Draft Commission notice on the appraisal of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (Text with EEA relevance)
Date: 2002-12-31
Institutions: European Commission
Subjects: common market, competition, competition law, dominant position, economic concentration, horizontal agreement, merger control

C 331/18

EN

Official Journal of the European Communities

31.12.2002

DRAFT COMMISSION NOTICE

on the appraisal of horizontal mergers under the Council Regulation on the control of concen-
trations between undertakings

(2002/C 331/03)

(Text with EEA relevance)

I. INTRODUCTION

1. Article 2 of Council Regulation (EEC) No 4064/89 of 21
December 1989 on the control of concentrations between
undertakings (1)
‘the Merger Regulation’)
the Commission shall appraise concen-
specifies
trations within the scope of the Merger Regulation with
a view to establishing whether or not they are compatible
with the common market.

(hereinafter:

that

2. The purpose of this notice is to provide guidance as to
how the Commission makes the appraisal of concen-
trations where the undertakings concerned are active
sellers on the
relevant market or potential
competitors on that market. In the following these concen-
trations will be denoted ‘horizontal mergers’ (2). The
guidance set out in this notice will focus on how the
removal of an actual or potential competitor may affect
competition in the relevant market (3).

same

3. The guidance set out in this notice draws and elaborates
on the Commission's
evolving experience with the
appraisal of horizontal mergers under the Merger Regu-
lation since its entry into force on 21 September 1990 as
well as the case-law of the Court of Justice and the Court
of First Instance of the European Communities. The prin-
ciples contained here will be applied and further developed
and refined by the Commission in individual cases.

4. The Commission's interpretation of the appraisal of ‘hori-
zontal mergers’ is without prejudice to the interpretation,
which may be given by the Court of Justice or the Court
of First Instance of the European Communities.

The main purpose of the market definition is to identify in
a systematic way the competitive constraints that
the
merging firms face. The objective of defining a market
in both its product and geographic dimension is to
identify those actual competitors of
the undertakings
involved that are capable of constraining their behaviour
and of preventing them from behaving independently of
an effective competitive pressure. Guidance on this issue
can be found in the Commission's Notice on the definition
of the relevant market for the purposes of Community
competition law (4). Many of the considerations leading
to the delineation of the relevant markets may also be of
importance for the competitive assessment of the merger.

7. The present notice is structured around the following

elements:

(a) the likelihood that

competitive effects in the relevant markets,
absence of countervailing factors;

the merger would have anti-
in the

(b) the likelihood that buyer power would act as a
in economic

to an increase

countervailing force
power as a result of the merger;

(c) the likelihood that entry by new firms would maintain

effective competition in the relevant markets;

(d) the likelihood that efficiencies will result

from the

merger;

II. OVERVIEW

(e) the conditions for a failing firm defence.

5. Pursuant to Article 2 of the Merger Regulation, a concen-
tration shall be declared incompatible with the common
market if, and only if, it creates or strengthens a dominant
position as a result of which effective competition would
be significantly impeded in the common market or in a
substantial part of it.

6. The Commission's appraisal of mergers notified under the
Merger Regulation essentially contains two main parts
which mutually interact:

(i) definition of
markets;

the relevant product and geographic

(ii) competitive assessment of the merger.

8. In view of these elements, the Commission will determine
whether or not the merger would create or strengthen a
a
dominant position as
result of which effective
competition would be
significantly impeded in the
common market or in a substantial part of it. However,
these elements are relevant
not all
to all horizontal
In particular, efficiencies and the failing firm
mergers.
defence are
the notifying
parties establish that
the necessary conditions are met
for those claims to be of relevance (see Sections VI and
VII of this notice). Furthermore, analysing all elements in
the same detail may not be necessary. For instance, finding
that entry would be very easy, timely and effective may be
sufficient
competition
problems can arise without detailed analysis of other
factors.

typically only analysed if

that no possible

to conclude

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C 331/19

III. POSSIBLE ANTI-COMPETITIVE EFFECTS OF HORIZONTAL

MERGERS

and

services

9. Effective competition brings benefits to consumers, such as
low prices, higher quality products, a wide selection of
innovation.
goods
Through its control of concentrations, the Commission
prevents concentrations that deprive consumers of these
benefits but allow concentrations
to
through continued effective
these benefits
fostering
competition.

that contribute

technological

and

10. In assessing the competitive effects of a merger,

the
Commission compares the competitive conditions that
would follow the merger with the conditions that would
In most cases the existing
prevail absent
competitive
relevant
the most
effects of a merger.
comparison for
However,
take into
for instance,
account likely entry or exit of firms when considering
what constitutes the relevant comparison (5).

evaluating the
the Commission will,

the merger.

conditions

constitute

be considered. These include elements such as market
shares, concentration levels and the importance of inno-
vation.

if

that

important

indications

14. Market shares often provide a useful first indication of the
competitive importance of both the merging parties and
their competitors (8). However, current market shares may
be less
the
there are
competitive conditions may change in the near future,
for instance in the light of likely exit, entry or expansion.
This could be the case if the merging firms are likely to
lose demand from customers who pursue a multiple
sourcing strategy. In bidding markets, market shares may
not be informative of the likely competitive impact of a
merger (9). In these cases it is preferable to obtain direct
the role of market players in the
information about
bidding processes,
for example by means of win/loss
analyses (10). The more precise the customer preference
information is,
should be placed on
market shares as indicators of the possible competitive
effects of a given merger.

the less weight

11. There are three main ways in which horizontal mergers
may significantly impede effective competition as a result
of
the strengthening of a dominant
position:

the creation or

(a) A merger may create or strengthen a paramount
market position. A firm in such a position will often
be able to increase prices (6) without being constrained
by actions of its customers and its actual or potential
competitors.

(b) A merger may diminish the degree of competition in
an oligopolistic market by eliminating important
competitive constraints on one or more sellers, who
consequently would be able to increase their prices.

(c) A merger may change the nature of competition in an
oligopolistic market so sellers, who previously were
not coordinating their behaviour, now are able to
coordinate and therefore raise prices. A merger may
also make coordinating easier for sellers who were
coordinating prior to the merger.

12. The Commission will assess whether the changes brought
about by the merger would result in any of these effects.
In oligopolistic markets (7), a merger can significantly
impede effective competition in two ways (b) and (c).
They may both be relevant when assessing a particular
transaction. In both scenarios increased prices will lower
consumer welfare.

Market characteristics and concentration

13. In considering the possible anti-competitive effects of the
merger, a number of basic facts about the markets need to

15. Changes in historic market shares often provide useful
information about the competitive process and the likely
future importance of the various competitors, for instance,
by indicating which firms have been gaining or losing
market shares.

indication of

16. The overall concentration in a market also gives useful
information about the competitive situation in a market.
The Commission will apply the Herfindahl-Hirschman
Index (‘HHI’) as a first
the competitive
pressure in the market post-merger. The HHI is calculated
by summing the squares of the individual market shares of
all the firms in the market (11). The HHI gives propor-
tionately greater weight
the
larger firms, in line with their relative importance in the
competitive process. The Commission is unlikely to inves-
tigate cases where the aggregate HHI after the merger
remains below [1 000] (12).

to the market shares of

17. An important part of

the competitive analysis is

to
establish the main parameters of
competition in a
particular market. Two broad types of competition are
normally distinguished. First, competition primarily in
output or capacity occurs in practice in situations where
firms choose output or capacity and then, given the level
of demand, adjust prices to sell this output. For example,
in some commodity industries, price levels are determined
by the overall
level of output on the market. Second,
competition primarily in prices occurs when firms set
prices and adjust
their production level according to
demand.

