Developing an innovation defence in European merger control

Innovation is reshaping markets across the globe. Yet EU merger control often sidelines the dynamic efficiencies that mergers can generate, continuing instead to emphasise short-term price effects, narrow market definitions, and static harms. The result is a merger regime that risks blocking beneficial deals and contributing to Europe’s weak performance in the innovation race. In this article, Roman Fischer and Elena Zoido [1] argue that EU merger policy should more explicitly recognise the potential for mergers to promote innovation. They set out the economic foundations of an “innovation defence”, examine the shortcomings of the EU’s current merger review process, and make four key practical recommendations. They conclude that updating the current guidelines is a necessary step towards better supporting the innovation that Europe needs, whilst continuing to safeguard competition.

Introduction

The European Commission has never approved a merger solely on the basis that its efficiencies outweigh the potential consumer harm. However, following the Draghi Report, and the Commission’s consultation on its merger guidelines, there are signs of change. In this article, Elena Zoido and Roman Fischer explore how the current merger assessment process makes it prohibitively difficult for an “innovation defence” to succeed, and how it might be changed to better support innovation in Europe.

Key recommendations include:

• On merger-specificity: When assessing whether claimed efficiencies genuinely require integration, the Commission considers whether other organisational arrangements – such as contracts or cooperation agreements – could achieve the benefits to the same degree as consolidation. Drawing on insights from organisational economics would help the Commission identify where other arrangements are likely to be as effective, and where that is unlikely
• On verifiability: Evidentiary requirements should be tailored to the specific sector and type of innovation to ensure that adequate evidence is provided, and the assessment should reflect the relevant time period over which benefits are expected to mature – recognising that high-impact innovations may take longer and are inherently uncertain. This will require earlier and more open communication on the evidence that is available and required. The introduction of a balancing test could also help guide how the Commission weighs small but certain harms against potentially large but uncertain transformative benefits.
• On benefits to consumers: Often, beneficial innovations disrupt existing markets or have benefits that extend beyond the market that is immediately affected. So, to better capture the benefits of innovation, the Commission should consider where its assessment of benefits can reasonably extend beyond the relevant markets, particularly where they are narrowly defined.
• On dynamic competition: Mergers shape competition and innovation by influencing future entry. The merger regime should permit acquisitions of innovative entrants where complementarities generate socially valuable innovation, while still guarding against anti-competitive consolidation.

The article proceeds as follows. First, we explain why innovation matters for EU merger policy. Section 3 sets out the economics of an innovation defence, highlighting the tension between accuracy and practicality in assessing innovation claims. Section 4 examines the shortcomings of the current assessment process and proposes specific improvements, including how to evaluate merger-specificity, verifiability, consumer welfare, and how to take into consideration the impact of the merger control regime on the (ex-ante) incentives for entry in anticipation of a buyout. 

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