The Role of Efficiency Claims in Antitrust Proceedings

388 Pages·2013·12.99 MB·English

The Role of Efficiency Claims in Antitrust Proceedings
2012

The OECD Competition Committee discussed efficiency claims in October 2012.
This document includes an executive summary and a detailed summary of the discussion and
the documents from the meeting: a background note by Fiorenzo Bovenzi and Anna
Pisarkiewicz from the OECD Secretariat, expert notes by Hans W. Friederiszick, Frederic
Michael Scherer and Helen Jenkins as well as written submissions from Australia, Chile,
Colombia, European Union, Germany, Indonesia, Japan, Korea, Mexico, New Zealand,
Russia, South Africa, Sweden, Switzerland, Chinese Taipei, Turkey, United Kingdom, United
States and BIAC.

Even if efficiencies and efficiency claims have been vigorously discussed for decades, they have rarely turned
out to be decisive in competition proceedings. Still, their role in competition law has recently gained greater
prominence, as witnessed by a number of recent merger decisions in different jurisdictions and the fact that
efficiency claims are also more often put forward in abuse of dominance or monopolisation cases.

The discussion revealed that while competition authorities in most jurisdictions examine efficiency claims in
merger cases, only few of them carry out ex post evaluations of merger decisions. Moreover, an increasing
number of jurisdictions acknowledges the role and examines efficiency claims also in dominance cases, even
though in these cases such claims have had little practical impact so far. Overall, there was some agreement
that while competition analysis should duly take into account the assessment of efficiencies, there is still much
to be resolved with respect to how such assessments should be carried out.

Economic Evidence in Merger Analysis (2011)
Remedies in Merger Cases (2011)
Vertical Mergers (2007)
Dynamic Efficiencies in Merger Analysis (2007)
Competition Policy and Efficiency Claims in Horizontal Agreements (1995)
Unclassified DAF/COMP(2012)23

Organisation de Coopération et de Développement Économiques
Organisation for Economic Co-operation and Development 02-May-2013
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DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
COMPETITION COMMITTEE
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THE ROLE OF EFFICIENCY CLAIMS IN ANTITRUST PROCEEDINGS

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DAF/COMP(2012)23
FOREWORD
This document comprises proceedings in the original languages of a Roundtable on the Role of
the Efficiency Claims in Antitrust Proceedings held by the Competition Committee in October 2012.

It is published under the responsibility of the Secretary General of the OECD to bring
information on this topic to the attention of a wider audience.

This compilation is one of a series of publications entitled "Competition Policy Roundtables".

PRÉFACE
Ce document rassemble la documentation dans la langue d'origine dans laquelle elle a été
soumise, relative à une table ronde sur le rôle des allégations de gains d‘efficience dans les procédures
d‘application du droit de la concurrence qui s'est tenue en octobre 2012 dans le cadre du Comité de la
concurrence.

Il est publié sous la responsabilité du Secrétaire général de l'OCDE, afin de porter à la
connaissance d'un large public les éléments d'information qui ont été réunis à cette occasion.

Cette compilation fait partie de la série intitulée "Les tables rondes sur la politique de la
concurrence".

Visit our Internet Site -- Consultez notre site Internet

http://www.oecd.org/daf/competition/
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DAF/COMP(2012)23
TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................................. 5
BACKGROUND NOTE .............................................................................................................................. 11
CONTRIBUTIONS FROM DELEGATIONS
Australia .............................................................................................................................................. 61
Chile .................................................................................................................................................... 73
Colombia ............................................................................................................................................. 83
European Union .................................................................................................................................. 89
Germany .............................................................................................................................................. 95
Indonesia .......................................................................................................................................... 105
Japan .................................................................................................................................................. 107
Korea ................................................................................................................................................. 115
Mexico............................................................................................................................................... 121
New Zealand ..................................................................................................................................... 125
Russian Federation ............................................................................................................................ 135
South Africa ...................................................................................................................................... 145
Sweden .............................................................................................................................................. 153
Switzerland ........................................................................................................................................ 155
Chinese Taipei ................................................................................................................................... 161
Turkey ............................................................................................................................................... 167
United Kingdom ................................................................................................................................ 173
United States ..................................................................................................................................... 189
BIAC ................................................................................................................................................. 197
CONTRIBUTIONS FROM EXPERTS
Mr. Hans W. Friederiszick -- Dominant and Efficient– on the Relevance
of Efficiencies in Abuse of Dominance Cases ................................................................................... 207
Ms. Helen Jenkins -- Efficiency Assessments in European Competition Policy
and Practical Tools .......................................................................................................................... 245
Mr. Frederic M. Scherer -- Merger Efficiencies and Competition Policy ......................................... 257
SUMMARY OF DISCUSSION .................................................................................................................. 287
***
SYNTHÈSE ............................................................................................................................................... 303
NOTE DE RÉFÉRENCE .......................................................................................................................... 309
COMPTE RENDU DE LA DISCUSSION ................................................................................................ 365
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EXECUTIVE SUMMARY