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18. However,

in some markets
In these

force.

competitive
examines how the merger will affect
pressure to innovate in the market.

innovation is
cases,

the main
the Commission
the competitive

A firm with a paramount market position

19. Some proposed mergers would,

if allowed to proceed,
leave a firm in a paramount market position. This would
occur if, as a result of the transaction, the merged firm (13)
would not be constrained in any significant way by actions
of actual competitors in the relevant market. A paramount
market position is found by reference to a number of
different criteria.

Indeed the smaller

20. According to well-established case law, very large market
shares — in excess of 50 % — may be in themselves, save
in exceptional circumstances, evidence of the existence of
a dominant market position (14),
in particular when the
other competitors on the market hold much smaller
shares.
firms may not act as a
constraining influence if, for example, they do not have
the incentive or the ability to increase their production or
they do not have a sufficient overall presence in the
market. A firm, the market shares of which will remain
below 50 % after the merger, may also be considered as
holding a paramount market position in view of other
factors
of
competitors (15).

strength

number

such

and

the

as

21. Various factors may also be taken into account in order to
the merged entity's economic

determine the extent of
power:

— economies of scale and scope: whenever large-scale
production or distribution gives the paramount firm
a strategic advantage over smaller competitors (16),

— privileged access to supply: the paramount firm may be
vertically integrated or may have established sufficient
control of the supply of upstream products (17) that
expansion by the small rival firms may be difficult or
costly,

merger giving rise to competition concerns (22),
in
particular in those cases where (i) finance is relevant
to the competitive process
in the industry under
review; (ii) there are significant asymmetries between
competitors in terms of their internal financing capa-
bilities; and (iii) particular features of the industry make
it difficult for firms to attract external funds,

— other strategic advantages, such as the ownership of
the most important brands (23), a well-established repu-
tation, or an extensive knowledge of the specific pref-
erences of customers.

individually or

the paramount

22. Some of the factors listed above are likely to benefit the
customers of
firm (see Section VI).
However, they may also make it difficult for competitors,
either
to effectively
constrain the paramount firm to a sufficient degree. For
instance, they may make expansion of smaller firms or
entry of new competitors difficult. The Commission will
thus
face
sufficient residual competition to make it unprofitable to
increase prices or decrease output.

the merging firms will

in the aggregate,

examine whether

the

ascertain

constraints.

23. A merger may either create a paramount firm or it may
strengthen it by further eliminating some of the remaining
competitive
specific
To
competitive effects of a merger, it will, inter alia, be appro-
priate to consider the competitive constraints that
the
merging firms exert on each other pre-merger and to
examine whether the elimination of these constraints will
lead the merged firm to significantly raise prices. Thus, the
elimination of inter-brand rivalry (24), or more generally,
the fact
that rivalry between the parties has been the
main source of competition on the market (25), may be
an important factor of the analysis. The fact that one of
the merging parties, although small, had an important
competitive function may also be relevant,
in particular
concentrated (26). This
when the market
is
analysis would be similar
to that described in more
detail in the following section on non-collusive oligopolies.

already

— a highly developed distribution and sales network: the
firm may have its own dense outlet
paramount
network (18), established distribution logistics (19) or
wide geographic coverage (20) that would be difficult
for rivals to replicate,

24. In deciding whether a merger creates or strengthens the
dominant position such that effective competition is likely
to be significantly impeded, the Commission will also take
into account whether the analysis of entry barriers, buyer
power or efficiencies (see Sections IV to VI) points to a
negative conclusion.

— access to important facilities or to leading technologies
may give the merging firms a strategic advantage over
their competitors (21),

— privileged access to specific inputs such as physical or
financial capital. In the large majority of cases financial
strength is unlikely to be an issue. However, in some
cases it may be one of the factors that contribute to a

Non-collusive oligopolies

25. Many oligopolistic markets exhibit a healthy degree of
competition. Nonetheless, under certain circumstances,
some mergers may diminish the degree of competition
by removing important competitive constraints on one
or more sellers, who consequently find it profitable to

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If one of

increase prices or reduce output post merger. The most
direct effect will be the elimination of the competitive
constraints that the merging firms exerted on each other.
Before the merger, the merging parties may have exercised
the
a competitive constraint on each other.
merging firms had raised its price or reduced output,
then it would have lost customers to the other merging
firm, making it unprofitable. The merger would thus
In addition,
eliminate
non-merging firms can also benefit from the reduction
results from the merger
of competitive pressure that
since
increase or output
reduction may switch some demand to the rival firms,
which,
in turn, may find it optimal to increase prices.
these competitive constraints could
The elimination of
lead to a significant price increase or output reduction in
the relevant market.

the merging firms' price

this particular

constraint (27).

Markets where firms compete primarily in output/capacity

30. In markets where output or capacity levels are the most
important strategic decisions made by the oligopolists, the
important concern for
firms is how their output or
capacity decision influences the prices in the market.
When goods are relatively homogeneous,
the merging
firms may have an incentive
to reduce output or
capacity below the combined pre-merger levels, thereby
raising the market prices. Before the merger, an increase
in the price induced by the contraction of output by one
of the merging parties would only benefit this particular
party through higher margins on its sales. After the merger
the higher margins would also be enjoyed on the sales
made by the other merging party. However, the extent
of
the post-merger price increase will depend on the
ability and incentive of the rival firms to expand output.

Market share and concentration thresholds

26. In

evaluating

in
consider

horizontal mergers
the Commission will

non-collusive
oligopolies,
various
measures of concentration. A high concentration level
could indicate
lack of competitive pressure on the
market. The Commission will use different measures
depending on whether the goods are relatively homo-
geneous (28) or differentiated (29).

