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EU Commission workshop on digital mergers: between theory and practice

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At the end of 2022, the European Commission held a workshop on concentrations in digital markets — a good opportunity to know more about the theoretical framework and the methodology to study merger cases, and to highlight a few of the challenges posed by mergers occurring in digital markets where platform usage and ecosystems often intertwine and overlap. As such, cases like "Google-Fitbit," "Meta-Within," and currently, "Microsoft-Activision," - a case of interest for a video game lover like me - were discussed during the workshop to sometimes illustrate the core concepts underlying an in-depth merger inquiry (and more broadly, concentrations).

In this article, I try to break down these concepts discussed during the Commission's workshop. As a disclaimer, I'm neither an advisor nor a lawyer; the sole purpose of this article is, I hope, to make essential competition policy concepts more understandable. This breakdown is based on the first panel of the workshop, titled "From conglomerate effects to ecosystems competition: A discussion on the applicable framework" as well as some additional research into European legislation on my part.

The full video of the workshop is available on Youtube.

Table of Contents

The Relevant Market

In both the European Union and the United States, regulators are required to define the relevant market when studying a merger case. In the United States, the Congress forces the Federal Trade Commission to define the relevant market for competition assessments. In the EU, it's "in principle" mandatory to define the relevant product and geographic markets.

If giving a definition of the relevant market matters so much, it's because it serves as the starting point for the regulator's analysis, from which many other analytical tools are derived, including "market shares", used in assessing market power and market concentration. It is indeed, impossible to calculate market shares or to assess market concentration without first defining the boundaries of that market.

Definition in European Law

EU legislation provides a clear definition of the relevant market, which was refreshed in 2021 to precisely take into account the specificities of digital markets1.

The relevant market combines the product market and the geographic market, defined as follows:

  • A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics, their prices and their intended use.
  • A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently similar.

A complex application in digital markets

The relevant market is thus defined on two dimensions: products and geographic scope. The definition may appear straightforward, but in practice, defining the relevant market does not necessarily come easily.

It can be particularly tricky for merger reviews in the digital industry, where regulators are faced with an inherently innovative and ever-changing market. The definition of the relevant market given by the regulator can prove to be obsolete in a few years, and it can be quite challenging to determine the substitutability of ecosystems, products, and services when their functionalities and uses are intertwined, combined, and when users engage in multi-homing2.

The workshop panel members note that while defining the relevant market is a necessary first step in the analysis, it should not hinder the regulator's inquiry. As such, in many cases, the definition of the relevant market is left open because it is of little importance: when no competition issues are identified, regardless of the way the relevant market is defined, or in market configurations that raise competition concerns in all its possible definitions. When a concentration case falls in between these two "extreme" scenarios, the relevant market must be precisely defined on a case-by-case basis.

Understanding the rationale behind the deal

The regulator will then try to understand the reasons behind the concentration: "Why did the stakeholders decide to carry out the transaction?" Understanding the rationale provides insight into how the stakeholders view the market, what changes they anticipate, and how they plan to adapt to these changes. The findings from this part of the inquiry may even lead to a redefinition of the boundaries of the relevant market.

Internal documents: reducing information asymmetry

Setting out the true reasons behind a concentration is not straightforward either. The actual motives may be kept strictly private, beneath the reasons publicly announced by the stakeholders. To eliminate as much information asymmetry as possible, the regulator must review the internal documents of the companies.

Any document related to acquisition audits and/or target valuation that contain estimates about the deal can be relevant3. Also, internal documents intended for the board of directors can reveal how each stakeholder communicates and promotes the concentration to a public with a financial interest: shareholders.

Establishing the counterfactual

This mix of qualitative and quantitative information will be used to establish a counterfactual. Simply put, the regulator will seek to understand what would have happened to the acquirer, the target and the rest of the market in the absence of the transaction, "absent the merger".

For example, the review of internal documents may reveal that studies have been conducted or commissioned by the acquirer regarding a "Plan B", alternative solutions prior to the concentration. The regulator, based on the development of an alternative scenario, may find out that supply or prices would be different absent the merger. All these elements will contribute to the regulator's counterfactual analysis, which is key to assess the impact of the deal.

