This presentation by Helder Vasconcelos, Vice-Rector at Porto University, 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. 1
CHALLENGES FOR MERGER CONTROL
IN RAPIDLY-EVOLVING SECTORS
Helder Vasconcelos
University of Porto
Paris, 5-6 December 2019

2. Outline:
I. Mergers and Incentives for Investment & Innovation
II. Problems with Merger Control in Dynamic Markets
III. Ex-post Evaluation of Merger Decisions
IV. An application: the New Digital Ecosystem
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3. I. Merger Incentives for Investment & Innovation
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4. Best environment for innovation?
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• Arrow (1962): Competition spurs innovation
• A monopolist has less incentives to innovate
• Schumpeter (1942): Innovation driven by large firms with mkt power
• Monopoly power encourages R&D efforts
• Market concentration increases rewards for innovators
• Shapiro (2013): Arrow and Schumpeter are not in contradiction!
• Innovation is fostered by ex-ante competition and ex-post
appropriability (possibility to profit from innovation)
• Empirical research on the link btw mkt structure and innovation is
inconclusive… But points to a positive effect of competition on
productivity thanks to higher investments.

5. Mergers and Investments
• Competition authorities need to look not only at prices, but also at
whether the merger will lead to higher investment/innovation…
• By sorting out good mergers (that create more efficient and innovative
players) from bad mergers (that increase prices and decrease investments),
merger control has a positive effect on growth.
• The EC has had to investigate a stream of mobile mergers
• MNOs claim 1: Scale economies
• MNOs claim 2: consolidation will raise profits, giving firms the money
they need for investments in infrastructure
• But empirical evidence suggests that it is competition which gives
incentives to invest/innovate…
• And if there are scale economies to be reaped, better Network Sharing
Agreements which preserve retail competition…
• For a formal treatment, see Motta and Tarantino (2018), and also
Denicolò and Polo (2018) and Federico et al. (2017). 5

6. II. Problems with Merger Control in Dynamic
Markets
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7. Sequential Mergers: how far should AAs look?
• If several mergers take place in the same industry…
• Each of them by itself may have a small negative impact, but altogether
may have a strong impact.
• Yet, competition law requires approval decisions in isolation.
• What’s the relevant timeframe in merger control?
• Approving a currently proposed merger may affect profitability and welfare
of potential subsequent mergers…
• The type of AA matters! (Motta and Vasconcelos (2005))
• Efficiency offense arguments do not find justification under a forward-
looking AA scenario…
• If merger gives rise to very high cost savings, competitors expected to
react (and merge as well) so as to attain similar cost savings, rather
than wait to be forced out of the market…
• Related work: Nocke and Whinston (2010) 7

8. Dealing with data in merger control
• Security and protection of users’ data and privacy:
• Safeguarding personal data should play a role in merger reviews.
• Privacy increasingly represents a non-price dimension of competition
• The advent of “Big data”
• Collection, storage and analysis of datasets that have large volumes
• Internet has made information about individual consumers more
accessible but also more commercially valuable (e.g. for price
discrimination purposes or to improve quality of products supplied)
• Data is also a commodity (e.g. advertisers purchase datasets)
• The amplification of data-driven network effects, especially in the
context of multi-sided platforms, may entail market tipping, potential
exacerbating winner-takes-all-outcomes…
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9. Dealing with data in merger control
• Combining datasets through a merger
• Allows merged entity to gain new insights about individual consumers
and may facilitate price discrimination so as to extract CS…
• Does this combination create undue market power in the market for
consumer data?
• Vertical concerns: risk of foreclosing rivals access to data
• Gives control of consumer data to an entity with which the consumer
did not choose to interact…
• Is there an horizontal overlap btw merging parties in the market for data?
• Merged entity should not have unique access to data.
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10. Notification issues: need to adjust criteria?
• One of the challenges of competition policy in the digital era is to avoid the
risk that pre-emptive mergers escape AA’s merger control…
• Reason: when turnover of the target firm is small, legally established
notification thresholds are not met…
• Problem: may create incentives for incumbents to acquire potential
competitors early on…
• Current discussion on the need to reform notification thresholds
• Allowing investigation of mergers involving target firms with low
turnover but large market capitalisation.
• Germany and Austria: expanded notification thresholds by introducing
transaction value thresholds…
• ‘killer acquisitions’ – large companies buying up promising smaller firms
(lacking money/marketing/production capacity) not to exploit
synergies/complementarities but to eliminate potential competition
(prevent a new entrant from developing into a powerful competitor)… 10

