Innovation in EU merger control

The Commission’s assessment of the effects of mergers on innovation has fascinated scholars and practitioners for the last two years or so. On 12 April 2018, the Commission’s Deputy Director General for Mergers Carles Esteva Mosso comprehensively addressed the issue at the Spring Meeting of the ABA Section of Antitrust Law. This blogpost traces earlier developments and gleans new insights from the most recent Commission statement.

The innovation theory of harm

Innovation in merger control has been called many things. Some noted that ‘[i]nnovation seems to have become the new “Greater Good” the Commission is pursuing when reviewing mergers’. Others opined that ‘[b]y and large, there is nothing really new under the sun.’ In addition to shorter contributions, the issue has also lead to a number of academic papers (ranging from the fairly to the very recent).

Innovation is certainly no new parameter of competition, nor is it a stranger in merger control procedures. The Horizontal Merger Guidelines, which date back to 2004, already acknowledge innovation as one of the consumer benefits brought about by effective competition (next to low prices, high quality and wide choice). More specifically, the Guidelines state:

In markets where innovation is an important competitive force, a merger may increase the firms’ ability and incentive to bring new innovations to the market and, thereby, the competitive pressure on rivals to innovate in that market. Alternatively, effective competition may be significantly impeded by a merger between two important innovators[.]

The Commission is specifically concerned with products that are still in development (‘pipeline products’). According to the Guidelines, ‘a firm with a relatively small market share may nevertheless be an important competitive force if it has promising pipeline products.’ When this firm is acquired by another firm with a similar, existing product, potential competition decreases. Such a merger may therefore result in (i) higher prices, whether or not the competing pipeline product is eventually brought to the market; and even (ii) the discontinuation of the pipeline product, leading not only to higher prices but also limiting consumer choice.

Cases along these lines have been especially prevalent in the pharmaceutical sector. In Medtronic/Covidien (2014) and Pfizer/Hospira (2015), for example, one of the merged parties had a drug in an advanced stage of development, while the other party already marketed a competing product. The Commission approved each of these mergers conditional upon the divestment of the pipeline drug in order to safeguard future competition.

Further and further down the pipeline

The above cases were fairly uncontroversial, as there is only a small difference between current and near-future competitors. However, the Commission has also been looking further down the pipeline. In Novartis/Glaxosmithkline Oncology Business (2015), for example, the Commission was concerned with both late-stage (phase III) and earlier-stage (phase I and II) pipelines in connection with the same drugs, ordering a divestment of the former and behavioural remedies with regard to the latter. Such an approach has drawn criticism from authors who note that relatively few drugs in phase I or phase II make it to the next stage of development (11% and 30%, respectively).

The notion of potential competition was broadened even further in Dow/DuPont (2017), a merger decision in the seeds and pesticides market. The Commission was not only concerned with early pipeline products and lines of research, but also with the likely reduction in overall innovation efforts following the merger. According to one commentator, the Commission was essentially asking: ‘[A]re these the companies most likely to compete against each other to develop products, as yet unknown, in a certain field?’. The innovation theory of harm in the Commission’s Bayer/Monsanto merger decision (March 2018; only a press release available) seems slightly more narrow, referring only to early pipeline projects and R&D lines of research.

Let’s hear it from the Commission

Commission Deputy Director General for Mergers Carles Esteva Mosso recently addressed the issue in speech, which – on paper – reads very much like a policy document (due to its length and referencing). As such, it is a welcome addition to the Commission’s competition policy brief on EU merger control and innovation from 2016.

Citing ICI/DuPont (a case from 1992, i.e. three years after the adoption of the Merger Control Regulation), Mosso reminds us that ‘[t]he Commission was mindful of the effects of mergers on innovation since the very beginning of EU merger control.’ He concedes, however, that enforcement practice has been concerned mainly with the short-term impact of mergers, and offers statistics to illustrate the point: Out of a total of 73 interventions in the last three years (2015-17), ‘[t]he overwhelming majority of our interventions were based on horizontal static unilateral effects on prices (66 cases). Innovation concerns were identified in 10 cases, usually in addition to static price concerns.’ Innovation competition is thus not a new parameter in merger control investigations, but it remains a relatively rare one.

Mosso then goes on to distinguish two types of innovation concerns in mergers. The first one relates to pipeline products that are usually quite developed, likely to reach commercialisation and are already known to target a specific product market. The second type of concern relates to innovation at earlier stages, which encompasses not only early yet market-specific R&D efforts, but also ‘wider innovation areas’. Placing Dow/DuPont in the second category, he mounts an elaborate defence of the Commission’s decision in that case.

Perhaps most interestingly, Mosso indicates under which conditions a merger involving innovation at earlier stages may have negative effects (through discontinuation, delay or re-orientation of overlapping lines of research):

Typically innovation can be stifled by mergers which bring together important and close innovators with similar R&D capabilities, in a sector where innovation is an important parameter of competition, the number of effective innovation players can be reliably identified and is limited, and the barriers to entry are high.

However, Mosso also notes that mergers can foster innovation. Increased innovation may constitute a countervailing efficiency in merger cases under three conditions, namely verifiability, merger-specificity and pass-on to consumers. A merger could for example, allow the parties to share knowledge more effectively, and to internalise involuntary knowledge spill-overs. Yet Mosso adds that in industries where protection against imitation is strong already (for example thanks to effective IP rights), it is less likely that a merger would increase the incentives to innovate by internalising knowledge spill-overs. The only case where innovation efficiencies played a significant role remains TomTom/Tele Atlas, where the parties possessed complementary rather than overlapping innovation capabilities (navigation systems and maps) in a sector with more limited IP protection.