Alternative solutions considered by the acquirer

In the workshop organized by the Commission, two cases are discussed:

  • The case where the acquirer would have considered building the product/service before opting for an acquisition
  • The case where other target companies were considered by the acquirer
Bought vs. built

To enter a market, the acquirer may have considered building the product "in-house" before resorting to the acquisition of a target company, most likely one that possess strategic and valuable assets (like brands, intellectual property, expertise, etc.).

The Head of the Concentrations Department C.5 (DG Comp, EU Commission) points out that sometimes, despite already possessing all the assets necessary to enter a new market through a "built" product, the acquirer will opt for an entry through an acquisition. THis is particularly true for digital markets which are quickly evolving and in which buying is considered faster than building.

If the acquirer had initially planned an "in-house" strategy before resorting to buy the target, then there was an alternative to the concentration. The regulator may consider that in the absence of a concentration, the elimination of a competitor would have been avoided, with the acquirer actually becoming a future competitor to the target.

The acquisition of alternative targets

The acquirer's internal documents may also reveal studies conducted on targets other than the one under consideration for the competitive assessment: the regulator will take note of the specificities of the target chosen for the deal. This target company can then be compared to other targets considered by the acquirer: what assets, skills, products/services offered, and market positioning (upstream, downstream, neighboring) led the acquirer's choice?

Alternatives considered by the target

The Head of the Concentrations Department also points out that while understanding the acquirer's alternative plans is important, understanding the alternative plans for the target company is also necessary.

  • What was the target's strategy and vision absent the merger?
  • How did the target plan to grow in the future?

Questions may also arise regarding the ways and means behind the concentration, the "how": the procedure, the existence of a bidding process and/or other interested buyers, and if applicable, are to what extent the different acquisition proposals are comparable.

Using all these elements in the counterfactual analysis, the regulator will assess the impact of the concentration scenario by comparing it to alternative futures in the absence of the concentration. Such is the method used to determine whether a concentration case raises competition concerns or not.

Theories of harm : identifying and setting out anticompetitive effects

In the competitive assessment, it is also necessary for the regulator to ensure that there are no anti-competitive strategies behind the concentration.

In these strategies, the acquirer or the merged entity will mobilize market power, a fundamental concept in competition policy. A company with significant market power has some degree of dominant position and can choose to abuse this dominance: it all depends on its intentions. The regulator is first interested in the capability of a company to abuse its dominant position, which is a direct consequence of its market power, and the source of competition problems.

If the concentration raises competition concerns (which is likely the case if the transaction is subject to an in-depth competitive assessment), the regulator (at least, in the case of the DG Comp) conducts a double check:

  1. Checking the capability and interest of the concentrated entity to engage in anti-competitive practices.
  2. Checking the kind and extent of the impact of the anti-competitive effects caused by the transaction.

To set out the effects of the transaction, regulators rely on theories of harm. A first typology of these theories of harm was discussed during the workshop.

Protecting the castle vs. expanding the kingdom

This expression from the Deputy Director of the Bureau of Competition (the division responsible for antitrust enforcement at the FTC) helps to capture the two "main" strategies that may motivate concentrations and raise competition concerns.

Defensive strategies

In the 'protect the castle' strategy, the concentration aims to protect the acquirer's core market. Two "recipes" for this kind of strategy were addressed by the Director of the Concentrations Department at DG Comp during the workshop.

Increasing barriers to entry

In the case of entry barriers, the acquisition of any types of assets can be useful to the acquirer, as long as their acquisition makes an entry into the main market more costly for new challengers. Under these conditions, the acquirer's main market is no longer contestable.

Article 36 of the "Guidelines on Horizontal Mergers"4, was mentioned during the workshop and details the principle of entry barriers in the context of mergers:

For instance, the merged entity may have such a degree of control, or influence over, the supply of inputs or distribution possibilities that expansion or entry by rival firms may be more costly. Similarly, the merged entity's control over patents or other types of intellectual property (e.g. brands) may make expansion or entry by rivals more difficult. In markets where interoperability between different infrastructures or platforms is important, a merger may give the merged entity the ability and incentive to raise the costs or decrease the quality of service of its rivals.

The regulator will also need to take the "time" aspect into account, in the competitive assessment, and make a distinction between short-term and longer-term effects. Sometimes, the operation can prove to be beneficial for the market in the short term, and harm competition in a longer term.

