreciated the potential difficulty for dealing
with such a case under the dominance test (Q 401). Mr Van Gerven,
of the ACC, suggested that perhaps the Commission might be able
to raise competition questions about such cases but it would not
do so "using the right analysis" and would have to lower
still further the test for collective dominance (Q 376).
150. The third case again demonstrates how a reduction
in competition could occur in an oligopoly without either tacit
collusion taking place or the creation or strengthening of a dominant
position. Professor Kay and Derek Morris both mentioned the Abbey
National/Lloyds TSB merger in the United Kingdom as a proposed
merger that could have caused problems for the Commission applying
the dominance test. The merger would have increased the market
share of Lloyds TSB from 22 per cent to 27 per cent and the share
of the four largest banks from 72 per cent to 77 per cent. The
Competition Commission had prohibited the merger but reported
that it would have been "extremely difficult" for it
to have done so under the dominance test, even though there was
clearly a substantial lessening of competition. Professor Kay
thought this was such a problem that it warranted a change of
substantive test in the ECMR (QQ 179, 182, 264).
151. Dr Bishop agreed that the main problem with
the dominance test was its capacity to deal with such oligopolies.
There was no "robust method" of predicting a post-merger
outcome in most oligopolies and this would "remain a question
of judgement for the foreseeable future" as judgement could
"never be done away with". Nonetheless, the SLC test
would be preferable here (QQ 63, 64). The JWP were quite clear
that "the 'problem' of oligopolistic markets could be better
addressed under a SLC standard" (p 34). The Government also
viewed SLC as "particularly well-suited to tackling oligopolistic
markets" (p 153).
SEPARATING THE SUBSTANTIVE TEST FROM ARTICLE 82
152. Dominance is also a precondition for Article
82 of the EC Treaty and assessing abuses of market powera
separate matter from mergersunder Article 82 and in national
competition law in almost all of the Member States (including
in the UK Competition Act). When the ECMR was first established,
one of the reasons the Committee was in favour of the dominance
test was on account of its "familiar terminology" (1989
Report, p 21). At the time, the Committee was concerned about
the legal uncertainty if the wording in the ECMR test were different
from (what was then) Article 86 EC. In 1989, the dominance test
had the advantage for legal practitioners that the jurisprudence
of the European Court of Justice in interpreting this word would
apply to the Regulation. After over a decade and some 2000 decisions
made under the ECMR, it is necessary to reconsider whether or
not this link between the language of Article 86 (now 82) and
the substantive test in the ECMR is still beneficial.
153. The Committee heard sound arguments for completely
detaching the test under the ECMR from the dominance standard
under Article 82.
Witnesses explained that the purpose of merger control was to
ensure that the structure of the market is not rendered less competitive
after a merger than before it rather than to prevent future abuse
of a dominant position. They argued that there would be an advantage
in the fact that the adoption of the SLC test would effectively
de-link the ECMR and Article 82. The Government saw real benefits
in introducing a "clear separation" between the competition
test applied in the ECMR and the concept of dominance under Article
"Under Article 82, a party that holds a dominant
position is under a special obligation as to its future commercial
conduct. This obligation applies to parties found to be either
singly or collectively dominant. The increasingly broad interpretation
of the concept of collective dominance under the existing ECMR
is, therefore, placing numbers of undertakings under a special
responsibility under Article 82 even if they themselves hold a
relatively small market share, since they have been found to be
in a position of collective dominance. A move to SLC under the
ECMR would prevent this situation being aggravated any further,
since the direct read-across to Article 82 would be removed"
154. The JWP agreed that merger control required
a prospective consideration of the structure of a market, post-merger,
whereas Article 82 sought to identify those acts or omissions
of dominant firms that deviated from the standards required arising
from the special responsibilities which Article 82 imposed upon
them. The JWP therefore considered that it would be "beneficial"
if the jurisprudence and decisional practice in relation to these
two matters were left to develop separately from one another.
This was an increasingly acute problem as the Commission, in some
of its decisions under the ECMR, appeared to have given a different
meaning to dominance and had reached a finding of dominance which
it would have been unlikely to have reached under Article 82.
