Merger Control - Horizontal Mergers

Horizontal Mergers

The vast majority of significant competition issues associated with mergers arises in horizontal mergers. A horizontal merger is one between parties that are competitors at the same level of production and/or distribution of a good or service, i.e., in the same relevant market.

There are two types of anticompetitive effects associated with horizontal mergers: unilateral effects and coordinated effects.

Unilateral effects, also known as non-coordinated effects, arise where, as a result of the merger, competition between the products of the merging firms is eliminated, allowing the merged entity to unilaterally exercise market power, for instance by profitably raising the price of one or both merging parties’ products, thus harming consumers.

In homogeneous markets, unilateral effects can be pronounced when two significant competitors merge to create a large, dominant player with only a few or no other competitors. In these markets, an important role in the assessment is played by market shares and by the capacity available in the market. In differentiated markets, unilateral effects tend to arise particularly when the two merging companies have highly substitutable goods. Such a price increase does not depend on the merged firm being the dominant player in the market. The likelihood and magnitude of such an increase will instead depend on the substitutability of the products supplied by the two firms – the closer the substitute, the greater the unilateral effects.

Coordinated effects arise where, under certain market conditions (e.g., market transparency, product homogeneity etc.), the merger increases the probability that, post merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices. As in the case of unilateral effects, the most common form of coordinated effects is in the case of horizontal mergers, i.e. mergers between firms active on the same market.

The main question in analysing coordinated effects should be whether the merger materially increases the likelihood that firms in the market will successfully coordinate their behaviour or strengthen existing coordination. The task is to identify what factors are likely to lead to coordination taking place between firms post-merger. This was a controversial area with which competition authorities and courts have struggled to come to terms over the years, but experience has led to the emergence of some agreement on what conditions are most likely to give rise to coordinated effects.

Under the European Union merger control regime, in order for coordinated effects to arise the so-called "Airtours criteria" have to be fulfilled.

According to the "Airtours criteria", coordination is more likely to emerge in markets where it is relatively simple to reach a common understanding on the terms of coordination. In addition, three conditions are necessary for coordination to be sustainable. First, the coordinating firms must be able to monitor to a sufficient degree whether the terms of coordination are being adhered to. Second, discipline requires that there is some form of credible deterrent mechanism that can be activated if deviation is detected. Third, the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be able to jeopardise the results expected from the coordination.