EU merger control: a new episode in the coordinated effects saga

Today the Court of First Instance (CFI), the first level of judicial review of the EU Commission decisions has annulled the authorization granted by the Commission to the Sony BMG merger.

The transaction involving the two music powerhouses was a 5-to-4 merger in the European market of online music, raising concerns as to the possible creation of a collective dominant position.

Under both US and EU merger control rules, a merger results in a substantial lessening of competition when it makes collusion on the post-merger market more likely or more effective than it was on the pre-merger market (coordinated effects).

The assessment of coordinated effects, heavily relies on the principles of oligopoly theory, as shaped by the work of George J. Stigler (See Stigler, A Theory of Oligopoly). In particular, a conclusion on coordinated effects may be reached considering (i) the ability of the parties resulting form the merger to reach a common, profit-maximizing strategy, (ii) the ability of the same parties to detect deviations from such a strategy, and (iii) the ability to timely punish firms deviating from the concerted strategy.

The EU Commission has adopted this approach in assessing the Sony - BMG merger and has authorized it, considering that, in the pre-merger market, there was no sufficient evidence of retaliation by or against any firm active in the online market and, therefore, the third prong (ability to punish) of the above test was not met. However, the CFI has found that the latter conclusion is flawed.

The Court has stated that, in order for the third prong of the test to be satisfied, it is not necessary that retaliation has actually taken place in the pre-merger market, being enough that retaliation mechanisms are in place on the market and ready to be employed against deviating firms.

This position is justified by the consideration that, where coordination is effective on the pre-merger market and all the players abide to the common strategy, there is no need for punishment. Therefore, absence of punishment should not be mistaken with absence of effective collusion in the pre-merger market. Of course, it is true that a definitive conclusion on coordinated effects can only be reached by taking into account all the structural features of the market and the behavior of the firms on that market.

During this year I have had the chanche to study the Commission decision on SonyBMG and to compare it with some other EU merger cases involving coordinated effects, such as Gencor and Airtours. The Sony BMG decision by the EU Commission appeared prima facie inconsistent with the previous Commission practice. Of course this was primarily due to the CFI judgment in Airtours. However, my impression was that the EU Commission, after Airtours, was adopting a correct economic approach to coordinated effects, but combined with a burden of proof which was too heavy to be appropriate in merger control cases. I have analyzed the problem in a paper which I posted on SSRN in May and can be downloaded here.