Abstract
The Directorate General for Competition at the European Commission enforces competition law in the areas of antitrust, merger control, and state aids. In this year’s review of the recent economic work undertaken at DG Competition we focus on two themes: the modernisation of state aid (with a specific focus on the Aviation Guidelines); and the application of economic techiniques to remedies evaluation in mergers (with a number of case studies).
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Notes
The previous Commission completed its mandate on November 1, 2014. After that, Commissioner Margrethe Vestager replaced Commissioner and Vice-President Joaquín Almunia as responsible for the competition portfolio.
We remind our readers that the European Commission has competence over state aid given by Member States (in whatever form, be it subsidy, guarantees, loans at lower than market rates, or any other state intervention that may distort competition and affect trade between Member States), and that the Commission can order recovery of aid that has deemed illegal, with the aim of restoring the situation that prevailed before the aid was granted.
European Parliament and Council Directive 2014/104/EU of 26 November 2014 on certain rules governing actions for damages under national law for infringements of competition law provisions of the Members States and of the European Union, OJ L 349, pp. 1–19 available at: http://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=OJ:JOL_2014_349_R_001&from=EN.
The enforcement data described below is reported in DG Competition's 2014 Annual Activity Report (available at: http://ec.europa.eu/atwork/synthesis/aar/doc/comp_aar_2014.pdf).
This figure represents the Commission's output in State aid, including final decisions as well as formal openings of investigations (i.e., "in-depth" assessment), administrative closures, monitoring cases, etc.
The last piece of the SAM that has not yet been adopted is the Communication on the Notion of Aid: a document that will provide guidance on how to identify public measures that are considered to fall within Article 107 (1) and thus constitute "state aid" that is subject to the Commission's scrutiny.
See Buehler et al. (2014).
See, for example, Verouden (2015).
See Criscuolo et al. (2012).
Special Report No 21/2014: EU-funded airport infrastructures: poor value for money.
The 2012 ACI Europe Economics Report shows that whilst 51 % of Europe's airports with more than 5 million passengers were loss-making (including non-operating income), this share reached 73 % for airports with fewer than 1 million passengers. The latest 2014 ACI Europe Economics Report shows that with respect to net profits, 77 % of small European airports (below 1 million passengers) were loss making in 2014 compared to 17 % of airports with 5–10 million passengers, 24 % of airports with 10–25 million passengers, and 0 % for the largest airports (above 25 million passengers).
"Poland Is Building an International Airport at a Former CIA Black Site", Bloomberg, 20 May 2015. "Special Report: EU funds help Poland build 'ghost' airports", Reuters, December 2014. "Regionalflughäfen siechen am Tropf von Politik um Airlines", WAZ, 22 March 2015. "Aéroports: le grand gaspillage?", FranceTVInfo, 7 May 2015.
For airports with fewer than 700,000 passengers, the threshold is increased to 80 %; and after 5 years, the Commission will re-assess the situation.
The overall strategy of the airport to achieve profitability over the long run when setting prices is also taken into account (Paragraph 66 of the Aviation Guidelines).
The case had started in 2007 with the notification of regional aid to be granted to Propapier, a paper manufacturer, for the construction of a paper mill. The aid was found compatible; but, following an appeal by Smurfit Kapa (a competitor), the Court annulled the decision on the grounds that the Commission had failed to substantiate sufficiently its analysis of the balancing between the negative and positive effects of the aid, and therefore, it "did not put itself in a position to overcome all doubts as to the compatibility of the aid in question with the common market." [Case T-304/08]. The Commission re-assessed the case; and in October 2014 it re-adopted a compatibility decision with regard to the regional aid. In addition, it adopted a second decision that found that the fees that were paid by Propapier for the use of a waste-water plant (and surrounding infrastructure such as a parking lot) that was built by the German state did not involve any state aid as the fees incrementally contributed, from an ex-ante perspective, to the profitability of the waste-water plant operator. The waste-water plant had not been built specifically for Propapier, and its use was open to all.
General aviation refers to civil aviation operations other than scheduled air services (e.g., gliders, training, business jets, etc.).
In order to avoid a reduction in competition following a merger, a competition authority should accept a complex divestiture that, for example, allows for some links to remain in place between the divested assets and the merged entity, only if it is satisfied that such a complex remedy is sufficient to remove the competition concerns. Therefore, the fact that a “clear-cut” divestment may not be feasible in a given case is not in itself a reason to accept a complex divestment in order to approve the transaction.
If the required access arrangements involve inputs that account for a substantial part of the value of the divested business, and if they last for a significant amount of time, then the divestiture remedy should in practice be regarded as similar to an access remedy. The line between a complex divestiture and an access remedy is in practice blurred, and to some extent a matter of definitions. Moreover, even an access remedy can be designed in a way to make it quasi-structural in terms of its impact on the market; and therefore, depending on the design, it can be looked at as a complex divestiture (on the basis of terminology used in this article). This is how the remedies that were accepted by the Commission in the mobile mergers that were cleared in 2014 are dealt with in this article.
For simplicity, in this illustration product A2 is assumed to be produced in a single-product plant. In practice, product A2 too may be produced in a multi-product plant, and therefore any divestment remedy would raise the issue of how to deal with multi-product assets.
Recent examples of recent complex divestitures in Phase II include Munksjo/Ahlstrom, Syniverse/Mach, Ineos/Solvay, Hutchison/Telefonica Ireland, Telefonica Germany/E-plus, and Huntsman/Rockwood.