By the Secretariat
Several key points emerge from the discussion at the roundtable, the background paper and the
delegates‘ and experts‘ written submissions:
(1) Welfare economics points to various sources of efficiency gains. The conflict between allocative
vs. productive efficiency and static vs. dynamic efficiency is addressed by the Williamson trade-
off, which in an economic downturn faces several constraints.
The sources of efficiency examined in economic welfare analysis are static (allocative,
productive) or dynamic. The underlying rationale for mergers can be the possibility of achieving
efficiency gains. Thus, most merger assessments will discuss productive and/or dynamic
efficiency. Practices examined as abuse of a dominant position, while potentially exclusionary,
may also have such efficiency benefits (for example, tying or bundling practices).
The tension underlying competition policy is effectively between allocative vs. productive
efficiency and static vs. dynamic efficiency. The welfare standard in use in a specific competition
regime also affects whether certain types of efficiency gains are more easily accepted in practice.
Rivalry and competitive markets result in pricing closely linked to underlying costs (allocative
efficiency), to the benefit of consumer welfare. Thus, the intervention by competition authorities
is to ensure that allocative efficiency is achieved and that firms do not earn excessive returns
through exclusionary practices or mergers that hamper rivalry. Still, some mergers may yield
lower-cost or higher-quality outputs (productive or dynamic efficiency), to the benefit of total
welfare. One of the difficulties in competition assessment is to weigh consumer and producer
welfare in a balanced way, so that efficiency benefits can be accepted when they increase
producer welfare.
This conflict was addressed by Oliver Williamson, who proposed a total welfare approach. He
argued that, if significant efficiencies occur, gains from efficiency tend to outweigh losses in
consumer welfare, which provides strong theoretical evidence in favour of mergers. Professor
Scherer expressed doubts with regard to the current validity of the Williamson trade-off, which
are motivated by the economic downturn, in particular the widespread unemployment and
Keynesian liquidity trap. Under non-crisis conditions, presuming full employment, resources
released through merger-based efficiencies enable social gains by releasing resources that are
used in other economic sectors to provide goods and services that benefit consumers. However,
with high levels of unemployment, those resources may leak and efficiencies may not provide a
consumer benefit. Second, the Williamson trade-off assumes that Say's law operates. That is, in
the first instance, because of the monopoly power achieved through the merger, the price is raised
and the consumer surplus is converted into higher profits or producer surplus. Next, those profits
are assumed to re-circulate into effective demand for additional investment goods or through
incremental consumer demand when distributed to shareholders. But in a Keynesian liquidity
trap, Say‘s law does not operate because firms and shareholders tend to accumulate profits that
they choose not to invest. Finally, there is some concern regarding a transfer of what before a
merger was consumers' surplus to producers‘ surplus and ultimately to the merging company's
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shareholders. If one assumes after Alfred Marshall that the marginal utility of money diminishes
as wealth increases, a transfer to predominantly wealthy shareholders constitutes a redistribution
of income from average-wealth consumers to rich consumers with lower marginal utilities. This
implies a welfare loss, hence the consumer welfare standard would need to be favoured over the
total welfare standard.
The consumer welfare standard might also be better suited to the institutional setting within
which competition policy operates. The argument in favour of consumer welfare is that under
total welfare there are deficits in the institutional setting. Since consumers‘ interests are not
equally represented in comparison to firms‘ interests, the welfare standard has to reflect this
imbalance. Further, consumer welfare can help achieve optimum or second-best equilibrium with
regard to the most welfare-enhancing combination of firms in a merger.
(2) Even though not all jurisdictions have introduced efficiency claims, such claims have been
progressively playing a more significant role in competition analysis. Competition authorities
that allow for efficiency claims in their antitrust proceedings have developed various approaches
with regard to procedure and substantive provisions.
Although a substantial number of jurisdictions have explicitly recognised efficiency claims in
mergers, the insertion of efficiency-related provisions is not yet a common practice. Even if some
legal systems do not foresee an efficiency defence, efficiency considerations may play a practical
role in assessing individual cases due to specific provisions inherent to national competition acts.
For instance, in Germany there is some scope for the consideration of efficiencies in the context
of the balancing clause or under the ministerial authorisation. Next, the SIEC test will further
promote a more effects-based assessment of merger cases and more efficiency claims seem
likely. Another reason why the legislator may implicitly renounce the introduction of efficiency
defence is that only the most anti-competitive mergers are prohibited (e.g. in Switzerland).
In jurisdictions where efficiency claims are introduced, several issues emerge. First, with regard