The JWP concluded that eliminating that confusion between the
two tests by a move to SLC would be helpful. (p 34; Q 100).
155. Many other witnesses, including John Vickers
(Q 218), agreed with this analysis. The ACC considered the impact
of the ECMR decisions on the dominance case law under Article
82 to be a "real drawback" and saw this as one of "the
most compelling arguments" for a change to SLC (QQ 371,
379). Dr Bishop agreed that this problem of "cross-contamination"
between the ECMR and Article 82 was the "main disadvantage"
of the dominance test (Q 57).
Professor Kay saw the current link between the two pieces of legislation
as limiting the way in which the MTF could operate and interpret
dominance (Q 181).
THE NEED FOR GUIDELINES ON THE SUBSTANTIVE TEST IN
156. Whether witnesses were for or against SLC, they
were unanimous in calling on the Commission to issue, without
delay, guidelines on how it interpreted the substantive test in
the ECMR. The CBI said that it was "high time that the Commission
issued a notice on its substantive analysis" and wanted the
Commission to provide "very detailed" guidelines (Q
39). The JWP considered such guidelines to be "essential".
If the Commission were to move to SLC, guidelines would be even
more important as everyone would need to know in advance precisely
what that test meant (p 34; Q 106). The JWP was concerned about
the amount of discretion the Commission would otherwise have when
it came to interpreting the term 'substantial' (Q 98). Dr Bishop
and the OFT both agreed that the substantive test should only
change when the Commission had issued guidelines (QQ 60,
157. It was suggested that the Commission could draw
on the guidelines on the SLC test that other jurisdictions had
already produced. John Vickers considered that "a great deal"
could be learned from the various guidelines issued by regulators
around the world on the application of the test. He thought that
there should be and would be "considerable" international
convergence in terms of the guidelines issued on this topic (QQ
158. Commissioner Monti promised that the Commission
would issue a notice on market power in merger analysis irrespective
of whether or not it proposed a change in the substantive test.
He was confident that this notice would provide "a very important
set of clarifications" (Q 402).
Conclusions on the Substantive Test
159. The debate about the substantive test raises
questions of fundamental importance to the Community's competition
regime: the decision to change the test should not be taken lightly.
We considered the arguments advanced in favour of both dominance
and SLC. There are similarities between the tests; both require
making predictions and in many cases their application may give
the same result. However, there is broad agreement that the SLC
test is in many ways better in theory and that, if now one were
drafting the Regulation from scratch, it is probable that the
SLC test would be adopted.
160. The Regulation has, however, been in force
for more than a decade and witnesses were concerned about the
implications of a change, in terms of the uncertainty it would
cause and the unpredictability of how the new test would be applied.
A move in Europe to SLC could certainly have short-term disruptive
consequences. There is, therefore, a tension between what is convenient
in the short term and a sensible long-term objective. Nevertheless,
we believe that the SLC test should be the substantive test in
the ECMR for the following reasons:
· If a
merger might significantly impede competition in a market, the
transaction should be examined in detail. It should not be a pre-requisite
for the Commission first to prove that the merger would also create
or strengthen a dominant position. Moving to the SLC test would
allow the Commission to analyse mergers solely on how they lessen
competition. The Commission's application of the present test
stresses dominance, may cause the Commission to "stretch"
the wording of the Regulation and runs the risk that significant
impediments to competition may not be investigated.
· The SLC
test comprehends the dominance test, but this does not apply vice
versa. In particular, the recent Airtours/First
Choice case may have serious implications for the dominance
test and the ability of the Commission to vet mergers that substantially
lessen competition in oligopolistic markets.
are understandably concerned that the SLC test would lead to more
mergers going to Phase II investigation and possibly being prohibited.
