As the year comes to a close, I am writing about a topic which will play a huge role in the antitrust world again next year: Innovation. In this post, I will take a broader look at innovation in European merger control, including Draghi’s ideas for modifications.
Innovation continues to be a major topic in politics and antitrust law. The importance of innovation (not only) for competition has been emphasised for years. Recently, Mario Draghi, former Italian prime minister and European Central Bank President (and – as the Commission says – „one of Europe’s great economic minds“), emphasised the importance of innovation for Europe’s economy in his report “The future of European competitiveness” (see Part A and Part B).
Draghi pointed out that Europe is facing complex challenges: Global trade is slowing down, geopolitics is fracturing, and technological change is accelerating. Draghi names innovation as one way of countering these challenges (by “Closing the innovation gap“ with the US and China). But before going into details of the report, let’s quickly revisit what is problematic about considering innovation in merger control processes – more generally and in the European Commission’s practice.
The problem with innovation and merger control: uncertainty
One of the main characteristics of innovation (or rather research and development as the innovating process) is its inherent uncertainty. In this respect, innovation differs from other competitive parameters such as price or capacity, which (usually) can be measured somehow, be it in numbers or other objective criteria. The same is not so easily true for research and development. For example, it is often uncertain whether an R&D process will lead to a successful result, and – if so – whether the outcome will be commercially successful.
The uncertainty of innovation makes it more difficult to capture the relevance of certain ongoing research and development from an ex-ante perspective in merger control processes.
Innovation in European merger control
The importance of innovation (or the innovating process) in merger control processes is not new. In Dow/DuPont, dating back to 2017, theories of harm circulating around innovation became the centre of attention.
In that case, for the first time, two theories of harm were developed to explicitly protect innovation competition. In previous decisions, only R&D-projects at a later stage (already having a link to a certain product) were included in merger control assessments. In the pharmaceutical sector, for example, the Commission was only interested in pipeline-products in phase III of clinical trials. In Dow/DuPont (and Bayer/Monsanto in 2018), in contrast, the innovation process as such – regardless of any output – was regarded as relevant for the purposes of merger control
Innovations are moving more and more into the centre of attention: Draghi-report
Innovation is also the focus of the report by Mario Draghi. Draghi was tasked by the European Commission to prepare a report of his personal vision on the future of European competitiveness.
Several statements from the report are relevant to merger control:
- Change in economy: Draghi points out a shift of the economy towards more innovation heavy sectors. In these sectors, innovation is usually based on digital technologies and brands. Companies do not only compete on low prices but also on scale and innovation.
- Change in economy requires changes to competition regulators: Following Draghi, there is no need to change the written rules of antitrust law. He is of the view that the relevant regulations are generally broad enough to capture new developments of the economy. It is rather the approach of the competition regulators that need to adapt. Such approach could be as follows:
- It should take into account competitive parameters other than price. Merger decisions should especially focus more on the impact on innovation and potential or future competition, instead of just looking at past or existing market shares.
- There should be a change in operating practices as well as updated guidelines considering innovation and future competition. These guidelines should explain how competition regulators assess the impact of competition on the incentive to innovate. They should also explain how merging parties can prove that a merger will increase the ability and incentive to innovate (‘innovation defence’).
- Parties, that make use of the innovation defence, should commit to levels of investment that can be monitored ex post. The burden of showing that the merger does not harm consumers in the long run, should fall on the parties.
Overall, Draghi’s suggestions might make sense given the increasing importance of innovation which might not be sufficiently reflected in the current regulations. For instance, the Horizontal Merger Guidelines from 2004 only address innovation as a competitive factor in one paragraph (paragraph 38).
The President of the German Federal Cartel Office, Andreas Mundt, also pointed out the growing importance of innovation competition in his presentation at the conference of the “Studienvereinigung Kartellrecht” on current topics of German and European antitrust law last week in Bonn. Mundt emphasised the importance of the ‘innovation commitment’ mentioned by Draghi (and mentioned above, last bullet). He highlighted the impact of such innovation commitment (or rather investment commitment) in merger control for future merger control cases.
Takeaways
Innovation is a topic that has become increasingly present in merger control in recent years, and there are three takeaways from these developments:
- Innovation as a competitive factor is characterised by uncertainty, which makes merger control assessments more difficult.
- It could therefore be helpful to have revised guidelines from the Commission as a point of reference in order to contribute to legal certainty.
- The Draghi-report argues that an adjustment in the implementation of existing merger control rules could be sufficient (but also required) in order to face innovation competition.
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