Killer acquisitions

This is another operating mode for a defensive strategy. This strategy involves acquiring a nascent and innovative target, which would otherwise:

  • Have become a future competitor in the acquirer's core market,
  • Or, would have been acquired by another firm from a different market, that may seek to enter the core market through an acquisition (cf. build vs. buy)

Offensive strategies and market foreclosure

The DG Comp stated that for now, they primarily deal with offensive strategies, such as 'expanding the kingdom' (or, in the context of digital markets, 'expanding the ecosystem'), which involves using its market power in the core market to expand into other markets, upstream or downstream (vertical concentration, vertical effect), or adjacent to the core market (conglomerate concentration, conglomerate effect), through an acquisition.

The risk of market foreclosure can be significant in the case of vertical concentrations in which the acquirer or the resulting merged entity holds a dominant position: if they concentrate such market power in the supply chain, then they potentially have the capability to restrict access to certain companies.

There are many forms of foreclosure, but in the context of the workshop organized by the Commission, the Deputy Director of the Bureau of Competition (FTC) mentioned the '3Ds' of market foreclosure: deny, delay, degrade. The merged entity can restrict access to a service, brand, infrastructure, technology, functionality, or product by:

  • Completely denying access/supply to competitors.
  • Delaying access to a functionality or the supply of a product (data, brand, intellectual property).
  • and/or degrading the quality of that access.

The regulator will also ensure that competitors will be able to adapt and survive in the market if the transaction takes place. Will other companies in the market still be able to compete on price? Non-price factors? Is it still possible to differentiate from competitors?

These possible counter strategies are assessed (on a case-by-case basis, as each digital merger case comes with its own twists) and are an integral part of the competition investigation. They can account for half of the answer to the ultimate question of the inquiry: 'Should this concentration case be approved?'

Remedies: when the operation raises competition concerns

By the end of the competitive assessment, the regulator takes a decision on the concentration case. There are three possible options:

  • Approval
  • Prohibition
  • Approval of the project under conditions

The fact that a transaction raises competition concerns does not necessarily mean that it will be prohibited by the regulator. Solutions exist to address the risks identified in the transaction, and these are referred to as 'remedies.' Remedies are the conditions under which the transaction can be approved. There are two types of remedies: behavioral remedies and structural remedies. In any case, the remedies must be proportionate to the competition concerns identified in the competitive assessment.

Behavioral remedy

In the case of behavioral remedies, in order for the transaction to be approved, the acquirer is required by the regulator to comply with commitments. The regulator will then have to monitor the proper implementation of these commitments, and sanction any breach.

Structural remedy

Structural remedies primarily involve the irrevocable divestiture of at least a portion the assets of the merged entity: intellectual property, trademarks, and other resources necessary for conducting business that raise a competition problem.

Competition authorities express a preference for structural remedies: the commitments of the merged entity can be limited in time and, more importantly, violated (which would require the regulator to mobilize its teams again for enforcement), whereas a structural remedy offers more certainty and more guarantees. Therefore, a structural remedy is a powerful tool with irreversible effects, carefully wielded by the regulator.

Conclusion

During the review of a concentration, some of these concepts can be used iteratively. For example, the regulator may provide an initial definition of the relevant market and later modify its scope based on the evidence discovered during the inquiry.

The general pattern of "filing, inquiry, decision/litigation" is similar across the competition authorities. It's what happens within this framework that can vary, as each authority has its own methodology. The concepts broken down here should be seen as tools for structuring the inquiry and precisely identifying the risks of the concentration case at stake. A more detailed and well-defined theory of harm means it will be easier to accurately proportionate the remedy.

Footnotes

  1. Definition of relevant market, EUR-Lex. The original definition is from 1997. The updating of that definition follows a consultation period with national competition authorities and other interested stakeholders to incorporate changes brought by the emergence of platforms and ecosystems on the one hand, and parameters other than price that companies use to compete, on the other. ↩

  2. Multi-homing refers to a situation in which users tend to use several competing platform services in parallel. European Commission, Directorate-General for Communications Networks, Content and Technology, Barcevičius, E., Caturianas, D., Leming, A.et al., Multi-homing – Obstacles, opportunities, facilitating factors : analytical paper 7, Publications Office, 2021 ↩

  3. If the investigation reveals that the two parties involved in the transaction have already, at least partially, implemented the concentration before a decision by the regulator, the practice will be interpreted as "gun jumping" and subject to sanctions. ↩

  4. Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings" (2004/C 31/03), EUR-Lex. Horizontal mergers refer to the merger of companies that supply similar types of products. ↩

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