It is, however, the Committee's view that any merger that substantially
lessens competition should be investigated and the SLC test provides
a better basis on which to assess such cases than the dominance
· A move
to SLC would establish a clear separation between the language
contained in the substantive test of the Merger Regulation and
the threshold for assessing abuses of market power under Article
82 of the EC Treaty. It would allow the jurisprudence and decisional
practice of the Commission in relation to these two matters to
develop separately from one another and result in greater clarity.
would be costs and risks associated with a change of substantive
test in the ECMR but these, we believe, would be manageable. Any
change should be accompanied by the Commission issuing draft guidelines
on how it proposed to interpret and apply the SLC test. It is
imperative that such guidelines are discussed and put in place
ahead of any change taking practical effect. The argument about
the uncertainty that would result from adopting a different substantive
testthat parties would not be able to anticipate how the
Commission might apply the testshould then lose much of
its force. Even if there is no change of test, the Committee is
firmly of the opinion that the Commission should, without delay,
issue guidelines on how it interprets the substantive test in
the ECMR. This would help to alleviate the current uncertainty
as to how the dominance test as applied by the Commission differs
convergence of merger laws is a desirable objective. As a first
move in this direction, we would like to see the harmonisation
of substantive tests. Although there might still be differences
in its practical application, this would represent a major step.
It would improve co-operation between competition authorities
and the handling of international or global mergers.
161. Having weighed all the evidence and the arguments
on either side, we consider that the SLC test should be the substantive
test in the ECMR. A move to SLC would give greater clarity, transparency
162. Article 2(1)(b) of the ECMR provides, inter
alia, that, when determining whether or not a merger is compatible
with the common market, the Commission should take into account
"the development of technical and economic progress provided
that it is to consumers' advantage and does not form an obstacle
to competition". The Commission, however, has never approved
a merger that created or strengthened a dominant position on those
grounds. If the Commission deems that a merger would create or
strengthen a dominant position that would result in a significant
impediment to competition, the merger is blocked.
163. Some witnesses suggested that the creation or
strengthening of a dominant position was not always unacceptable
when set against the attempts to achieve efficiencies for consumers.
In some instances, a merger that might create or strengthen a
dominant position could, at the same time, produce benefits for
consumers in the form of either lower prices or greater choice
or quality. It was proposed that, if these efficienciessuch
as economies of scale or innovation through expensive research
and developmentwere merger specific, they might occasionally
outweigh the disadvantages to consumers associated with the reduction
in competition. In these very exceptional cases, the ECMR should
be able to take account of these efficiencies and allow the merger
to go ahead. Such an amendment would create a 'defence' for those
mergers that might lessen competition but which would yield demonstrable
This could be achieved by introducing a possible second stage
to the ECMR appraisal process. Those mergers which were judged
to fail the initial assessment of competitive effect (i.e., that
create or strengthen a dominant positionor, following a
switch, substantially reduce competition) would still have a possibility
of exemption and authorisation. This would allow the competition
detriment to be balanced or set off against other benefits.
164. Witnesses from industry were very keen for the
Commission to give explicit reference to an efficiencies defence
in the ECMR (pp 8; 130). They argued that efficiencies, such as
innovation and consumer benefits, should be balanced against any
anti-competitive effects of a merger. Noting that the US was more
prepared to make such a balance, the Union of Industrial and Employers'
Confederation of Europe (UNICE) even suggested that a change of
Commission policy in this respect "could improve constructive
co-ordination with the United States" (Q 293; p107). Arguments
in favour of considering efficiencies also came from the European
Parliament's Committee on Economic and Monetary Affairs, who said
that, "for mergers in innovatory sectors, a balance should
be sought between the need for economies of scale in the research
and development sector [
] and maintaining reasonable competition".
Dr Bishop also thought that "in principle" an efficiencies
defence should be established (Q 76).
165. Professor John Kay, however, was against introducing
an efficiencies defence into the ECMR. It would necessitate the
Merger Task Force (MTF) making the kind of speculative cost-benefit
analyses which he considered impossible to do with any degree
of certainty and he was sceptical about the ability of economists
to predict what the future structure of the industry and market
would be. Although Professor Kay believed that there were pro-competitive
mergers, he considered that it would be possible to take account
of all the relevant arguments involved in such cases by applying
the SLC test, without the need for an explicit efficiencies defence
(Q 188). Mr McMahon, of Mytravel Group, agreed that efficiencies
should not stand apart as a separate aspect of merger appraisals
166. The Commission explained that "one of the
main streams of thought behind the merger review" was "to
give more explicit and more predictable recognition to efficiency
considerations." It said that if a merger brought efficiencies,
and it could be expected that these efficiencies would be passed
on to consumers, this was something to be taken into account.