27. In the context of relatively homogeneous products, the
HHI index provides a particularly good indicator for the
competitive situation in the market. A merger is likely to
raise serious doubts within the meaning of Article 6(1)(c)
ECMR when it leads to an aggregate HHI of [2 000] or
more and an increase in HHI of [150] or more (30).

the

28. In a differentiated product market

competitive
constraint is determined by the degree of substitutability
between the various goods. When data are available, the
degree of
evaluated through
customer preference surveys, the analysis of purchasing
patterns, estimation of the cross-price elasticities of the
products involved (31), or diversion ratios (32).

substitutability may be

29. Although market shares give an imperfect indication of the
intensity of competition in differentiated product market,
they may still be informative of the likely competitive
pressure in the market. Concentrations
leading to a
limited combined market share are unlikely to result in a
level of economic power that could impede significantly
effective competition. This may be the case when the
the undertakings concerned does not
market share of
in a
exceed 25 % either
substantial part of
the
remaining competitors are sufficiently close substitutes.

in the common market or
it provided the products of

31. When rival firms have enough capacity, buyers will easily
find alternative sources of supply as long as it remains
profitable for rival firms to expand output. In this case,
the post-merger price increase may be limited, and the
Commission may see no reason for concern. However, it
may be the case that competitors are unable or unwilling
to expand output sufficiently to offset the output reduction
in
from the merging parties. Such output expansion is,
particular,
binding
unlikely when competitors
if existing excess capacity is
capacity constraints or
than capacity
significantly more
currently in use (33).

to operate

costly

face

32. Also in markets where firms offer differentiated products,
output and capacity choices may determine prices. Though
the particular price of each product may vary according to
its characteristics, the overall price level
in this type of
market is closely related to the output decisions of the
firms, and the aggregate level of demand. In this context,
a decrease in output of one of the merging firms' products
is likely to lead to increased demand for competing
producers. The incentive of the merging firms to reduce
output will be stronger the stronger is the degree of
substitutability between the merged entity's products. The
reactions by rivals are likely to be less significant when
they face capacity constraints, and when their products are
not good substitutes for the merging firms' products.

33. In order to determine the impact of

the
Commission will analyse the ability and the incentive of
the merging firms to reduce output as described above.
The Commission will analyse also entry barriers, buyer
power or efficiencies (see Sections IV to VI).

the merger,

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Markets where firms compete primarily on prices

Bidding markets

34. In certain markets, setting prices is the most important
strategic decision made by the oligopolists. For example
product differentiation may allow firms some price flexi-
bility. Negative effects on competition may arise where,
following the merger, the new entity finds it profitable
the loss of competition
to raise prices as a result of
between the merging firms. Before the merger,
the
merging firms may have exercised a competitive constraint
on each other in the sense that if one of the firms raised
its prices, it would lose customers to the other firm. The
merger would remove this particular constraint.

39. In situations when sellers compete to make a specific offer
to each particular buyer, the competitive effect analysis of
a merger may be different from that presented above. In
the main
in the case of bidding markets,
particular,
competitive outcome is ensured by the presence of
several competitive bids. The Commission will analyse
whether
there would be bidding contests where the
merging firms would likely be each other's most credible
contenders. This could be the case when the merging
parties are the two bidders with the lowest costs and
where no other bidders have sufficiently low costs to
exercise a competitive constraint on the winning bidder.

35. The incentive to increase prices is strongly related to the
proportion of lost sales that each merging firm would be
the other
expected to recapture in increased sales of
merging party's product. The Commission will,
first,
focus on the degree of substitution between the merging
firms' products. The higher the degree of substitution
between the merging firms' products, the stronger would
be the incentive for the merging firms to raise prices and
the higher the likely post-merger price increase.

36. The Commission will, second, evaluate the degree of
product differentiation between the merging firms and
their competitors' products. The merging firms' incentive
to raise prices is more constrained when rival
firms
produce close substitutes than when they offer distant
substitutes. The Commission will be
concerned
where there exists a high degree of substitution between
the merging firms' products and the products supplied by
rival producers. For example, a merger between two
producers that offer products which consumers view as
particularly close substitutes could generate a significant
price increase. If rival firms, however, offer products that
are close substitutes to those of the merging parties, then
the post-merger price increase may be limited.

less

37. In some markets it may be relatively easy and not too
costly for the active firms to reposition their products or
extend their product portfolio. The Commission will
examine whether
repositioning or
the possibility of
product
extension by the merging parties or
competitors may influence the incentive of the merged
entity to raise prices. Product repositioning or product
line extension is less likely when it entails large sunk cost.

line

Increased risk of coordination

40. A merger may change the nature of competition in an
oligopolistic market so sellers, who previously were not
coordinating their behaviour, are now able to coordinate
and thus raise their prices, without having to enter into an
agreement or resort to a concerted practice within the
meaning of Article 81 EC (34). The alteration of
the
market structure may be such that they would consider
it possible, economically rational, and hence preferable, to
adopt on a lasting basis a course of action on the market
aimed at selling at above competitive prices.

41. A merger may also make coordinating easier for sellers
who were coordinating already before the merger, either
by making the coordination more robust or by further
It is unlikely
departing from the competitive outcome.
that the Commission would approve a merger if coor-
dination were already taking place prior to the transaction
unless it determines that the merger is likely to disrupt
such coordination.

42. Coordination may take various forms. In some markets the
most likely coordination may be on keeping or raising
prices above the competitive level. In other markets coor-
dination may aim at
the
amount of new capacity brought to the market. Firms
may also coordinate on dividing the market, for instance
by geographic area (35) or by other customer characteristics
or by taking turns
in bidding
markets.

limiting the production or

in winning contracts

38. In order to determine the impact of

the
Commission will analyse the ability and the incentive of
the merging firms to increase price as described above.
The Commission will analyse also entry barriers, buyer
power or efficiencies (see Sections IV to VI).

the merger,

43. Coordination is more likely to emerge in markets where it
is fairly simple to establish the terms of coordination. This
includes both the type of coordination and the implicit
rules governing the coordination. Parties should thus be
able to arrive at a common perception as to which actions
would be considered aggressive (‘cheating’), thus justifying
countering
other
members of the oligopoly.

(‘punishments’)

responses

the

by

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44. Three basic conditions must be fulfilled for coordination to
be sustainable. First, the coordinating firms must be able to
monitor to a sufficient degree whether the terms of coor-
dination are being adhered to, that is to detect whether
any firm in the group is deviating from the terms of coor-
dination. Second, there must be credible deterrent mech-
anisms that can be activated in case deviation is detected.
Such deterrent mechanisms should be sufficiently severe
that they convince the coordinating firms that it is in
their best interest to adhere to the terms of coordination.
Third, the actions of outsiders, such as current and future
competitors, as well as customers, should not be able to
jeopardise the results expected from the coordination (36).

Establishing terms of coordination

49. Coordination is more likely to emerge if the members of
the oligopoly could easily arrive at a common perception
as to how the coordination mechanism works. Members
regarding what would be
should have similar views
considered to be
aligned
behaviour and which actions would be likely to result in
a punishment from the other members of the oligopoly.

in accordance with the

substantial

45. A market where it is reasonably easy to establish the terms
of coordination and where the three criteria mentioned
above are fulfilled to a sufficient degree, is prone to the
emergence of coordinated behaviour. This is not to say
coordination will necessarily occur.
that
However,
the more
the fewer firms in the oligopoly,
likely it is that firms will be able to take advantage of
establish or
the
improve a situation of mutual coordination.
In most
cases a merger in this context would thus either strengthen
it
existing coordination or
occurring.

increase the likelihood of

favourable market

condition and

46. The Commission examines whether it would be possible to
establish the terms of coordination and whether the three
necessary conditions are likely to be sufficiently met in the
post-merger situation and the changes that the merger
brings
allow the
Commission to assess whether a merger would lead to
an increased risk of coordination occurring or to coor-
dination being made easier or more successful.

respect. This will

in this

about

47. The Commission takes into account both the structural
features of
the past
behaviour of the firms in these markets. Many structural
features
the
conditions.

than one of

the markets

for more

concerned

important

and

are

48. The analysis of

the possibility of coordination in a
particular relevant market typically requires considering a
large amount of information, which may not all point to
the same conclusion. Evidence of past coordination in
similar product or geographic markets may then be
useful information indicating that the necessary conditions
mentioned above are likely to be fulfilled also in the
markets relevant to the merger. Similarly, firms may be
vigorously competing prior to the merger in ways that
make the emergence of coordination unlikely.