to procedure, there may be an asymmetry in the analysis of efficiencies and anti-competitive
effects. An efficiency defence might be a part of a two-stage process, where first there is a
finding that a merger is anti-competitive, and second it is examined whether it can be justified on
efficiency grounds. In other words, efficiencies are considered as a counterbalance to anti-
competitive effects. There is a risk here that efficiency analysis becomes unnecessary if there are
no anti-competitive effects. In an efficiency rebuttal, instead, evidence on efficiency claims forms
part of a holistic analysis of positive and negative effects of the merger under consideration.
Second, the merging parties – upon which the burden of proving efficiencies is placed – may
have a difficult job in making their case. This originates from the difficulty to substantiate
efficiency claims with clear-cut and quantifiable evidence on merger‘s likely effects.
The next concern regards the crediting of fixed-cost efficiencies in mergers. In evaluating
dominance of firms many jurisdictions apply the LRAIC or the AAC test that incorporates fixed-
cost elements. In mergers, evaluation of variable costs is favoured. Thus, it is necessary to
examine retrospectively the fixed-cost efficiencies in the approved mergers. This would allow
probing the reason why agencies do not accept that all costs are marginal in the long run and why
they offer different treatment to fixed-cost and marginal-cost efficiencies.
Other concern regards the treatment of dynamic efficiencies. The literature provides many
examples supporting the view that dynamic efficiencies have a considerably greater potential to
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benefit consumers than static efficiencies. In the US, for example, dynamic efficiencies have
been progressively taken into account, as the Genzyme/Novazyme case exemplifies.
Another issue concerns the merger specificity requirement. When taken literally, it would prevent
the acceptance of an efficiency defence in many cases. Theoretically, parties could nearly always
enter into contractual relations to combine resources and extract synergies. In some jurisdictions
(e.g. Australia) the competition authority does not consider whether a conduct is necessary to
achieve the likely net public benefits, and consideration of any alternative solutions is relevant
when those alternatives are likely in the foreseeable future, absent the proposed conduct. Hence,
the conduct is authorised if: i) those other means are not likely to occur in the counterfactual
because of lack of market incentives or other reasons; ii) the conduct would produce efficiencies
as compared to the counterfactual.
Efficiencies can also be taken into account at different stages of procedure. In the United
Kingdom some of the efficiency claims made with respect to mergers are accepted either as part
of the analysis of competitive effects or at the remedies stage in the form of relevant consumer
benefits. In a number of cases when efficiencies were clear-cut, they were given considerable
weight as part of the remedies package.
Finally, in some cases efficiency considerations or other objective justifications have allowed the
clearance of mergers to monopoly or near-monopoly. For instance, competition authority in
Colombia agreed to a merger between six companies, which attained a market share of 85.7 per
cent. The decision was based on: operational model proposed by the firms, consideration that
prices were regulated by a public authority, and the pursuit of the national economic interest. In
New Zealand the competition authority also agreed to a merger to monopoly based on productive
efficiencies and efficiencies linked with economies of scale and cost savings.
(3) There is a variety of tools and techniques to quantitatively assess whether the claimed efficiencies
will materialise after the merger.
Competition authorities and merging parties recognise that efficiency claims have to be evidence-
based and quantifiable. For competition authorities, the evaluation of anticipated efficiencies is a
difficult task since the type of efficiencies claimed and the role of such claims in the assessment
of different antitrust cases vary significantly. It is widely acknowledged that it is often difficult to
obtain reliable and adequate data which is crucial to estimate sound economic models. Further,
there is a risk that economists provide parties with different models that come to different
conclusions. This, however, should not imply that efficiency considerations are not given
appropriate weight in antitrust assessment. As competition authorities become more familiar with
measuring and verifying efficiencies, they become more likely to give such claims more weight
in their proceedings.
Contributions submitted to the Secretariat point to different techniques that may help understand
the likely benefits of corporate arrangements. Professor Scherer indicates in his paper that
impartial observers with substantial experience in the relevant industry are best suited to assess
claims that mergers will yield significant efficiencies. Dr. Jenkins specifies that cross-sectional
and panel modelling of performance analysis using techniques such as data envelopment analysis
(DEA) can be helpful to identify and quantify efficiency gains in antitrust proceedings. It can
handle multiple inputs and outputs that cannot be reduced to a single input or a single output
measure. The DEA measures efficiency by reference to an efficiency frontier, which is
constructed as linear combinations of efficient companies. The method assumes that two or more