It believed that clarifying this issue would help companies to
perceive its procedure as more predictable. (QQ 396, 398)
CAN AN EFFICIENCIES DEFENCE BE INCORPORATED INTO
THE DOMINANCE TEST?
167. The Commission requested views on the role of
efficiencies in merger control, independently of a discussion
of the two tests. However, the Green Paper highlighted claims
that the dominance test might not allow for the proper consideration
of efficiencies that could arise from mergers (paragraph 40).
168. Indeed, several of our witnesses who had supported
the introduction of the SLC test considered that SLC would make
it easier to adopt an explicit rule on efficiencies (pp 34, 195).
In this respect, they thought that the SLC test was more solidly
rooted in economics than the dominance test (see above paragraphs
130-131), and would provide "a more explicit basis"
for assessing efficiencies arising from mergers.
169. Not all the witnesses agreed on this point,
however. Some claimed that as the current test was 'dominance
plus' (see above paragraphs 103-04), this already enabled the
Commission to take efficiencies into account. The "second
limb" of the existing substantive test (i.e., "as a
result of which effective competition would be significantly impeded
in the common market or a substantial part of it") made the
consideration of efficiencies possible (QQ 319, 378). Other arguments
were used to suggest that the Commission already had a legal basis
to take account of efficiencies (pp 50, 107).
170. The Confederation of British Industry (CBI)
also raised a more general point. The ECMR was based on Article
81 of the EC Treaty, so Article 81(3) arguments (about efficiencies
being verifiable and measurable) should apply to it by analogy
in any event (p 8). The Commission also mentioned Article 81(3)
and, perhaps conscious of Article 2(1)(b) of the ECMR, did not
think that there was "an objection in principle" to
efficiencies being taken into consideration in the ECMR dominance
test. They too stressed that the dominance test was 'dominance
plus' and "on that basis" felt "more confident
about looking in a more prospective and dynamic way at efficiencies"
WOULD AN EFFICIENCIES DEFENCE BE PARTICULARLY IMPORTANT
IF THE ECMR CHANGED TO SLC?
171. A separate argument was founded on the proposition
that a test based on SLC would be likely to prohibit more mergers
than the dominance test (see above paragraphs 106-11). The Joint
Working Party of the Bars and Law Societies of the UK (JWP) said
that if the ECMR incorporated the SLC test it would be particularly
important for it to adopt an explicit efficiencies defence in
order to compensate for the higher number of mergers that it envisaged
would be prohibited under the new test (p 34). The Competition
Law Association (CLA) agreed that if the SLC test were adopted
an explicit efficiency defence would be "one of the most
important things" that would need to change in the ECMR,
in order to reflect "the lower SLC hurdle" (p 50; QQ
172. John Vickers, the Director General of the Office
of Fair Trading, acknowledged that there were some who would argue
that the efficiencies defence would or could be treated differently
in the context of the two substantive tests but he described this
as "rather arcane and difficult territory" (Q 225).
DOES THE COMMISSION HAVE AN EFFICIENCIES 'OFFENCE'?
173. The American Chamber of Commerce (ACC) mentioned
"the widespread perception" that occasionally the Commission
had de facto applied an efficiencies offence. That is,
in situations where the merger of two companies could generate
economies of scale and scope making it more difficult for other
companies to compete, the Commission would say that this, in itself,
was an offence and a reason to prohibit the merger (p 130).
Indeed, the National Consumer Council (NCC) considered that the
Green Paper implicitly acknowledged that, "on rare occasions",
the dominance test might "actually lead to the rejection
of a merger case that stands to benefit consumers" (p 195).