50. Generally,

for a

single, homogeneous product,

the more simple and stable the economic
environment, the easier it is for the firms to establish
the terms of coordination. It is easier to coordinate on a
price
than on
hundreds of prices in a market with many differentiated
it is easier to coordinate on a price
products. Similarly,
when demand and supply conditions are relatively stable
than when they are continuously changing. In this context
substantial organic growth by some firms in the market
may indicate that the current situation is not sufficiently
stable to make coordination likely. Coordinating by way of
market division will be easier if customers have simple
characteristics
to
readily
Such characteristics may be
geographically based, based on type of customer or
simply based on the
customers who
typically buy from one specific coordinating firm.

coordinating firms

existence of

allow the

allocate

them.

that

complex

stemming

51. Coordinating firms may, however, find ways to overcome
problems
from
economic
for instance, establish simple
environments. They may,
pricing rules that reduce the complexity of coordinating
on a large number of prices. One example of such a rule is
establishing a small number of pricing points,
thus
reducing the coordination problem drastically. Another
example is having a fixed relationship between certain
base prices and a number of other prices so that all
prices basically move in parallel.

52. Detailed knowledge about the other firms may also help
overcome some of the problems in establishing terms of
coordination.
In particular transparency as to the cost
structure may be important. Structural links such as cross-
shareholding or participation in joint ventures may help in
aligning incentives between the oligopolists. Another way
to establish the common terms of coordination would be
to publicly exchange strategic information through the
press. One such example would be if
the firms were
confronted with the challenge of coordination on how
from one
much extra capacity to put on the market
year to the next. Stating publicly how much demand is
expected to increase could be a way to overcome this
challenge. The more complex the market situation is, the
more
communication is needed to
establish the terms of coordination.

transparency or

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53. Firms will also find it easier to establish terms of coor-
dination, the more symmetric are the firms (37). Symmetry
firms have
among firms enhances the probability that
compatible incentives to coordinate and,
in particular,
they agree on what are desirable terms of coor-
that
dination. For instance, firms with similar cost structures
and market shares, operating at similar capacity levels
and with the same degree of vertical
integration, will
likely find it relatively easy to coordinate on desirable
prices.

54. The Commission will pay particular attention to any
change the merger may bring about with respect to how
easy firms would find establishing terms of coordination.
For instance, a merger may increase the symmetry of a
group of firms by making the market shares, the levels of
capacity usage, the degree of vertical
integration or the
these firms more similar. A merger
cost structures of
may also involve a firm, which consistently in the past
has shown to prefer lower prices than its competitors.
Such a firm is sometimes termed a maverick.
the
merged firm were to follow pricing strategies similar to
those of the other competitors, the remaining firms would
find it easier to coordinate on desirable prices, and the
merger would increase the likelihood of coordination.

If

Monitoring

55. Coordinating firms are always tempted to increase their
share of the market by deviating from the terms of coor-
dinating, for instance by lowering prices, increasing their
capacity or trying to win more tenders than envisaged.
Only the threat of timely ‘punishment’ keeps firms from
deviating.
to know when to activate such
deterrent mechanisms, the coordinating firms need to be
able to monitor to a sufficient degree whether deviation is
taking place. Markets therefore need to be sufficiently
transparent to allow coordinating firms to observe in a
timely way what choices other firms are making.

In order

Transparency may be diminished if actual prices also
comprise unobservable discounts.

57. In particular in bidding markets the degree of transparency
depends on the type of auction method that is applied. In
sealed bid auctions, no bidder may obtain access to
information regarding the offers
submitted by other
bidders. In an open outcry auction, bidding behaviour by
one bidder is readily observable by the other bidders.
importance for
Similarly in other markets,
assessing the degree of transparency to investigate what
type of
information about each transaction is publicly
available. In some markets prices are publicly available.

is of

it

of

some

certainty whether

58. When evaluating the level of transparency in the market,
the key element is to identify the information about the
other oligopolists' actions that can be inferred from the
information available. Coordinating firms should be able to
interpret with
unexpected
behaviour is actually the result of deviation from the
terms
unstable
For
in
environments it may be difficult
for a firm to know
whether its lost sales are due to an overall low level of
demand or to a loss of market share to a competitor who
is offering particularly low prices. Similarly, in a situation
where overall demand or cost conditions fluctuate, it may
be difficult to interpret whether a competitor is lowering
its price because it expects the coordinated prices to fall or
because it is behaving aggressively.

coordination.

instance,

59. In some markets where the general conditions may seem
to make monitoring of other firms' behaviour difficult,
firms may nevertheless engage in practices, which have
the effect of easing the monitoring task, even when
these practices may not necessarily be entered into for
such purposes. These practices, such as voluntary publi-
information or announcements may increase
cation of
transparency or help competitors interpret
the choices
made. Cross-directorships, participation in joint ventures
and similar arrangements may also make monitoring
easier.

56. The degree of transparency depends inter alia on how
transactions take place in a particular market. Trans-
parency is higher in a market where transactions takes
place on a public exchange where offers and demands
are matched, than in markets where transactions are confi-
dentially negotiated between buyers and sellers on a
bilateral basis. Publicly available price lists may offer trans-
parency insofar as they tend to reflect transaction prices.

60. The Commission will pay particular attention to whether
the merger brings about changes to the ability of coor-
dinating firms
instance,
changes in vertical integration may allow a better moni-
toring of prices. A merger may also involve a firm, which
previously has not followed some industry practice, which
made monitoring easier.

to monitor each other. For

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Deterrent mechanisms

that are

sufficiently severe

61. Coordinating cannot take place without the existence of
to
deterrent mechanisms
convince all coordinating firms that it
is in their best
interest to adhere to the terms of coordination. It is thus
the threat of future retaliation that keeps the coordination
sustainable. However the threat is only credible if, in case
deviation by one of the firms is detected, the deterrent
mechanisms will indeed be activated. Although deterrent
mechanisms often are also called ‘punishment’ mech-
anisms, this should not be understood in the strict sense
that such a mechanism necessarily punishes individually a
firm that has deviated.
If firms expect coordination to
break down for a sufficient time if anybody deviates, and
thus revert to a non-coordinated outcome this constitutes
in itself a deterrent mechanism. This mechanism may
however not be sufficient to discipline tacit coordination,
in which case other mechanisms may have to be involved.

