Quantifying the effects from horizontal mergers in European competition policy

Abstract

This paper starts from a recent case to study how merger analysis in Europe may be potentially improved. Starting from the geographic market definition in the Merger Decision, we formulate and estimate an oligopoly model with differentiated products. Based on the estimates, we compare several alternative market power tests: a hypothetical market power test, an actual market power test and a comparative market power test. Our comparison of these alternative tests illustrates that the recently introduced empirical techniques need not be in conflict with traditional policy practices in Europe, but should be seen as a natural extension of commonly accepted principles. Furthermore, we emphasize the importance of our dynamic comparative market power test in the European context. According to this test, the relevant point of comparison when assessing a merger is not the status quo, but rather a relevant alternative merger scenario that is likely to happen in the event the merger is rejected. In a European context, the choice is often to accept a sequence of regionally based mergers or rather a sequence of pan-European mergers. Finally, we also emphasize the importance of constructing confidence intervals when computing the predicted merger effects, especially if one is interested in testing the hypothesis that a merger has no effects.