Another possible concern is that the supply relationship between the divested business and the merged entity may increase transparency in the market, and thus lead to a risk of coordinated effects. We do not address this possible concern in this article.
The counterfactual in the absence of the merger would be instead a situation where two upstream suppliers of U1 and U2 are each vertically integrated downstream (with A1 and A2 respectively), and compete in the downstream market.
See for example Reisinger and Tarantino (2015). An important assumption to generate foreclosure incentives in this setting is that the merged entity can only contract on wholesale terms with the new owner of A2, but cannot pre-commit to its own retail output and prices. This assumption is realistic in a remedies setting since an agreement between the merged entity and A1 on retail prices or quantities would be effectively equivalent to collusion in the downstream market, and it would therefore not be legal. Under the assumption that the merged entity cannot pre-commit to retail outcomes, once the wholesale contract between the merged entity and A1 has been agreed upon, A1 and A2 compete in the downstream market on the basis of the respective upstream costs.
This result is formally shown in Reisinger and Tarantino (2015) under the assumption of retail quantity competition.
Reisinger and Tarantino (2015) also consider the case with product differentiation and downstream cost asymmetries. This paper shows that under retail quantity competition the wholesale price charged to the independent downstream firm remains above cost if the cost difference between the downstream firms is not too large. Under retail price competition, the wholesale price charged to the downstream firm is always above cost.
See Moresi and Salop (2013).
This suggests that if a full un-remedied merger between A1 and A2 is predicted to result in strong upwards pricing pressure (say, because of the presence of high diversion ratios and/or high margins), by the same token the dependence of A1 on the merged entity is also likely to result in strong partial foreclosure incentives, and significant upwards pressure on downstream prices.
This assumes that whilst regulation is effective in determining wholesale prices it may be less effective (or not effective at all) in determining quality. This question has been analysed extensively in regulated industries, including telecoms and energy.
In the context of a competitive asset divestment process, the profits that are earned by B as a result of having access to the input U1 at cost would be effectively captured by the new owner of the divested assets A1 as part of the negotiation of the purchase price for the divestment (on the assumption that the terms of the input contract between A1 and B and of the purchase price for asset A1 are jointly negotiated with the merged entity).
COMP M. 6576, Munksjö/Ahlstrom, Decision of 24.05.2013.
Determining that access should be provided at cost does not of course address the risk of non-price discrimination (e.g. in the form of quality degradation), as discussed in the previous sub-section.
M.6905, INEOS/SOLVAY/JV, Decision of 08.05.2014. The competitive assessment and economic work undertaken in this case was described in Buehler et al. (2014).
The smaller of the two parties in the INEOS/Solvay joint venture (Solvay) was vertically integrated: hence the need for the remedy to replicate the competitive constraints that were maintained by a vertically integrated player.
M.6992 HUTCHISON 3G UK/TELEFONICA IRELAND, Decision of 28.05.2014.
The concern here is therefore not about setting the right price for the capacity that is made available, but rather to ensure that the level of capacity that is offered is sufficient over time, in order to avoid binding capacity constraints (which would lower the incentives to compete of the capacity-based MVNO).
A more traditional concern that is often associated with quasi-structural access remedies is how to ensure that the new entrant can effectively differentiate its offers from the merged entity, in particular in terms of non-price dimensions.
It is also relevant to note that the structural elements that have been included in the remedies for some of the recent mobile mergers (e.g. H3G/Orange Austria, and Telefonica Germany/E-plus) have not resulted to-date in structural entry.
This issue was encountered in a number of recent Phase II merger assessments, including the mobile telephony mergers that were cleared in 2014 and Ineos/Solvay.
Note that the existence of partial foreclosure reduces the willingness to pay for asset A1. Whilst the seller is harmed by the lower proceeds that are associated with the sale of the divested assets, this loss is more than compensated by the benefit from a reduction of competition downstream.
References
Buehler, B., Koltay, G., Boutin, X., & Motta, M. (2014). Recent developments at DG competition: 2013–2014. Review of Industrial Organization, 45(4), 399–415.
Buettner, T., Federico, G., Magos, D., & Kuhn, K.-U. (2013). Economic analysis at the European commission 2012–2013. Review of Industrial Organization, 43(4), 265–290.
Criscuolo, C., Martin, R., Overman, H., & Van Reenen, J. (2012). The causal effects of an industrial policy. http://www.nber.org/papers/w17842.
Moresi, S., & Salop, S. (2013). vGUPPI: Scoring unilateral pricing incentives in vertical mergers. Antitrust Law Journal, 79(1), 185–214.
Reisinger, M., & Tarantino, E. (2015). Vertical integration, foreclosure, and productive efficiency. RAND Journal of Economics., 46(3), 461–479.
Verouden, V., “EU State aid Control: The quest for effectiveness”, input statement for the workshop “An Enquiry into the Forces Shaping Subsidy and State Aid Laws” (SHAPE), University of Birmingham, May 18–19, 2015.
Acknowledgments
The views expressed in this article are personal, and do not necessarily represent those of DG Competition or of the European Commission. We are grateful to Benno Buehler, Thomas Buettner, Emanuele Tarantino and the Editor (Larry White) for several helpful comments on this article.
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Federico, G., Motta, M. & Papandropoulos, P. Recent Developments at DG Competition: 2014. Rev Ind Organ 47, 399–423 (2015). https://doi.org/10.1007/s11151-015-9489-5
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DOI: https://doi.org/10.1007/s11151-015-9489-5