62. A firm would only chose to deviate from the coordinated
practice if the discounted rewards from deviating are larger
than the discounted cost of the punishment. Compared to
the alternative of maintaining the coordinated practice, a
deviation would initially lead to a higher profit, but later
on to a lower level of profit once the other members of
the
punishment.
Deviations are prevented when the net present value of
the loss of future profit during punishment outweigh the
net present value of
is enjoyed
during the period of deviation. The sooner the punishment
is likely to be implemented, the smaller is the gain from
deviation, and the larger
is the loss incurred during
punishment.

oligopoly would

the higher profit

implement

that

the

63. Punishments that only enter into force after some time
period, or are not likely to be activated, are less likely to
be sufficiently severe. For example,
if a market is char-
acterised by infrequent,
lumpy orders, a firm may be
tempted to deviate in order to gain a large contract. It
may be difficult
severe
to establish a
deterrent mechanism in such a market, since the gain
from deviating is large, certain and immediate, and the
losses from being punished may be uncertain and only
materialise after
some time. The speed with which
deterrent mechanisms can be implemented is related to
the issue of
firms are only able to
observe their competitors' actions after a substantial
then punishment will be similarly delayed and
delay,
may influence whether it would be sufficient
to deter
deviation.

transparency.

sufficiently

If

64. The deterrence need not necessarily take place in the same
market as the deviation. If the members of the oligopoly
have commercial interaction in other markets, these may
offer various methods of deterrence (38). The deterrence
joint
can take many forms,
ventures or other forms of cooperation or selling of
shares in jointly owned companies.

including cancellation of

it would be rational

65. Members of an oligopoly can only base coordination on a
deterrent mechanism if
for each
member to carry it out once a hypothetical deviation
occurs. Whether a member of
the oligopoly would
indeed implement a deterrent mechanism depends on a
balancing of
short-term and long-term consequences
similar to that carried out by the potential deviator. If a
deviation is not punished, coordination will break down
and future profit levels will likely be low. On the other
hand, if the punishment is executed, coordination may be
restored thus leading to higher profits in the future. It can
thus be rational to implement a punishment mechanism
even if it entails some short-term costs for the members of
the oligopoly as long as they are outweighed by the
the restoring coor-
long-term increase in profits that
dination would bring about.

66. In some cases particular punishment mechanisms may not
be credible because they intrinsically prevent the reversion
to the coordinated outcome. One such example would be
in a stagnant market where capacity increases only can
take place in big chunks (for instance by building a new
factory) and where capacity has no value unless used in
this particular market. In this scenario coordination aiming
at keeping total capacity below the competitive level, may
be unlikely because no credible deterrent mechanism is
the oligopoly
available in the case one member of
deviates by increasing capacity to a level, where further
increase
to a permanent
oversupply.

in capacity would lead

advantage

competitive
to the other oligopolists
In a market with strong network effects,

67. In some cases the deviation may in itself bring about a
that no punishment
durable
could effectively
available
i.e.
counter.
markets where any one consumer prefers to be supplied
by the same supplier as the other consumers (39),
the
deviation may bring about an irrevocable shift
in the
competitive balance in the market that would leave the
other competitors permanently behind.

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68. The merger may bring about changes as to how severe the
punishment can be in a particular market. This could, for
instance, result from changes in the distribution of market
shares or excess capacity. The Commission will pay
particular attention to such changes in the analysis of
the competitive effects of the merger.

Potential entry

71. Concentrations where an undertaking already active on a
relevant market merges with a potential competitor in this
market can have similar anti-competitive effects to mergers
between two undertakings already active on the same
relevant market. The Commission will
therefore apply
similar methods of analysis to the two types of concen-
trations.

Reactions of outsiders

If

69. For coordination to be successful the actions of current
and future competitors, as well as customers, should not
be able to jeopardise the results expected from coor-
for example coordination aims at reducing
dination.
the overall capacity in the market, this will only hurt
consumers if there is nobody outside the oligopoly that
would respond to this decrease by increasing their own
capacity correspondingly. The analysis of these elements is
similar to the way they are analysed when other types of
impediments to competition from mergers are considered.
The effects of entry and buyer power of customers are
dealt with in the following sections. However, special
consideration should be given to the possible impact of
these elements on the stability of coordination. For
instance, by changing its commercial practice and concen-
trating a large amount of its requirements on one supplier
or by offering long term contracts, a large buyer may be
able to tempt one of the coordinating firms to deviate in
order to gain substantial new business.

Particular cases

Innovation

70. In non-collusive oligopoly markets or in markets char-
acterised by a firm with a paramount market position,
the
where innovation is
the main competitive force,
Commission examines how the merger will affect
the
competitive pressure to innovate in the market. The
competitive pressure in such markets may be diminished
if the merger is between the only two competitors that
previously provided the most important innovations. For
instance, this may be the case of a merger between two
pharmaceutical companies, which were the only ones with
pipeline products related to a specific product market.
Alternatively, if the merger increases the firms' ability to
bring new innovations to the market this may increase the
competitive pressure to innovate. In markets where coor-
dination is more likely, innovation make coordination less
easy to sustain. The reason is that innovations, particularly
drastic ones, may allow one firm to gain a significant
advantage over its rivals. Thus, this may reduce both the
value of future coordination and the amount of harm that
rivals would be able to inflict.

72. A merger with a potential competitor can generate hori-
zontal anti-competitive effects if the potential competitor
significantly constrains the behaviour of the firms active in
the market. This is the case if the potential competitor
possesses assets that could easily be used to enter the
market without incurring significant sunk costs. This is
also the case if the potential competitor is very likely to
incur the necessary sunk costs to enter the market in a
relatively short period of time after which the potential
competitor would constrain the behaviour of the firms
active in the market.

73. For a merger with a potential competitor

to have
significant anti-competitive effects, two basic conditions
must be fulfilled. First, the potential entrant must already
exert a significant constraining influence or there must be
a significant likelihood that it would grow into an effective
competitive force. Evidence that a potential competitor has
plans to enter a market in a significant way could help the
Commission to reach such a conclusion (40). Second, there
should not be a sufficient number of other potential
competitors, which could exert
the same competitive
pressure as the merging potential competitor.

Mergers creating or strengthening buyer power

lead it

In particular,

74. The Commission may also analyse to what extent a
merged entity will increase its economic power as buyer
in upstream markets. On the one hand, a merger that
creates or strengthens the economic power of a buyer
the
may impede effective competition.
merged firm may be in a position to reduce its purchase
in
of inputs in order to obtain lower prices. This may,
turn,
in the final
to lower its level of output
product market, and thus harm consumer welfare. On
increased buyer power may often be
the other hand,
increased buyer power
beneficial
lowers
downstream
restricting
competition or total output, then a proportion of these
cost reductions are likely to be passed onto consumers
in the form of lower prices. Competition in the down-
stream markets could also be adversely affected if,
in
particular, the merged entity could use its buyer power
to impose vertical restraints on suppliers, thus foreclosing
its rivals.

consumers.
If
costs without

for
input

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IV. COUNTERVAILING BUYER POWER

75. The competitive pressure on a firm is not only exercised
by the competitors but can also come from its customers.
The Commission will, when relevant, consider to what
extent customers will be in a position to counter the
increase in market power that a merger is expected to
create.