11. What’s the overall effect of killer acquisitions?
• Do pre-emptive mergers hurt innovation enough?
• (-) If the practice prevents new/better products/services to reach
consumers, prices of existing ones can be kept high(er)
• (+) The prospect of “innovation for sale” strategies motivates smaller
firms to be more innovative (aiming at capturing incumbent’s profits)…
• Merger policy strictness affects the type of innovation (Cabral (2019))
• A lenient merger policy towards the acquisition of fringe firms by
dominant firms leads to higher incremental innovation
(competition in the market) rates and lower radical innovation
(competition for the market) rates
• But the fact that innovation rates increase does not necessarily
imply that welfare increases…
• Demand model with more structure needed to estimate the
welfare effects of innovation.
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12. Remedies: increasingly complex & uncertain
• DG COMP Annual Activity Report (2017) – in the period 2007-2011:
• 3457 mergers notified
• Only 8 merger prohibited!
• Average EC’s intervention rate: 7%
• According to Federico (2018), over the period 2011-2017:
• 37% of the 116 merger remedies: standard divestitures
• 34%: complex divestitures (carve-outs, rebranding and IP divestitures)
• 16%: access remedies
• EC has been resorting to increasingly sophisticated remedies
• Standard divestitures representing a minority of cases…
• Being complex and untested, remedies, carry uncertainty
• May not correct the anti-competitive effects of the merger
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13. Remedies: increasingly complex & uncertain
• Cases wherein more creative solutions are needed
• E.g. carve-outs within assets of merging parties, access remedies, staff
and contract carve-outs to create competitors
• Need to access not only the scope but also viability/competitiveness of
the purchaser (identify a good buyer).
• Example: Capacity-based MVNO in EU mobile mergers
• Innovative but never tested in practice
• Future-proofness: (i) difficult to assess in a rapidly changing
industries; and (ii) contractual clauses may change completely the
nature of the remedy
• AAs redesign the industry with such remedies…
13

14. III. Ex-post Evaluation of Merger Decisions
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15. Ex-post assessments needed!
• Why is it so important? – OECD (2016, 2014):
• Did the intervention (or non-intervention) achieve its objectives?
• Test effectiveness of predictive techniques used in merger analysis;
• Make outcome of interventions more transparent (accountability).
• Identify errors and learn with them:
• Type 1: unconditional clearances of anti-competitive mergers
• Type 2: intervention in pro-competitive mergers
• Some (additional) difficulties in rapidly changing environments:
• Dynamics of the industry: new services, increasing quality, changes
in demand over time, complex pricing menus, etc.
• Need for a credible counterfactual: control group selection
• Importance of non-price effects: investment, quality, entry, etc.
calls for qualitative methodologies as a complement. 15

16. III. The New Digital Ecosystem
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17. The new Digital Ecosystem
• The new digital value chain
• Layer 1: Equipments
• Layer 2: Networks (“Classical” Telcos)
• Layer 3: Services (Apps & Contents)
• Dynamic market with new players popping up and old ones sliding down
• Complementarity between infrastructure products and content services
• Decreasing traditional sources of revenues for Telcos due to OTT substitution
• It is unclear to what extent can telcos monetise on new services (with the possible
exception of IP-TV)
• What about incentives to invest/innovate?
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18. Multi-sided Platforms
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P1
ISPs/OTTs
P2
Indirect Network
ExternalitiesSide 1 Side 2

19. Multi-Sided Platforms II
• ISPs cater to consumers and content providers
• OTTs link consumers and advertisers
• Other Examples:
• Media Companies (e.g. newspaper, TV broadcaster) delivers content to
users and eyballs to advertisers, charging users for participation (pay
TV) or activity (video on demand, traditional newspapers) and
advertisers for adds.
• Cable TV: a more complex case
• High value content providers (e.g. premium sports) can typically
demand high payments from the cable operators
• Providers of content that is valued less may need to pay the cable
operator to have their content transmitted…
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20. Multi-Sided Platforms III
• Multi-sided platforms may charge multiple prices on diferent
markets
• Biased pricing structures…
• A zero price does not mean there is no market…
• Two players at the OTT or ISP layer may belong to the same
relevant market even if one (or both) have zero prices on the side
of the market they interact
• There are potential pitfalls when applying traditional
competition tools to electronic communication markets…
• E.g. Should below-cost pricing in two-sided markets worry
antitrust agencies? (Evans and Schmalensee (2016))
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21. Challenges for Merger Control
• When defining markets, demand substitutability should be the key
criterion for market definition
• If multiple technologies/services can be used for the same
purpose, all providers of these different technologies/services
are competing in the same market
• A SSNIP test for mobile voice services must take all relevant
substitution possibilities into account:
• Consumers may switch to OTT services if they experience a price
increase for traditional voice services
• They may also substitute parts of their calls by messages (SMS or
substitute services by OTTs such as WhatsApp)
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22. Challenges for Merger Control
• Does fierce competition destroy or enhance investments?
• Is consolidation needed for investments to occur?
• Can economies of scale be reaped at a national level?
• Trade-off between investment and regulatory intervention?
• Competition authorities need to have a broader perspective
• Analysis of the merger induced effects on investments and on
prices should not be restricted to the layer where the merger
occurs
• Dynamic perspective needed: innovation effects across layers!
• Competition authorities and NRAs should use their instruments in a
coordinated fashion
• E.g. Merger remedies design…
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23. 23
CHALLENGES FOR MERGER CONTROL
IN RAPIDLY-EVOLVING SECTORS
Thank you!
5-6 December 2019, Paris