174. The Commission, however, insisted that it did
not have an efficiencies offence. Rather, when companies become
more efficient, and therefore stronger competitors, the Commission
considered this to be "a positive point for competition"
WHAT CONDITIONS MUST BE MET FOR EFFICIENCIES TO BE
175. Although the Government saw merit in the Commission
clarifying its approach to this subject, they urged "a relatively
cautious approach" because they considered that efficiencies
would "only be relevant to the assessment of mergers in a
small number of cases" (p 156).
176. The JWP argued that any efficiencies defence
"should be drawn narrowly". It should be available to
the parties only where the efficiencies were merger-specific (i.e.,
where the efficiencies could be achieved only as a result of the
merger) (p 34). The view that the Commission should consider only
those efficiencies which came about as a consequence of the proposed
merger was widely held (e.g. pp 50, 156). Other criteria were
also commonly judged to be important for the Commission to consider.
Dr Derek Morris, the Chairman of the Competition Commission, insisted
that for efficiencies to be considered they should be "significant,
reasonably imminent, reasonably certain." The most forceful
opinion, however, was that the Commission should take account
of efficiencies only where they would demonstrably be passed on
to the consumer. It was argued that if the significant efficiency
gains accrued only to shareholders, there would be no reason for
them to be passed on to consumers. Dr Morris stressed this point:
"A merger that clearly has substantial synergistic
gains but creates a very substantial degree of market power such
that there really would be no particular incentive or pressure
to pass those benefits on, would have benefits that would be unlikely
to count" (QQ 267, 275).
177. The European Parliament's Committee on Economic
and Monetary Affairs agreed that, when evaluating efficiencies,
attention should focus especially on the consumer.
Judging whether or not the efficiencies would be passed on would
demand very close examination by a Competition Authority.
178. The Commission confirmed that under its proposed
efficiencies test the parties would have to show that the efficiencies
would be passed on to the consumer. The Commission admitted that,
once it had ruled that a merger would create or strengthen a dominant
position, it would be difficult to demonstrate that the remaining
elements of competition were such that they would "lead to
a transfer of wealth or benefits to the consumer." The Commission,
therefore, thought that in future any efficiency defence would
be used "rather exceptionally" (QQ 396, 400).
179. Consumer groups expressed a concern that, when
considering efficiency gains that accrued to the consumer, the
Commission should not extend these benefits to include other social
concerns. The NCC believed that the criteria should be "specifically
focused on the interests of consumers rather than the wider economy
or social concerns". Furthermore, it asserted that "very
strong evidence" should be necessary to approve a merger
in such circumstances (p 196). The European Consumers' Organisation
(Bureau Européan des Unions de ConsommateursBEUC)
was concerned that an efficiencies test "would introduce
'industrial policy' considerations into key decisions." That
could "politicise" the decision-making process, "much
to the detriment of expediency, transparency and consistency".
AT WHAT STAGE IN THE REVIEW PROCESS SHOULD THE COMMISSION
180. Witnesses were clear that an explicit efficiency
defence could only take place after the Commission had found that
a merger could give rise to a competition problem. If a merger
had been judged to have failed the substantive test, there could
be explicit provision in the ECMR to consider whether there were
any offsetting benefits from efficiencies when the Commission
was considering remedies.
181. John Vickers saw "a lot of merit"
in a system where, if there were benefits flowing through to customers
in the relevant market, those could be taken into account at the
remedies stage. However, he considered it to be "quite hard
to think of mergers which would substantially lessen competition
and bring such efficiency gains which moreover flowed through
to customers in the relevant market." Nonetheless, he did
not consider it to be impossible and consideration of efficiencies
could be a "useful" part of the remedies stage (Q 226).
CONSULTATION WITH CONSUMER GROUPS
182. We considered whether it would be possible for
the Commission to judge better whether, and if so to what extent,
the proposed efficiencies of mergers would be passed on to consumers
by consulting more with consumer groups.
The Government attached "importance to facilitating the active
involvement of consumers' representatives in competition enforcement".
