European competition policy - merger policy


As the chief enforcer of EU competition policy, the European Commission has the power
to make or break some of the word's biggest companies. So how does the EU evaluate
the economic factors behind approving or rejecting a merger within the EU?
Consider a situation where the European Union Competition Commission is asked to
investigate the grounds for approving or blocking a merger between two European

Examples to think about might include
• Two low cost airlines seeking a merger
• A takeover of one large pharmaceutical manufacturer with another


Static efficiency
- Mergers result in economies of scale and therefore improved
productive efficiency (cost savings)

Dynamic efficiency - Increased profits can be used for R&D into new products and new
production processes (innovation) creating long term dynamic efficiency; provides funds
for capital investment

Role of the capital markets

The capital markets will sort out mergers which eventually fail to deliver the promised
benefits. If unsuccessful mergers occur, corporate raiders are always ready to kick out
the unsuccessful management who are not making enough profit for shareholders
(consequently the share price will fall). Survival of the fittest ensures efficiency by
keeping management on their toes (thereby reducing X-inefficiencies)
It is argued that this is a more effective mechanism than government intervention which
will only make matters worse because of the potential for government failure.

Market Contestability arguments

Growth of interest in the concept of contestable markets complements the free market
approach to mergers. By concentrating on removing entry barriers to a marker,
monopolies and mergers can only remain dominant by producing good products

Investment argument

Lower costs and a bigger combined business may prompt higher levels of capital
investment which is good news for the productive capacity of the EU economy

Globalisation argument

Mergers and takeovers can reinforce and improve the competitive position of EU
companies relative to non EU companies (a countervailing power to dominance of giant
US firms) – important in industries that are becoming truly globalised and where
increasing returns to scale / falling LRAC is an important ingredient of competitive

Enhancing economic integration within the EU

Mergers and takeovers are an inevitable consequence of the creation of a single market
– perhaps the EU competition authorities should take a benign view of mergers if they
have at their core, the aim of creating a business large enough to provide goods and
services to a community of over 370 million people (soon to be close to 500 million in the
wake of EU enlargement)


Mergers and takeovers create monopolies and market dominance
; consumers
are exploited and resources misallocated if there are significant entry barriers inhibiting
competition – leading to market failure and a deadweight loss of economic welfare.

Mergers can deter actual and potential competition. In practice, there are always
barriers to market contestability especially in industries where set up (fixed / overhead)
costs and sunk costs are high

The evidence is mixed as to whether mergers improve companies' performance, either in
terms of profitability, or cost savings – many of the claims for increased efficiency and
economies of scale made prior to a merger prove to be exaggerated over time

Imperfections in the capital markets: The market for corporate control is does not
work optimally. Unsuccessful managements may remain in place for sometime.
Shares are mainly held by financial institutions but whilst they are the owners they do not
run the companies on a day to day basis. This means there is a divorce of ownership and
control with managers pursuing their own interests (salary and welfare) rather than
maximising profits for the shareholders.

Employment effects – mergers and takeovers nearly always lead to rationalisation as
part of a process of cost cutting (more productively efficient) but this may be at the
expense of jobs (possibility of structural unemployment) and fewer outlets / choice for
consumers (an issue of equity)


The vast majority of cases referred to the EU competition authorities are cleared. Less
than 20 have been blocked over the last twelve years.

In July 2001 the European Commission has blocked the $45bn deal between US firms
General Electric (GE) and Honeywell. Although US competition authorities had given their
approval to the deal, the commission was worried that the integration of Honeywell's
avionics and GE's strength in jet engines could lead to dominance of the market.

The EU also blocked a proposed merger between Air Tours and First Choice Travel:
“The proposed operation would create a dominant position in the market for short-haul
foreign package holidays in the United Kingdom, as a result of which competition would
be significantly impeded in the common market”

Main criteria for evaluating the impact of a merger
• The market position of the merged firm (market share and other competitive
• Strength of the remaining competitors
• Customers’ buying power
• Potential competition (is the market contestable?)
Most mergers and takeovers take place in technologically dynamic industries – this has
important implications for competition policy. Will a merger act to enhance or slow down
the pace of innovation and levels of investment. Each investigation has to be considered
on a case by case basis.