79. In assessing whether new entry can be considered as a
sufficient competitive constraint on the merging parties,
entry must be shown to be likely, timely and sufficient
in its magnitude and scope to prevent the potential anti-
the merger. The Commission is
competitive effects of
unlikely to find competition concerns when there is
strong evidence that these conditions are met.

76. Even firms with very high market shares may not be able
to act independently of their customers if the latter possess
buyer power (41). Buyer power in this context should be
understood as the ability of
large customers within a
reasonable timeframe to resort to credible alternatives if
the supplier decides to increase prices or to deteriorate the
conditions of delivery (42). Examples of such buyer power
would be if the buyer could immediately switch to other
suppliers, credibly threaten to vertically integrate into the
upstream market or to sponsor upstream entry (43), for
instance by persuading a potential entrant to enter by
committing to place large orders with this company. It
is more likely that large and sophisticated customers will
possess this kind of buyer power than will smaller firms in
a fragmented industry. However,
to
consider the incentives of buyers to utilise their buyer
power in this way. For example, a downstream firm may
not wish to make an investment in sponsoring new entry
if the benefits of such entry in terms of lower input costs
could also be reaped by its competitors.

important

is

it

77. The Commission may conclude that buyer power

a
significantly

is
to prevent a creation or strengthening of a
sufficient
result of which effective
dominant position as
competition would be
the
smaller customers without buyer power will not be faced
with significantly higher prices or deteriorated conditions
after the merger (44). Furthermore, it is not sufficient that
buyer power exists prior to the merger, it must also exist
and remain effective following the merger. This is because
a merger of two suppliers may reduce buyer power if it
removes a credible alternative.

impeded if

V. ENTRY

78. In a dynamic competitive environment the number and
identity of firms in an industry may vary over time in
response to changing conditions. If the profit level in an
industry is high due to lack of competitive pressure on the
incumbents, one should expect entrepreneurs to seek to
obtain a part of that profit by entering the industry. When
entering the market is particularly easy, the mere threat of
potential entry may be sufficient to prevent the merging
parties from exercising market power. Indeed, in such a
case, any price increase may create the incentives for new
entry.

80. As regards the likelihood of new entry, the Commission
will examine whether there is a high probability that new
entry can be expected after the merger. In this respect, the
Commission will have particular regard to the existence of
barriers to entry to the relevant market, that is to the
specific features of
the market, which may give the
incumbent
firms a decisive advantage over potential
competitors. When entry barriers are low, the merging
parties will be more likely to be constrained by new
entry. Conversely, when entry barriers are high,
the
merging firms can be expected to exert market power,
and raise their prices, without being constrained by new
firms entering the market.

81. Barriers to entry can take the form of legal, technical or

strategic advantages:

— legal advantages cover

barriers created by legislation limit
market participants by,
number of licences,

situations where regulatory
the number of
for example, restricting the

— the incumbents may also enjoy technical advantages,
such as preferential access to essential facilities, natural
resources,
intellectual
innovation and R & D, or
property rights, which make it difficult for any firm
to compete
in certain
to obtain essential
industries,
input materials, or patents might protect products or
processes. Other factors such as economies of scale and
scope, distribution and sales networks, access
to
important
technologies, may also constitute barriers
to entry,

successfully. For
it might be difficult

instance,

— furthermore,

strategic barriers

to entry may exist
because of the established position of the incumbent
firms on the market. In particular, it may be difficult to
enter a particular industry because experience or repu-
tation is necessary to compete effectively, both of
to obtain as an entrant.
which may be difficult
loyalty to a particular
Factors
between
relationships
brand,
of
suppliers
the
and
reputational
promotion or

such as consumer
of
closeness
the
customers,
advertising, or other

importance

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Official Journal of the European Communities

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also encompass

advantages will be taken into account. Strategic barriers
to entry
the
incumbents already have committed to large excess
capacity, or where the costs faced by customers in
switching to a new supplier may also inhibit entry.

situations where

be sufficiently intense to dissuade the merging parties from
increasing prices.

VI. EFFICIENCIES

82. For entry to be likely,

it must be sufficiently profitable
when potential responses from the incumbents are taken
into account. Entry is thus more difficult if the incumbents
will be able to closely monitor which customers the
entrant is trying to acquire and to protect their market
shares by giving targeted pre-emptive price reductions to
those customers.

83. The likely evolution of the market should be taken into
account when assessing whether or not entry would be
profitable. Entry is more likely to be profitable in a
market that is expected to experience high growth in the
future relative to a market that is expected to decline. Scale
economies or network effects make entry unprofitable
unless the entrant can obtain a sufficiently large market
share.

84. Entry is particularly likely if suppliers in other markets
already possess production facilities that could be used
to enter the market in question. Such a reallocation of
production facilities is more likely if the two alternatives
are approximately equally profitable prior to the merger.

the Commission will

85. The Commission will look carefully at the history of the
industry when assessing barriers to entry. It is not likely
that
find barriers to entry in an
industry that has experienced frequent and successful
examples of entry. On the other hand if previous
attempts to enter the market have been unsuccessful,
perhaps due to deterring behaviour by incumbents, then
entry would appear to be less likely in the future.

sufficient

scope and magnitude.

86. Any new entry should not only be likely but also timely
In assessing
and of
whether entry would be timely,
the Commission will
look at whether any such potential new entry will be
sufficiently quick and persistent to prevent the exercise
of market power. The appropriate time period should
depend on the characteristics and dynamics of
the
market, as well as on the specific capabilities of potential
entrants (45). Entry which is not of sufficient scope and
magnitude is not likely to constitute a constraint on the
incumbents and to deter the anti-competitive effects of the
merger. For instance, entry into some market ‘niche’ may
not be a credible constraint. The threat of entry must also

87. The Commission welcomes corporate reorganisations in
the form of concentrations as being in line with the
requirements of dynamic competition and capable of
increasing the
competitiveness of European industry,
improving the conditions of growth and raising the
living in the Community (46). Accordingly,
standard of
the Commission takes into account in its assessment of
horizontal mergers
technical and
economic progress provided that it is to the consumers'
advantage
to
not
and
competition (47).

the development of

form an

obstacle

does

88. The Commission considers any substantiated efficiency
claim in the overall assessment of the merger.
It may
decide that, as a consequence of the efficiencies that the
merger brings about,
this merger does not create or
strengthen a dominant position as a result of which
effective competition would be significantly impeded.
This will be the case when the Commission is in a
position to conclude on the basis of sufficient evidence
that the efficiencies generated by the merger are likely to
the merged entity to act
enhance the incentive of
pro-competitively for
consumers, by
effects on competition which the
counteracting the
merger might otherwise have.
the
consumer, it is necessary to ensure that the merged firm
will have sufficient incentives not only to realise the effi-
ciencies arising directly from the merger but also to make
continuing efforts to enhance efficiency. This presupposes
sufficient competitive pressure from the remaining firms
and from potential entry.