They welcomed "more active steps to engage consumers' representatives
in ECMR cases", although they stressed that "any input
should be on competition issues alone and not the broader social
implications of any concentration" (p 150). The NCC and BEUC
both called for the MTF to notify consumer groups directly of
mergers and invite these organisations to comment on each case.
The NCC even went as far as suggesting that the MTF should create
an Office for the Consumer in European Mergers in which a separate
post would be established"the Consumer Participation
Officer." This person "could be regarded as comparable
to the Hearing Office" and would have responsibility for
notifying consumer groups and facilitating their access to non-confidential
aspects of the file (pp 197-98).
THE NEED FOR GUIDELINES ON EFFICIENCIES
183. Witnesses wanted the Commission to provide guidelines
on all of these areas of uncertainty. The JWP argued the need
for the Commission to clarify the position of efficiencies in
merger analysis. The Commission should "provide guidance
both on efficiencies as a 'defence' and as on 'offence'"
(p 34). Witnesses from industry also called for clarification
on the scope of the efficiency defence that would lay out both
when efficiencies would be considered and what the standard of
proof required by the Commission would be (pp 8, 107, 190).
184. As noted above (paragraph 158), the Commission
undertook, "by the end of this year", to produce draft
interpretative guidelines on its practice relating to the application
of the substantive test. The guidelines would embrace the analysis
of market power and "necessarily" would have to include
"an important chapter" on how the Commission would look
at efficiencies and take such considerations into account (QQ
CONCLUSIONS ON EFFICIENCIES
185. The Committee is extremely sceptical whether
it is necessary or desirable to introduce into the text of the
ECMR provisions setting out an explicit efficiency defence. If
there were a significant reduction in competition in a market,
there would be very little incentive or reason for the company
to pass on any efficiencies to the consumer. The ECMR is about
maintaining competition and the Committee is keen to ensure that
that object is achieved.
186. The Committee is also concerned about how
the Commission could ensure that the efficiencies proposed by
the parties were in fact passed on to the consumer after the merger,
without regulating prices or controlling capacity. It is difficult
to envisage an acceptable and effective system of imposing sanctions
where projected efficiencies do not materialise and it would be
hard for the regulator to defend the public interest. This is
a particular problem as the vast majority of mergers have been
shown not to deliver value.
Accordingly, the Committee recommends that the ECMR should not
include an explicit efficiencies defence.
187. If, however, in a specific case an efficiencies
defence were to be put forwarded, the Commission should be encouraged,
when considering possible efficiency gains and remedies, to seek
advice from consumer groups. The Commission should also issue
guidelines to consumer groups on the most effective ways of becoming
involved in merger cases.
41 This is the common short-hand name for the substantive
test and is used by the Commission in the Green Paper. Some witnesses
questioned whether it accurately reflected the wording of the
test and the procedure by which the Commission examines mergers.
We outline this discussion below (paragraphs 103-04). Back
Paragraph 169 of the Green Paper. See also Commissioner Monti's
speech "Review of the EC Merger Regulation-Roadmap for the
reform project", given at the Conference on Reform of European
Merger Control, in the British Chamber of Commerce, Brussels,
on 4 June 2002. Back
There is a debate as to whether mergers that fail the substantive
test in the ECMR (i.e., that create or strengthen a dominant position
as a result of which competition would be significantly impeded)
should be permitted if, as a result of the merger, benefits (or
'efficiencies') would accrue to the customer. We explore this
issue below (paragraphs 162-87). Back
In practice, it is not clear whether both elements of the test
must be satisfied before the Commission may prohibit a transaction
or whether the second element (i.e., significantly impeding effective
competition) is merely a description of the consequences of the
The GE/Honeywell case was cleared in the US on SLC and
prohibited in Europe on the dominance test. However, witnesses
referred to this as an exception that was not comparable to other
cases (see below paragraph 124-25). Back
QQ 306, 310-15, 323, 372-73. Back
See paragraph 5 above. Back
For information on which accession countries use which substantive
test see the Government's evidence (p 169). Back
Footnote to paragraph 161 of the Green Paper. Back
For an explanation of this argument see above paragraphs 103-04. Back
This is probably a reference to Carrefour/Promodes, where
the Commission's decision found dominance at less than 30 per
Case T-342/99, judgment of 6 June 2002. The Court of First Instance
annulled the European Commission's decision to block the acquisition
of the United Kingdom's tour operator First Choice by competitor
Airtours, on the basis that the Commission had made a series
of fundamental errors of assessment. The CFI concluded "that
the Decision, far from basing its prospective analysis on cogent
evidence, is vitiated by a series of errors of assessment as to
factors fundamental to any assessment of whether a collective
dominant position might be created". The ruling does
not call into question the theoretical idea of collective dominance
it merely expounds strict criteria that the Commission will have
to satisfy in order to defend a finding of collective dominance.
