Nicolas Petit explains how Mario Draghi’s report on revamping European Union competition calls for a drastic shift from current hostility toward business consolidation when it supports goals like innovation through demonstrable efficiencies.
Mario Draghi’s report on raising European competitiveness contains two insights about competition policy. First, competition policy has a small but significant role to play in closing the “innovation gap” between the European Union, the United States and China. Second, increasing European productivity demands “revamping” competition through the introduction of technical-legal reforms.
Business as usual is not what Draghi wants from future competition policy. And yet, in the past few days, a “defensive tone” has appeared in the European antitrust world. The fear of some of our colleagues is over a risk that the EU will roll back the high enforcement levels seen in merger and abuse of dominance law in the past ten years. With some degree of scaremongering, the defensive view of competition policy warns against a more permissive policy towards business size and scale, especially when this involves domestic corporations.
We lawyers know that language matters. The main chapter of interest in the Draghi report (Part B) is titled “Revamping competition.” This word choice should be sufficient to signal a desire to shift enforcement policy from the current trajectory. If Draghi had wanted to press harder the gas pedal of current competition policy, “reinforcing” would have been a better title.
More importantly, perhaps, any framing of the Draghi report as a step towards less enforcement misses the point. Draghi’s vision is not about more or less competition enforcement. The report does not reify enforcement or absence thereof per se. Instead, Draghi’s report concerns itself with economic realities. The report acknowledges that economic competition drives innovation. At the same time, the report observes that the evidence whereby competition enforcement has promoted innovation is ambiguous. Draghi thus calls for a different competition enforcement paradigm focused on innovation.
Draghi’s vision for merger policy
The sections of Draghi’s report devoted to merger law confirm this:
- The report supports the introduction of an “innovation defense.” In particular, “merger evaluations should assess how the proposed concentration will affect future innovation potential in critical innovation areas.”
- The criteria to benefit from the innovation defense should be “specific” to avoid abuses. Innovation tests might be included in a revised version of the EU merger guidelines. Draghi appears to exclude the idea of new or revised legislation, in line with his general skepticism towards the adoption of further regulatory instruments by the EU.
- Defenses in merger cases should consider “fixed cost efficiencies.”
- The report gives examples of sectors where a pro-consolidation policy must be developed. Draghi highlights telecoms, where he wants to see a restructuring of the current population of 34 EU firms, and defense, where he argues that the industry lacks scale.
- A pro-consolidation merger policy could also be leveraged in sectors that lack pan-European firms or where domestic production is critical, such as semiconductors or space. Bulking up European firms through scale forms also part of the so-called “resilience” agenda.
- Draghi suggests the specification of a procedure to avoid ex post opportunism from merging parties and make sure investments and innovation efforts are delivered. Firms should make credible commitments to the European Commission. Guidelines or practice may create a process whereby innovation and investment claims can be verified if consolidation does not obviously lead to the levels of investments promised.
EU merger policy backdrop
How far do Draghi’s recommendations depart from existing law and policy? From a textual perspective, the deviation is clear.
Paragraph 20 of the guidelines allows agency intervention at very low concentration levels if one party is an important innovator. Similarly, at paragraph 38, the guidelines spell out a theory of harm that allows prohibition of a merger or acquisition if two, or even just one of the parties, constitute an “important innovator” or may become an “important competitive force.” As far as grounds for merger clearance are concerned, paragraph 81 of the guidelines devotes only a couple of sentences to innovation achieved through efficiencies.
Besides, merger practice is also heavily biased towards intervention. The past decade has seen an increase of new theories of harm related to innovation. The new theories allow the EC to block mergers on the account that the transaction will reduce rivalry between innovators, either by removing R&D pipelines—such as in the Dow/Dupont case—or by eliminating one important potential innovating force, as in Adobe/Figma. These theories are very speculative. And they’ve not been accompanied by an increase in efficiency theories that would allow merger clearance. For example, the Dow/Dupont decision says that a longer time horizon must be taken into consideration for merger harms, but this extension does not play equally for merger efficiencies. That double standard demonstrates a bias for prohibition.
In addition, the European Commission is tough on efficiency defenses. The number of successful efficiency defenses raised in merger history can be counted on one’s hand. What is more, most of the time, credited efficiencies are not really related to innovation. In merger cases, efficiencies must be rolled into a relevant market- and price-centric framework. At a recent hearing at the European Economic and Social Committee, a representative of the Commission rightly recalled the practice whereby efficiencies are only to be credited if benefits return to harmed consumers through lower prices in the same relevant product market. Under that lens, one cannot accommodate many innovation defenses per definition, as innovation generally leads to initial higher prices to recoup R&D investments. In addition, in a radical innovation context, the relevant market where consumers are harmed will disappear.
Of course, one could say that it’s hard to pinpoint specific cases that were blocked erroneously without considering innovation. But what we have seen in past years is more of a “soft ban” against mergers. The policy stance outlined in the two mandates of Commissioner Margrethe Vestager was to harden the line against mergers, which emerged out of conversations about concerns specific to the U.S. legal, political, and economic system.
For example, much time in these conversations was spent trying to argue that the burden of proof on competition enforcement agencies was too high, which many have argued is the case in the U.S. This was accompanied by bold claims that mergers rarely if ever create efficiencies, and that there is no economic logic to consolidation, only a financial one. Add to this a widespread concern from the European Commission and other agencies about so called “killer acquisitions” without consideration that the issue clusters in one sector of the economy: pharmaceuticals.
All this has led to the development of an attitude of hostility towards technology mergers visible in cases like Booking/eTraveli, Adobe/Figma, Amazon/iRobot and Illumina/Grail.
Draghi’s re-casting
With that backdrop, it is quite clear that the Draghi report invites a substantial reconsideration of merger law. Draghi wants a more consolidation-friendly merger policy. And he appears to call for an even more friendly policy towards consolidation between domestic European firms in sectors key to resilience.
The innovation defense is a clear sign of it. Of course, the practicalities matter, and there are hard issues that will require much intellectual competition policy work from the European Commission. The idea of contracting with merging firms over an investment plan and sanctioning ex post deviations from the plan appears hard to implement. Yet, this could be a mission with which to task the Commission under the New Competition Tool that Draghi supports, which will help the enforcers collect information in their investigations. Similarly, defining some markets by default as European will not win over many votes in the EC. There is, however, probably no need to do this if an effective innovation and investment defense is taken on board. Elaborating predictable and practical legal frameworks that account for dynamic competition and capabilities is what matters.
One final point on the philosophy of the report. Draghi does not view a primary role for competition policy in closing the innovation gap, but a supportive one. The report’s main thread is to improve investment by firms in Europe. If a European Capital Markets Union ever sees the light of day, more money will be available for investment. A vibrant market for corporate control will be key to increase capital spend. Merger policy should not stand in the way.
Bottom line? Draghi’s report is far from business as usual for competition policy. Revamping competition does not mean reinforcing the competition acquis. Neither does it mean less competition policy. It means a different one.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