In the interest of

the benefit of

89. Efficiencies are most likely to make a difference when they
are substantial and the possible anti-competitive effects
that might otherwise occur are small. The greater these
possible negative effects on competition,
the more the
Commission has to be sure that the claimed efficiencies
likely to be realised, and to the direct
are substantial,
is unlikely that a market
benefit of
position approaching that of
a monopoly can be
declared compatible with the common market on effi-
ciency grounds.

the consumer.

It

90. For the Commission to reach the conclusion that as a
consequence of efficiencies, a merger does not create or
strengthen a dominant position as a result of which
effective competition would be significantly impeded, the
efficiencies have to be of direct benefit to consumers and
to be merger-specific, substantial, timely, and verifiable.

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Official Journal of the European Communities

C 331/29

91. Efficiencies

should directly benefit consumers

in the
relevant markets where it
is otherwise likely that a
dominant position will be created or strengthened as a
result of which conditions of effective competition would
be significantly impeded. In line with the need to ascertain
whether efficiencies will benefit consumers, cost effi-
ciencies that lead to reductions in variable or marginal
costs are more likely to be relevant to the assessment of
efficiencies than reductions in fixed costs, since the former
are more likely to result in lower consumer prices.

92. Also efficiencies that lead to new or improved products or
services may directly benefit consumers. For example, a
joint venture company set up in order to develop a new
product may bring about the type of efficiencies that the
Commission can take into account.

93. Efficiencies are merger specific when they are a direct
consequence of the merger. In this respect the Commission
concentrates on realistic and attainable alternatives rather
the
than merely
industry
Commission takes
account
practices as well as the respective capabilities of
the
merging parties. In the same vein, the Commission does
not consider cost reductions, which result
from anti-
competitive reductions in output as efficiencies.

In
established

ones.
of

theoretical

particular,

94. Efficiencies have to be verifiable so that the Commission
can be reasonably certain that the efficiencies are likely to
materialise. The longer efficiencies are projected into the
future, the less weight the Commission can assign to the
efficiencies being brought about (48). The Commission
must also be in a position to assess whether the effi-
ciencies are substantial enough to counteract a merger's
potential harm to consumers. Where reasonably possible,
efficiencies should therefore be quantified. As indicated
in order to verify whether cost efficiencies will
above,
directly benefit consumers,
in variable or
to the
marginal costs are likely to be more relevant
analysis than reductions in fixed costs. Similarly, demon-
strable efficiencies leading to new or improved products,
which directly benefit consumers, are more likely to be
considered by the Commission than mere assertions to
this effect.

reductions

incumbent upon the notifying parties

95. Most of the relevant information, which could allow the
Commission to assess whether the merger will bring about
the sort of efficiencies allowing to clear a merger,
is
uniquely in the possession of the merging parties. It is,
therefore,
to
provide in due time all relevant information necessary to
demonstrate that
specific,
substantial, timely, and verifiable. Similarly,
it is for the
notifying parties to provide the evidence necessary to
show why the efficiencies will counteract any adverse
effects on competition that might otherwise result from
the merger and therefore directly benefit consumers.

the efficiencies are merger

VII. FAILING FIRM

strengthens

96. The Commission may decide that a merger, which creates
or
is nevertheless
a dominant position,
compatible with the common market if one of the under-
takings is a failing firm being acquired by another under-
taking. The basic requirement is that the deterioration of
the competitive structure that follows the merger cannot
be said to be caused by the merger (49).

97. The Commission considers the following three criteria as
relevant for the application of a ‘failing firm defence’. First,
the acquired undertaking would in the near future be
forced out of the market because of financial difficulties
if not taken over by another undertaking. Second, there is
no less anti-competitive alternative purchase than the
notified concentration. Third, absent a concentration the
assets of the failing firm would inevitably exit the market.
In such circumstances, the merger may be deemed not to
cause the creation or strengthening of a dominant position
as a result of which effective competition would be
significantly impeded in the common market
if either
the disappearance of the failing firm (50) or its acquisition
by any other foreseeable potential purchaser (51) would
equally lead to the creation or
strengthening of a
dominant position.

98. It is upon the notifying parties to show that the three
criteria described above are fulfilled and that the deterio-
ration of the competitive structure that follows the merger
is not caused by the merger.

VIII. INVITATION FOR COMMENTS

review,

99. The present public consultation is part of a wider process
the terms and
reform and clarification of
of
application of the Merger Regulation.
Interested parties
are invited to submit their views on the present draft
Notice. Such comments should reach the Commission no
later than 31 March 2003.

By mail to:

European Commission
Directorate-General for Competition
Horizontal Guidelines
B-1049 Brussels

By electronic mail:

Comp-MTF-horizontal-guidelines@cec.eu.int

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(1) OJ L 395, 30.12.1989, p. 1, corrected version in OJ L 257, 21.9.1990, p. 13. Regulation as amended by Council Regulation (EC) No 1310/97 of

30 June 1997 (OJ L 180, 9.7.1997, p. 1), corrigenda in OJ L 40, 13.2.1998, p. 17, and OJ L 199, 26.7.1997, p. 69.

(2) The term ‘concentration’ used in the Merger Regulation covers various types of transactions such as mergers, acquisitions, takeovers, and certain
types of joint ventures. In the remainder of this notice, unless otherwise specified, the term ‘merger’ will be used as synonymous for concentration
and therefore cover all the above types of transactions.

(3) This notice does not cover the assessment of the effects of competition that a merger has in other markets including vertical and conglomerate

effects. Nor does it cover the assessment of the effects of a joint venture as referred to in Article 2(4) of ECMR.

(4) OJ C 372, 9.12.1997, p. 5.

(5) See sections on merger with a potential entrant, on a merger that increases the buyer power of the merging parties and on the failing firm

defence.

(6) In this notice the expression ‘increased prices’ is often used as shorthand for increased prices, reduced choice and qualities of goods and services,
innovation, and other possible consequences of a lack of effective competition. The expression should also be
diminished technological
understood to cover situations where, for instance, prices are decreased less, or are less likely to decrease, than they otherwise would have
absent the merger.

(7) An oligopolistic market refers to a market structure with a limited number of sizeable firms. Because the behaviour of one firm has an appreciable
impact on the overall market conditions, and thus indirectly on the situation of each of the other firms, oligopolistic firms are interdependent.

(8) As to the calculation of market share data, see Commission notice on the definition of the relevant market for the purposes of Community

competition law (OJ C 372, 9.12.1997, p. 3, paragraphs 54-55).

(9) In many cases the strength of the competitive constraints that exist between the various market players will depend more on the precise
characteristics of the market players and the customers concerned than on the share of total sales for which the market players account.
Market shares may in such circumstances either understate or overstate the competitive effects.

(10) A win/loss analysis identifies which sellers have been participating in bids for certain groups of customers and the extent to which these sellers

have been successful in winning the contract or in obtaining a high position in the customers' ranking of bids.

