This presentation by Pedro Gonzaga and Gabriella Erdei, OECD Competition Division, was made during the discussion “Merger Control in Dynamic Markets” held at the 18th meeting of the OECD Global Forum on Competition on 6 December 2019. More papers and presentations on the topic can be found at oe.cd/mcdym.

1. Merger Control in Dynamic Markets
1
Pedro Gonzaga (Pedro.GONZAGA@oecd.org)
Gabriella Erdei (Gabriella.ERDEI@oecd.org)
OECD Competition Committee

2. Mergers have ambiguous static and dynamic
effects
2
• Any horizontal merger trades-off two effects:
– Short-term elimination of one (potential) competitor
– Realisation of efficiency gains
• The net outcome is ambiguous:
Static effects
• Prices
• Quality (design, safety,
durability, content,
customization, etc.)
Dynamic effects
• Product innovation
• Process innovation
• Investment
In what circumstances is it enough to look at the static effects
of the merger?

3. Merger review in “static” markets that change
little over time
3
• Short-term effects are generally good predictors of long-term
effects.
time
welfare
variation
0
merger
E.g. extraction of natural resources, production of raw materials.

4. Merger review in dynamic markets: scenario 1
4
• Short-term: efficiency gains (parties are not current competitors).
• Long-term: loss of competition in innovation spaces and loss of
future competition in new developed products.
time
welfare
variation
0
merger
E.g. pharmaceuticals, chemicals.

5. Merger review in dynamic markets: scenario 2
5
• Short-term: elimination of a current competitor.
• Long-term: dynamic efficiency effects (e.g. innovation spillovers)
or entry of a new competitor.
time
welfare
variation
0
merger
E.g. News platforms, review websites, technology hardware and
software...

6. In highly dynamic markets, short-term effects are
not always a good indicator of long-term effects
6
Short-sighted merger
control
Risk of Enforcement
Errors
Error Type 1 Error Type 2
 The assessment of effects within a longer timeframe can improve the
precision of merger control in dynamic markets.
But how to adapt merger control to dynamic markets in practice
without increasing enforcement unpredictability?

7. #1 Merger analysis should focus on the
substitutability of products and capabilities
7
Short term Medium term Longer term
• Overlapping
products
• Overlapping
geographical
areas
• Pipeline products
• Projects to enter
new regions
Innovation
capabilities:
• IPRs
• Laboratories
• Skilled labour
• Natural
resources
• Technologies
 Substitutability can be assessed with a diversion ration analysis.
 Limitations of market definition.

8. #2 The evolution of market shares is a better
indicator of competition than static market shares
8
Market A Year 1 Year 2 Year 3 Year 4
Firm 1 50% 49% 50% 50%
Firm 2 50% 51% 50% 50%
Market B Year 1 Year 2 Year 3 Year 4
Firm 1 80% 60% 25% 40%
Firm 2 20% 40% 75% 60%
Which market is more competitive?
In evaluating monopoly power, it is not market share that counts, but the
ability to maintain market share. (United States v. Syufy Enters)

9. #3 The assessment of barriers to entry & exit is
crucial to determine long-term harm
9
• Direct evidence:
• Indirect evidence:
– Repeated past entry and exit is the most reliable indicator.
– Surveys to market participants about their intention to enter are
not always reliable.
Barriers to Entry Barriers to Exit
Entry costs that
incumbent did not incur
Sunk costs

10. #4 Dynamic efficiency effects deserve special
consideration
10
• Efficiencies must be merger specific:
– Can the efficiency be achieved through other means (e.g.
research joint venture)?
• Efficiencies must be passed through to consumers.
– Net innovation pressure test? (Salinger, 2019)
Economies of scale
in R&D
Appropriation of
innovation spillovers
Entrepreneurial exit
Innovation Incentives

11. #5 Dynamic markets may require flexible
remedies
11
Examples of trigger events
Entry / lack of entry of a new competitor within an established timeframe
Development of a new technology that addresses competitive concerns
Variation in market shares, prices or investment beyond a threshold
Expiration / attribution of intellectual property rights
Regulatory reform that changes competitive conditions
Structural remedies Behavioural remedies
Conditional on market
evolution?
Review clauses?

12. Merger Control in Dynamic Markets
12
Pedro Gonzaga (Pedro.GONZAGA@oecd.org)
Gabriella Erdei (Gabriella.ERDEI@oecd.org)
OECD Competition Committee