A Dynamic Framework for the Assessment of Horizontal Mergers

EXECUTIVE SUMMARY

Firms compete not only on prices or quantities but also along longer-run dimensions such as entry and exit, product differentiation, investment in capacity and quality, and development of new technologies, products and services. These more dynamic decisions matter across both high-tech and traditional industries. As a result, mergers can affect consumer welfare through both short-run price effects and changes in firms’ ability and incentives to invest, innovate and reposition over time. Assessing such dynamic competition requires analysing both demand- and supply-side conditions, including investment drivers and strategic constraints.

As markets become more complex and dynamic, policymakers, academics and stakeholders hold a broad consensus that merger control must keep pace with these changes to fully account for dynamic competition. Merger control should not remain anchored in static concepts focused on prices and market shares that risk overstating harm in some cases and understating in others.

The European Commission (the “Commission”) is currently revising its Horizontal Merger Guidelines (“HMG”). With this report, we offer a conceptual framework to support the Commission in that regulatory modernisation.

The central concern we identify is not that the Commission uses inappropriate economic tools or systematically ignores relevant variables. Rather, the issue lies in how these elements are integrated and weighted within the current analytical framework. We identify four main problems.

Short-term bias and risk aversion. The current approach tends to prioritise highly certain, short-run effects while discounting longer-term, inherently more uncertain but often central dynamic effects such as those on investment or market positioning.

De facto presumption of harm. The Commission’s current approach implicitly assumes that mergers are more likely to harm than strengthen competition, an assumption largely rooted in a static, price-focused perspective. However, the broader economic literature does not support this view.

Asymmetric standards. Anti-competitive effects are assessed within the core significant impediment to effective competition (“SIEC”) analysis under a “more-likely-than-not” standard. By contrast, pro-competitive effects are assessed under stricter standards within the efficiencies framework. We argue that there is no sound basis for this asymmetry where both risks and benefits are uncertain and derived from the same economic principles.

Sequencing. Entry, buyer power and efficiencies are treated as offsets to an already-formed theory of harm, rather than shaping the assessment from the start. This sequencing is particularly problematic when relevant factors that shape competition cannot be easily translated into short-run price effects.

Together, these features risk overestimating harm, underestimating dynamic benefits and deterring welfare-enhancing mergers.

To address these concerns and as a constructive contribution to the HMG discussion, we propose a unified approach that evaluates adverse and positive effects together within the SIEC framework. Such an approach requires a clear distinction between strategic effects and efficiencies. Strategic effects, on the one hand, are changes in the merging parties’ behaviour across relevant competitive dimensions (price, quantity, quality, entry, innovation, etc.). These can be both pro- or anti-competitive. Efficiencies, on the other hand, are merger-induced changes to underlying economic conditions (such as costs, financing, productivity or capabilities). Once established as verifiable and merger-specific, the effects of efficiencies on the merging parties’ competitive behaviour constitute indirect strategic effects and, as such, must become part of the strategic-effects assessment.

In our framework, pro-competitive strategic effects that stem directly from the change in ownership are not treated as efficiencies but are assessed within the core SIEC analysis on an equal footing with anti-competitive effects. We propose an assessment framework for the Commission organised around the following steps.

Step 1 – Identify the relevant dimensions of competition. Determine which dimensions of competition drive consumer welfare in the case at hand (price, quality, entry, investment) and the market characteristics around them. Non-price dimensions should be considered from the outset, not treated as countervailing factors.

Step 2.a – Formulate and assess dimension-specific theories of competitive effects. For each relevant dimension, articulate a theory of competitive effects (and not only harm) grounded in economic theory and supported by case-specific evidence (including the merger rationale). This step focuses on the assessment of strategic effects and should be symmetric: positive and negative strategic effects should be evaluated together within a unified SIEC assessment.

Step 2.b – Consider potential efficiencies. Efficiencies should be treated as merger-induced changes in the merging parties’ economic conditions (those related to their production and investment costs, technologies, financing conditions and organisational capabilities) which generate indirect strategic effects along dimensions identified in Step 1. This clarifies what belongs in the “efficiencies box” and ensures that the behavioural implications of efficiencies are integrated into the competitive assessment rather than treated as a separate balancing exercise.

Steps 2.a and 2.b should not be understood as strictly sequential. The assessment of strategic effects (both direct and indirect) is iterative and should be refined as additional evidence becomes available, including substantiated efficiencies where relevant.

Our proposed approach directly addresses the four problems that we have identified with the current assessment framework. By requiring the Commission to identify all relevant dimensions of competition and develop dimension-specific theories of competitive effects, it reduces the bias towards prices and short-run effects. By integrating pro- and anti-competitive strategic effects within a single SIEC assessment, it removes the asymmetric treatment of risks and benefits and ensures that the analysis does not rest on an implicit presumption that mergers are harmful by default. The framework also corrects the sequencing problem. Entry, buyer power, investment and other dynamic factors are brought into the analysis from the outset instead of being considered only as late-stage “countervailing” arguments.

We illustrate the application of the proposed structured approach in three settings where the current framework presents limitations:

Local markets: Diversion and consumer switching, not simple presence-based metrics, should drive analysis; entry and relocation dynamics matter.

Telecommunications: Mergers can improve investment incentives and accelerate network upgrades; both short-run price and long-run quality effects must be assessed.

Life sciences: Innovation outcomes depend on mechanisms such as duplication, complementarities, risk and financing; by combining research and development efforts, mergers can improve innovation outcomes. There should therefore be no presumption that consolidation reduces welfare-enhancing innovation.

A modernised approach to merger control should integrate positive and negative strategic effects symmetrically into a unified, evidence-based SIEC analysis. By identifying relevant competitive dimensions, articulating dimension-specific theories of competitive effects and distinguishing efficiencies from strategic effects, merger control can better address dynamic competition without changing legal standards or reducing procedural efficiency.