Still learning to walk: the Commission’s early approach to distortions of competition in mergers

Lorenzo Coppi, Florian Mockel and Angelos Stenimachitis analyse how price regulation affects information quality and welfare in the ESG rating industry. They show that tools such as price caps or floors can correct distortions in rating precision, but their success depends crucially on the underlying risk structure of projects. Misapplied regulation may weaken incentives to produce accurate ratings and ultimately reduce value and social welfare.

The views expressed in this article are the sole responsibility of the authors and cannot be attributed to Compass Lexecon or any other parties.

Abstract

Since its entry into force, the EU Foreign Subsidies Regulation (FSR) has generated over 200 notifications of concentrations, yet only two cases have undergone an in-depth investigation. This article argues that the Commission’s current approach to assessing distortions of competition in FSR merger cases remains underdeveloped and, in parts, economically incoherent. Drawing on the Commission’s Draft Guidelines and the two in-depth investigations to date, we discuss how certain parts of the FSR’s analytical framework lack a consistent theory of harm and a clear nexus between identified subsidies and possible negative distortions. The Commission appears to assume that all distortions of competition are negative from an economic perspective, disregarding the possibility that certain distortions – such as those facilitating investment or addressing market failures – may on balance enhance welfare. Moreover, some concerns raised under the FSR, notably regarding relocation or IP ‘offshoring’, appear to stem from the foreign identity of the acquirer rather than from the presence of a foreign subsidy, thereby conflating FSR control with FDI screening. The article concludes that the Commission should refine the economic foundations of its analysis to ensure that FSR enforcement targets only demonstrable, subsidy-induced distortions that negatively affect the relevant markets and not be tempted to use FSR as a broad tool for FDI control.