(11) For example, a market containing five firms with market shares of 40 %, 20 %, 15 %, 15 %, and 10 %, respectively, has an HHI of 2 550 (402 +
202 + 152 + 152 + 102 = 2 550). The HHI ranges from close to zero (in an atomistic market) to 10 000 (in the case of a pure monopoly).
Although it is desirable to include all firms in the calculation, lack of information about small firms is not critical because such firms do not affect
the HHI significantly.

(12) The aggregate HHI is the post-merger HHI calculated on the assumption that the two merging parties maintain their respective market shares.

(13) In some exceptional circumstances, a merger may also allow a company which was not a party to the notified transaction to have, or to
strengthen, a paramount market position (see Commission Decision of 29 September 1999, IV/M.1383, Exxon/Mobil, recitals 225-229).

(14) Case T-221/95, Endemol/Commission, [1999] ECR II-1299, paragraph 134, and Case T-102/96, Gencor/Commission, [1999] ECR II-753, par.

205; Case IV/M.890, Blokker/Toys ‘R’ Us (OJ L 316, 25.11.1998, p. 1, paragraph 74).

(15) See, for example, Case IV/M.1221, Rewe/Meinl (OJ L 274, 23.10.1999, p. 1, paragraph 28). See also Case C-250/92, Gottrup-Klim [1994] I-5641,

paragraph 48.

(16) Scale and scope economies result from the spreading of fixed costs over larger output or a broader set of products.

(17) See, for example, Case T-102/96, Endemol/Commission, [1999] II-753, paragraph 167.

(18) See, for example, Case T-22/97, Kesko/Commission, [1999], ECR II-3775, paragraphs 141 et seq.

(19) See, for example, Case COMP/M.2097, SCA/Metsa Tissue (OJ L 57, 27.2.2002, p. 1, paragraph 147).

(20) Case COMP/M.2033 Metso/Svedala, 2001, nyr, paragraph 195.

(21) Case IV/M.603, Crown Cork & Seal/Carnaud/MetalBox (OJ L 75, 23.3.1996, p. 38, paragraphs 66 et seq.).

(22) Case T-156/98 RJB Mining/Commission [2001] ECR II-337.

(23) See, for example, Case IV/M.623, Kimberly-Clark/Scott (OJ L 183, 23.7.1996, p. 1).

(24) See, for example, Case M.430, Procter & Gamble/VP Schickedanz (II) (OJ L 354, 31.12.1994, p. 32) and Case T-290/94, Kaysersberg/Commission,

[1997] II-2137, paragraph 153.

(25) Case T-310/01, Schneider/Commission, [2002] II-0000, paragraph 418; Case IV/M.1628, TotalFina/Elf Aquitaine (OJ L 143, 29.5.2001, p. 1);

Case COMP/M.2097, SCA/Metsä Tissue (OJ L 57, 27.2.2001, p. 1, paragraphs 94-108).

(26) Case IV/M.877, Boeing/McDonnell Douglas (OJ L 336, 8.12.1997, p. 16, paragraph 58 et seq.)

(27) See for example Case COMP/M.2817, Barilla/BPS/Kamps at paragraph 34; Case COMP/M.1672, Volvo/Scania (OJ L 143, 29.5.2001, p. 74, at

paragraph 148).

31.12.2002

EN

Official Journal of the European Communities

C 331/31

(28) Although most markets involve some elements of product differentiation, there exist markets in which goods are relatively homogeneous. Goods
are relatively homogenous if customers consider the products from one producer as a sufficiently good substitute for the product from any other
producer.

(29) Products may be differentiated in different ways. There may be differentiation in terms of geographic location, based on branch or stores location.
For example, location matters for retail distribution, banks, travel agencies, or petrol stations. Differentiation may also be based on brand image,
technical specifications, quality or level of service. The level of advertising in a market may be an indicator of the firms' effort to differentiate their
products. For other products, buyers may have to incur switching costs to use a competitor's product.

(30) The increase in concentration as measured by the HHI can be calculated independently of the overall market concentration by doubling the
product of the market shares of the merging firms. For example, a merger of two firms with market shares of 30 % and 15 % respectively would
increase the HHI by 900 (30 × 15 × 2 = 900). The explanation for this technique is as follows: before the merger, the market shares of the
merging firms contribute to the HHI by their squares individually: (a)2 + (b)2. After the merger, the contribution is the square of their sum:
(a + b)2, which equals (a)2 + (b)2 + 2ab. The increase in the HHI is therefore represented by 2ab.

(31) The cross-price elasticity of demand measures the extent to which the quantity of a product demanded changes in response to a change in the
price of some other product, all other things remaining equal. The own-price elasticity measures the extent to which demand for a product
changes in response to the change in the price of the product itself.

(32) The diversion ratio measures the proportion of sales of a product that is lost to another product in the event of a price increase.

(33) Case COMP/M.1693 — Alcoa/Reynolds.

(34) Case T-102/96, Gencor/Commission, [1999] ECR II-753, paragraph 277; Case T-342/99, Airtours/Commission, [2002] ECR II-000, para-

graph 61.

(35) This may be the case if the oligopolists concentrated their sales in different areas for historic reasons.

(36) Case T-342/99, Airtours/Commission, [2002] ECR II-000, paragraph 62.

(37) Case T-102/96, Gencor/Commission, [1999] ECR II-753, paragraph 222.

(38) See Case T-102/96, Gencor/Commission, [1999] ECR II-753, paragraph 281.

(39) For example, the market for game consoles is characterised by strong network effects. The individual consumer will want to buy the game console
that is most popular among other users, because the number of games developed for that particular console is likely to be higher and there would
be more other users to exchange games with.

(40) See, for example, Case IV/M.1681 — Akzo Nobel/Hoechst Roussel Vet, paragraph 64.

(41) See, for example, Case IV/M.1882 — Pirelli/BICC, paragraphs 77-80.

(42) Case IV/M.1313 — Danish Crown/Vestjyske Slagterier (OJ L 20, 25.1.2000, p. 1, paragraphs 171-173).

(43) Case IV/M.1225 — Enso/Stora (OJ L 254, 29.9.1999, p. 9, paragraph 89).

(44) Case IV/M.1225 — Enso/Stora (OJ L 254, 29.9.1999, p. 9, paragraphs 95-96).

(45) See, for example, Case COMP/M.1693 — Alcoa/Reynolds (OJ L 58, 28.2.2002, p. 25, paragraphs 31-32, 38).

(46) See Recital 4 of the Merger Regulation.

(47) See Article 2(1)(b) of the Merger Regulation.

(48) Benefits from efficiencies that are projected into the future are to be discounted over time. In part this is because in most cases, the longer
efficiencies are projected into the future, the less probability the Commission can assign to the efficiencies actually being brought about.

(49) Case C-68/94 — France/Commission, [1998] ECR I-1375, paragraph 110.

(50) Case C-68/94 — France/Commission, [1998] ECR I-1375, paragraphs 117-120.

(51) Cases M.2810 — Deloitte & Touche/Andersen UK; M.2816 — Ernst & Young France/Andersen France; M.2824 — Ernst & Young/Andersen

Germany.