companies can be combined to form a virtual company, with composite costs and outputs. The
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actual companies are compared with these virtual companies. If another actual or virtual
company or their combination achieves the same output as the actual company at a lower cost,
the actual company is judged to be inefficient. The DEA also informs whether the claimed effect
is merger specific. Consequently, the method gives the competition authority more comfort about
the verifiability of the claimed efficiency.
Compensating Marginal Cost Reduction (CMCR) is another practical tool that might serve to
assess efficiencies. It has already been applied in Sweden in the context of merger assessment. Its
underlying idea is that information about current margins and diversion ratios is enough to
calculate the marginal cost efficiencies required to offset the increase in market power resulting
from a merger. The advantage of the CMCR is that it only requires data on pre-merger mark-ups,
diversion ratios and the exact marginal-cost reductions. Hence, there is no need to estimate pass-
through or cost reductions to consumers. Nor is there a need to estimate how non-merging
competitors would react to price changes.
(4) Ex-post evaluation of efficiencies enables competition authorities to examine performance of
mergers and to improve their antitrust analysis. Some of its results can be used by the merging
parties to validate their claims during an investigation.
Evaluation indicates under what conditions and in the presence of which variables efficiency
claims are likely to be credible and eventually occur in the market. Hence, it allows for a
quantitative assessment of claimed efficiencies. Benchmark tests are another practical outcome
of the evaluation exercise. For instance, in the US evaluation has allowed to elaborate a method
by which a quality metric can be devised and applied to assess ex-post effects of a merger in the
healthcare sector.
Contributions to the Roundtable show that ex-post evaluations of mergers provide ambiguous
conclusions with regard to the achievement of claimed efficiencies. Submissions from Japan and
the US show that mergers do not always improve performance of firms. The background paper
analyses a wide range of studies and comes to the conclusion that this may be due to the fact that
there are many case- and sector-specific factors which influence the outcome. The reliability and
effects of the ex-post examination of consummated mergers depend on dataset and variables
examined.
(5) Questions regarding efficiency claims are also pertinent in dominance cases, in particular in the
IT sector, as there is less guidance from legislation and case law than in mergers. Further
analysis on how a more integrated approach to efficiencies and anti-competitive effects can be
implemented in dominance cases is required.
While in many jurisdictions (Canada, EU, US) legal provisions on abuse of a dominant position
make no explicit allowance for an argument based on efficiency gains, legislation in some
countries (Mexico, Republic of South Africa, Turkey) clearly allows dominant firms to bring
forward efficiency claims. Despite lack of an explicit provision, a possibility to justify potentially
anti-competitive conduct on efficiency grounds has been recognised by the EU and the US
courts, as well as in soft-law instruments of the European Commission. However, the review of
Article 102 TFEU decisions shows that efficiency defences are not invoked in majority of cases.
In their paper Friederiszick and Gratz assert that since 2009 in 42 per cent of cases efficiencies or
another objective justifications were put forward, in particular in the IT sector. Given the growing
number of cases in this sector, it is recognised that a sound regulatory environment is crucial to
handle efficiency considerations appropriately.
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Moreover, business and antitrust perspectives on potentially anti-competitive conduct differ.
Empirical analysis of motives behind low price strategies, undertaken by Friederiszick and Gratz,
shows that pricing below average variable cost is a common practice. Business managers
consider aggressive pricing to be less advisable for a leading company in a growing market,
which is either due to the fact that such practice is regarded as less effective for larger firms or

because of well-understood consequences of violating antitrust rules.
With regard to procedure, efficiencies in dominance cases are considered either as a defence or as
a factor in the overall analysis of the competitive impact of a conduct in question. The first
scenario is a two-stage analysis, in which the existence of abuse is established in the first place.
Second, it is assessed whether claimed efficiencies outweigh potential anti-competitive effects.
The second approach implies that efficiencies are an integral factor of the overall assessment.
Hence, they are more intertwined with anti-competitive concerns. As a consequence, the
prohibition of the potentially abusive conduct is not applied when efficiencies outweigh anti-
competitive effects. The background paper notes that practical difficulties may be the main
reason why competition authorities are tempted to consider efficiencies as a defence rather than
as one of the factors in an overall assessment of abuse. Still, in some jurisdictions (Turkey) a
balancing test is carried out. Hence, further analysis on how a more integrated approach to
efficiencies and anti-competitive effects can be implemented in dominance cases is required.
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