A horizontal merger brings together firms that produce the same product within the same market.
Horizontal mergers can be either beneficial or detrimental overall. By definition, horizontal mergers reduce the number of actual competitors in the market. Horizontal mergers may also produce cost savings and other benefits. If these benefits outweigh any reduction in competition, then the merger should be allowed to proceed.
Analysing Horizontal Mergers
Competition authorities commonly take a two-stage approach to analysing horizontal mergers (see Figure 1).
Figure 1: Two Stage Process for Analysing Mergers
The first stage uses measurable thresholds or “safe harbors” to determine whether a merger is likely to raise serious competition concerns. If a merger falls within the specified threshold then it is considered to be “safe”, and may proceed without further investigation.
For example, in the United States, antitrust authorities set thresholds based on the change in market concentration from a proposed merger. In Europe, the Merger Control Regulation applies only to mergers, acquisitions, and joint ventures that satisfy thresholds based on the turnover of the firms involved.
The purpose of these thresholds is to focus resources on investigating those transactions that are most likely to raise serious competition concerns. Those mergers that do not fall within specified safe harbors are investigated in depth.
A full merger investigation should consider a range of factors to determine whether the merger would increase market power, and to evaluate any offsetting benefits. Relevant factors include:
- Technological change and dynamic efficiencies that would result from the merger,
- Cost savings and other efficiencies claimed by the merging firms,
- The ease of market entry, or existence of any barriers to entry,
- The potential for collusion among firms in the market following the merger,
- The possibility that the merged entity may act anti-competitively,
- Whether one or both of the merging firms are likely to survive or fail if the merger does not proceed,
- Whether the merger would eliminate any potential competitors,
- Whether customers in the market have “countervailing power” that would constrain the merged entity.
Remedies
If a merger is found to substantially reduce competition, or give the merged entity a dominant position in a market, the first step is to evaluate any benefits from the merger. If the merger is likely to generate benefits that outweigh the damage to competition, then it should be allowed to proceed.
In some jurisdictions regulatory authorities may impose ex ante obligations on a merged firm, where the merger would otherwise be anti-competitive. For example, in both the United States and Europe, National Regulatory Authorities may impose conditions on a merger that would otherwise be anti-competitive.