Chicago Global

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.

Toward a Theory of Country Size

It is well known that following consolidation, during which it might have looked as if countries were destined to combine into a few supercountries, we entered a period of secession and disintegration, with the number of countries growing.  One puzzle associated with this is why there are so many federations.  What follows is the beginning of a theory of size and confederation - and I look forward to comments before putting this in the form of a full-blown theory.

My starting point is that resources are not spread evenly across regions, so that when one part of a country is rich (as from salt deposits (long ago) or natural harbors or oil reserves), it will prefer to be on its own in order not to share its wealth with a larger group. But of course these pockets of wealth will be vulnerable to attack (trade wars and embargos for starters, but then military invasions too) if they are on their own and not in reliable alliances.  "Optimal" country size is thus about compromising security (which is positively correlated with size) with the cost of sharing valuable resources. Risk averse people might agree on a large country size if they did not know whether they would be rich or poor, but once they discover regional wealth, that region can be expected to be exploited.

At the same time, large scale and central control creates a monopoly on power and that can be bad for everyone.  A federation can be seen as a kind of compromise.  The central government provides security against outsiders, and to a degree manages competition among the member states or regions.  The members are left with enough power to enjoy some of their regional wealth, and they are in the business of competing with one another for mobile citizens, outside investment, and so forth.  It is as if the region, or province, buys security and some insurance (because it might be resource poor in the future) in return for some ability to enjoy its wealth and to gain from the competition among jurisdictions within the federation.

If invasion comes to be seen as politically or even morally unacceptable, or international organizations spring up that succeed in reducing international grabs, then we should expect more independence movements and more sovereign states because there is less need for mutual security.  I am tempted to say that this is where we are in history, except that it is also true that services and human capital have become increasingly important in the creation of wealth. If immobile natural resources are less important than in the past, then we might find less of a drive to smaller states.  Smaller states will continue to provide more competition among jurisdictions, and that is good in the market for political power and policies, but there will likely be less of a gain in terms of excluding outsiders from making tax or ownership claims on valuable resources.  If so, and other things (especially the threat of invasions) constant, we should expect another phase of consolidation.

At the same time, large scale and central control creates a monopoly on power and that can be bad for everyone.  A federation can be seen as a kind of compromise.  The central government provides security against outsiders, and to a degree manages competition among the member states or regions.  The members are left with enough power to enjoy some of their regional wealth, and they are in the business of competing with one another for mobile citizens, outside investment, and so forth.  It is as if the region, or province, buys security and some insurance (because it might be resource poor in the future) in return for some ability to enjoy its wealth and to gain from the competition among jurisdictions within the federation.

If invasion comes to be seen as politically or even morally unacceptable, or international organizations spring up that succeed in reducing international grabs, then we should expect more independence movements and more sovereign states because there is less need for mutual security.  I am tempted to say that this is where we are in history, except that it is also true that services and human capital have become increasingly important in the creation of wealth. If immobile natural resources are less important than in the past, then we might find less of a drive to smaller states.  Smaller states will continue to provide more competition among jurisdictions, and that is good in the market for political power and policies, but there will likely be less of a gain in terms of excluding outsiders from making tax or ownership claims on valuable resources.  If so, and other things (especially the threat of invasions) constant, we should expect another phase of consolidation.

Enjoying Italian soccer in a Chinese living room

90 are the minutes in a soccer game and 90 is the number Italians traditionally associate with fear. In this story, fear is what three major pay-tv and pay per view broadcasters operating in Italy are dealing with. Soccer is currently Italy’s most productive (and indebted) industry. Plus, like in any good ‘global economy’ thriller these days, China is also involved. But let’s start from the beginning….

Rupert Murdoch’s Sky, Silvio Berlusconi’s Mediaset and La7 (controlled by former telecom incumbent Telecom Italia) hold broadcasting rights for Italian Serie A (first division soccer), for satellite pay-tv (Sky) and for digital terrestrial pay-per-view (the others). Somehow (in a seemingly lawful way), such rights were sold to a number of Chinese broadcasters which merrily undertook to display the games on tv and on their Internet websites. An Italian peer-to-peer website, before each game, published the links to the live events broadcasted in China and a remarkable share of the Italian soccer audience began to link to Chinese websites and watch live premium soccer on laptop rather than subscribing pay-tv or pay-per-view.

The three broadcasters, cold with fear for their subscription and advertisement revenues, sought an interim injunction to block the Italian website. The injunction was first granted, but ultimately revoked by the judge in Milan, on the ground that the server allegedly infringing the broadcasting rights (to which the links referred) is located in China and the mere linking to copyrighted materials is not illegal. The Italian website has already resumed its activity. Italian soccer teams and broadcasters, having learned that globalization carries the pros and cons of a truly open worldwide market, are now considering measures to prevent ‘parallel broadcasting’ of Italian soccer. Someone screams for restrictive measures on Chinese broadcasters and retaliation. Someone else wants pressure to be put on Chinese government to prevent retransmission in Italy. However, many in Europe have learned the bittersweet lesson that the mouse cannot play hardball with the cat and that the threat of secluding a market of a few millions soccer-addicted fans to Chinese companies is not going to work with who is comfortably sitting on a few hundreds million customers hungry for soccer (and, what counts most, for other made in Italy products).

Meanwhile, waiting for the virtues of trade negotiations to become apparent, the Italian soccer supporter is enjoying an overdose of free calcio.