Conclusion

Innovation competition is not a new concept, but its importance is definitely growing. One noticeable trend is that the Commission is looking further and further down the pipeline when formulating its innovation concerns. Still, according to Mosso, the Commission’s decision so far ‘have not been based on any presumptions regarding innovation effects but relied on a meticulous, fact-based analysis.’

Finally, other Commission initiatives also concern innovation in merger control. Most notably, it is considering the introduction of value-based notification thresholds in addition to the current turnover-based ones (see e.g. here and here). This idea is spurred by the digital economy, where the acquisition of promising start-ups may escape the current notification thresholds, ‘even in cases where the acquired company already plays a competitive role, holds commercially valuable data, or has a considerable market potential for other reasons’. That discussion, however, deserves a blog post of its own.

Tags

About

Friso Bostoen

Blog Editor

Ph.D. Researcher and Teaching Assistant, KU Leuven

>> Friso’s CoRe Blog posts >>

Leave a Reply

Related Posts

22. Oct 2020
Features by Stefano Riela

Covid-19 and the geopolitics of the Herfindahl-Hirschman Index

The Covid-19 pandemic has revealed that trade is not a free flow whose tap globalization has turned on for good: export may be restricted due to unavailability and, as in the case of import, as part of foreign policy. What emerged as a discontinuity with the globalization of the last three decades makes the assessment of a market structure more […]
12. Oct 2020
Features by Alexandr Svetlicinii

Two hats on one head: Competition authorities and FDI screening

The Regulation 2019/452 establishing a framework for the screening of foreign direct investments into the Union (EU FDI Screening Regulation) was adopted on 19 March 2019 and became fully operational on 11 October 2020. Its adoption was preceded by the heated discussion on the need to reform the EU merger control framework, which according to some stakeholders, should be able […]
16. Jun 2020
Features by Virgilio Mouta Pereira
connections

Hitting the mark or setting the bar too high? The “merger gap” and prospective analysis in the aftermath of CK Hutchison/Telefónica

by Miguel Marques de Carvalho and Virgílio Pereira On 28 may 2020, the General Court (“GC”) handed down a landmark judgment whereby it overturned the European Commission’s (“Commission”) decision which had prohibited the four-to-three acquisition of Telefónica UK (“O2”) by Hutchison 3G UK (“Three”). This blogpost provides an overview  of the main points raised by the ruling and offers some […]
09. Jun 2020
Features by Alice Rinaldi
Mobile apps image

Re-imagining the Abuse of Economic Dependence in a Digital World

As proven by the recent consultation on the Digital Services Act, the European Union is actively pursuing new solutions to cope with the challenges posed by digitalization. This post proposes a new approach to conducts taking place in the context of online commercial relationships, such as refusals to access platforms or datasets. Namely, it suggests that the European legislator should […]
28. May 2020
Features by Marios Iacovides
corona virus

Covid-19 and the transformative power of State Aid: a framework for a democratically legitimate recovery

By Julian Nowag and Marios Iacovides The coronavirus pandemic has led to major shocks to the global economy and the EU Member States, with hardly any State spared. The European Commission estimates that the EU economy will contract by 7.5 % in 2020. Unemployment is forecast to rise from 6.7% in 2019 to 9% in 2020. Within this context, the […]
19. May 2020
Features by Virgilio Pereira
Amazon logo

Amazon/Deliveroo: Dynamic Counterfactual Analysis and the Failing-Firm Defence

The economic and financial impact of the Covid-19 pandemic foreshadows an increase in the number of deals where the so-called “failing-firm defence” (“FFD”) might come under discussion, as recently demonstrated by the provisional clearance of Amazon’s investment in Deliveroo by the Competition and Markets Authority (“CMA”). This blogpost addresses the interplay between the FFD and dynamic counterfactual analysis, in light of the […]
14. May 2020
Features by Daniel Mandrescu
credit card swiping

Restrictions of competition by object and multi-sided platforms – insights from Budapest Bank

The judgment of the CJEU in Budapest Bank (Case C-228/18) is the most recent case that provides guidance with regard to the application of art. 101 TFEU in the context of multi-sided platforms. The CJEU explicitly confirmed the possibility of finding restrictions of competition by object by such players despite the complexities originating from their multi-sided nature. However, the manner in which […]
23. Apr 2020
Features by Friso Bostoen

Venture capital and antitrust: on exit strategies, killer acquisitions, and innovation harms

Venture capital (VC) is the primary source of financing for early-stage startups bringing their innovation to market. And a disproportionate amount of venture capital goes to startups in the tech sector. However, the last few years have seen a contraction in VC investment, particularly in potential competitors to incumbent digital platforms such as Facebook, Google and Amazon, which some interpret as […]
25. Mar 2020
Features by David van Wamel
Picture of Elevator

Otis II: A lost opportunity to clear the mist

In Otis II, the Court of Justice of the European Union (‘Court’) reaffirms that any party can claim damages for loss caused by an EU competition law infringement. More specifically, persons not active on the market affected by a cartel, but who provide subsidies to buyers of the products offered on that market, must be able to claim damages for […]
16. Mar 2020
Features by Friso Bostoen

Corona and EU economic law: Antitrust (Articles 101 and 102 TFEU)

By Friso Bostoen and Liesbet Van Acker As the corona pandemic instils more and more fear in the population, some of its economic effects are immediately noticeable. Two items—hand sanitizer and facemasks—have been in particularly high demand (and short supply). This has driven prices up to a level where one may wonder whether they are abusive in the sense of […]

If you are interested, please use our Newletter to stay informed about our upcoming conferences, workshops, trainings and current published journals in our core areas of EU competition, data protection, substances and environmental law, as well as exciting new projects in emerging technologies and digitalisation.

Don’t miss any news and sign up for our free news alert.  Sign up now