The Court stated that three conditions must be met if there is
to be a finding of collective dominance:
- Each member of the alleged dominant
oligopoly must have the ability to know how the other members
are behaving in order to monitor whether or not they are adopting
a common policy. According to the Court, this required "sufficient
market transparency for all members of the dominant oligopoly
to be aware, sufficiently precisely and quickly, of the ways in
which the other members' market conduct is evolving".
- The situation of tacit collusion
must be "sustainable over time, that is to say there must
be an incentive not to depart from the common policy on the market".
- The Court stated that "the
Commission must also establish that the foreseeable reaction of
current and future competitors, as well as of consumers, would
not jeopardise the results expected from the common policy".
In short, tacit collusion must be feasible
and it must be sustainable, both internally (within the dominant
oligopoly) and externally (the competitive pressures from fringe
firms and customers must be sufficiently weak).
Equally important, the judgment stresses
that by merely relying on assumptions without establishing "cogent
evidence", the Commission failed to prove "to
the requisite legal standard that the concentration would give
rise to a collective dominant position". Back
This was typified in the Heinz/Beech-Nut case in the US,
which was mentioned by the OFT, the Commission, Dr Bishop and
Mr Burnside, of Linklaters (QQ 58-59, 222, 376, 401). Back
If the current test is interpreted as a two-stage 'dominance plus'
test (see above paragraphs 103-04), it could be argued that some
detachment is afforded by the second element of the test (i.e.,
"as a result of which effective competition would be significantly
impeded"). But no witness mentioned this as having an effect. Back
UNICE was alone in not considering this to be an "important"
point (Q 316). Back
The Office of Fair Trading, in the context of the Enterprise Bill,
is currently working on draft guidelines to explain how it considers
the SLC test will be applied in the United Kingdom. Back
Derek Morris: "almost all economists and almost all lawyers
in principle agree that the substantial lessening of competition
test is the better test. To get such widespread agreement across
both professions is truly wondrous to behold and extremely rare.
] I do not think if we were designing the test today almost
anyone would go for the dominance test." (Q 264). Dr Bishop
said: "If we started with a blank piece of paper today, I
think we would start with substantial lessening of competition
and it would not be controversial" (Q 57). Back
The Government's Enterprise Bill suggests a limited efficiencies
defence in United Kingdom domestic law. This appears in Clause
29 (relevant consumer benefits) as first published for the House
of Lords (HL 92). The efficiencies that are acceptable in this
bill and so qualify as relevant customer benefits are "lower
prices, higher quality of goods or services in any market in the
United Kingdom [
] or greater innovation in relation to such
goods or services." The benefits must also accrue "within
a reasonable period [of the merger]" and be "unlikely
to accrue without the [merger taking place]". Back
The case most frequently cited (e.g. by the ACC, p 130) to support
this assertion is GE/Honeywell. Back
In the Green Paper, the Commission declares that it is open to
ideas encouraging or facilitating the involvement of consumer
groups (paragraph 243). Back
cf. World Class Transactions: Insights into Creating Shareholder
Value Through Mergers and Acquisitions, KMPG Transaction Services,
2001. In its 1999 survey, KMPG found that only 17% of the companies
in the survey created value as a result of the merger. In 2001,
KMPG found that 30% of deals added value. Back