Expert economist Thilo Klein joined Sir Nicholas Forwood QC, Katarzyna Czapracka, and Mark Powell of White & Case to discuss the General Court ruling which annulled the European Commission’s decision to block the Three/O2 merger in 2016, in a webinar organized by Concurrences and attended by over 400 participants across 55 countries.
The General Court’s judgment in the CK Telecoms case has been described as a “bombshell”. The Court’s verdict has implications for quantitative analyses in future investigations of mobile mergers but also for investigations in other industries.
In H3G UK/O2 UK, the Commission performed the same quantitative analysis that it has run in all mobile cases since H3G/Orange Austria (2012). In phase I it computed indicative price rises (“IPR”), i.e. forecasts of potential merger-induced price increases. In phase II the EC used a calibrated merger simulation based on the IPR method, which takes into account potential reactions to the price increases by third party competitors.
In the absence of merger efficiencies the Commission’s analysis will always predict price increases. There is nothing sinister about this: economists expect mergers of substitutes to create incentives to raise price. But the IPR of MNO mergers will always turn out to be high. The Commission’s model is driven largely by two variables: the diversion ratios between the parties, which will tend to be high in a concentrated industry like mobile telecoms, and the parties’ gross margins, which will be high because most of the costs of network operators are fixed. In combination, these two factors drive high price forecasts.
Following the CK Telecoms judgment, the Commission will need to evaluate whether it can still rely on this method in future cases. The Court noted the statement in the Commission’s decision that the analysis “should not be seen as an exact and precise quantification of the price increases that may result from the transaction, but rather as an ‘indication for the likelihood’ of such increases” and concludes that the method therefore cannot be relied upon to justify a merger prohibition.
The judgement contains a discussion on the need for a critical threshold for expected merger-induced price increases that is of general relevance for investigations of transactions in any industry. Here the guidance is less clear. On the one hand, the Court accepts that the Commission failed to show that the predicted price increases were “significant”, inter alia because it did not explain why in the case at hand tougher intervention was merited than in previous cases even though the predicted price effects were no higher. The Court thus establishes that the results of quantitative analyses in previous cases constitute relevant precedent in future assessments. On the other hand, the Court stresses that the Commission is not obliged to offer a de minimis threshold for predicted price effects.
The Court’s stance on efficiencies arguments is quite revolutionary. An efficiency defence used to be impossible to win. The Commission would always hold that it is on the parties to prove merger efficiencies and apply an insurmountably high standard in assessing whether the cumulative conditions of verifiability, merger specificity and benefits to customers are satisfied. The CK Telecoms judgment may shake up this state of affairs. First, it states that every horizontal transaction generates cost efficiencies as duplicate fixed costs are eliminated. Second, it holds that these efficiencies may well lead to price reductions. This runs counter the conventional wisdom that fixed costs savings are not passed on to consumers. And third, the Court stipulates that these “standard efficiencies” are not subject to the conditions of the efficiency defence; rather, it is on the Commission to take them into account in its competitive assessment and quantitative analysis.