Outline Definition of coordinated effects The notion of collective dominance Economic links Oligopolistic markets The ‘gap’ under the dominance test Conditions for coordinated conduct: Repeated interaction Barriers to entry Capacity to reach a mutually acceptable equilibrium Ease of detection of cheating Enforceability of compliance

Horizontal mergers

Recap: ‘gap’ with the previous test Under the dominance test, mergers were likely to be blocked if they led to a single firm being dominant in the market (unilateral effects or non-coordinated effects) or to a number of firms engaging in collective dominance (co- ordinated effects). The EUMR does not expressly refer to collective dominance nor does it refer to a dominant position on the part of one or more undertakings.

Recap: ‘gap’ with the previous test The “Gap” in the application of the EUMR corresponded to the situation where the post-merger entity’s market power would not amount to single firm or collective dominance but the merger may, however, lead to non-coordinated effects.

SIEC test Advantages of the new test: – Enhances legal certainty – closes gap – retains past precedent – avoids confusion with Article 102 TFEU – retains same intervention threshold – Effects-based competition test – Asks the right question: will competition be significantly impeded? The change is that the new test puts an end to legal uncertainty and focuses EUMR analysis on the real issues

Coordinated Effects A merger may create or reinforce a situation where competition is reduced by co-ordination among market players → co-ordinated effects EUMR did not expressly refer to collective dominance The EUMR’s applicability to collective dominance: Commission in its Nestlé/Perrier decision

Coordinated Effects Almelo: “in order for such a collective dominant position to exist, the undertakings in the group must be linked in such a way that they adopt the same conduct on the market” (Case C- 393/92, paras 42-43) The GC in Gencor: “a relationship of interdependence existing between parties to a tight oligopoly” - a likelihood of coordination was sufficient to establish collective dominance (Case T-102/96). The term “economic links”, used in Flat Glass (Cases T-68, 77, and 78/89; collective dominance-Article 102), was substituted for “structural links”.

Nestlé/Perrier (Case No IV/M.190) French bottled water market would be highly concentrated The merged entity would have very considerable capacity reserves A narrow oligopoly of three suppliers The degree of market transparency would be very high Prices have constantly increased The three national suppliers had similar cost structures Buying power of retailers and wholesalers would not be sufficient to constrain significantly the market power of the post-merger entities

Air tours/First Choice (T-342/99) The major tour operators: Thomson (30.7%), Airtours (19.4%), Thomas Cook (20.4%) and First Choice (15%) Supply to tour operators of seats on charter flights to short-haul destinations in UK and Ireland. 4 large firms, 85 per cent of the market Post-merger HHI: 2,752 Low demand growth High transparency in prices

Air tours Magic Three Co-ordination more likely to emerge in markets where it is fairly easy to establish the terms of coordination and where co-ordination is sustainable. Sustainability requires that (Airtours criteria) The undertakings involved can monitor each other’s market behaviour (market transparency) There is credible deterrence mechanism’ (retaliation mechanism) to ensure adherence Outsiders and customers cannot undermine the co-ordination (lack of countervailing power)

Sony/BMG (Case COMP/M.3333 [2004]) National market for recorded music Insufficient evidence that the five majors had held a collective dominant position in the past Coordination in respect to prices than capacity (Airtours) Reduction from 5 to 4 Deficits in actual transparency Partly heterogeneous product characteristics Lack of actual evidence as regards retaliatory action Cleared the merger as not likely to create collective dominance

GC: IMPALA (Case T-464/04 ) Successful appeal by Impala on the clearance decision Sony/BMG (first ever 3rd party appeal upheld against clearance) The GC decision stated that the Airtours criteria can also be established indirectly: the three conditions defined by the GC in Airtours v Commission…may, however, in the appropriate circumstances, be established indirectly on the basis of what may be a very mixed series of indicia and items of evidence relating to the signs, manifestations and phenomena inherent in the presence of a collective dominant position.

GC: Impala - retaliation GC confirmed that mere existence (rather than evidence of exercise) of deterrent mechanisms was sufficient, since if members of the oligopoly confirmed with the common policy, there was no need for retaliation. But how to prove theoretic retaliation mechanism is credible if never used?

GC: Impala - transparency Impala: Decision found campaign discounts (not mentioned in SO) reduced transparency. GC: findings on transparency not supported by sufficient evidence ‘…close alignment of prices over a long period, especially if they are above a competitive level, together with other factors typical of a collective dominant position…[these] …in the absence of an alternative reasonable explanation, suffice to demonstrate the existence of a collective dominant position, even if there is no firm direct evidence of strong market transparency’

IMPALA /Sony BMG Case C‑413/06 P The GC committed an error of law in misconstruing the principles which should have guided its analysis of the arguments raised before it concerning market transparency in the context of an allegation of a collective dominant position (at para 133) The assessment of transparency cannot be undertaken in isolation and in an abstract manner.

Sum up Air tours GC overturned creation of collective dominance (capacity) finding Sony/BMG GC overturned a ‘no pre-existing collective dominance (price)’ finding (and also that merger will not create collective dominance) CJEU set aside the GC’s judgment

Standard of evidence for collective dominance – GC: Airtours GC on standard for prohibition of merger creating collective dominance Decision Price Waterhouse/Coopers & Lybrand: ‘convincing evidence’ – a quotation from France v Commission (Kali & Salz) : ‘the strong burden of proof on the Commission in the case of an oligopolistic market which the Commission holds to be subject to collective dominance’

Horizontal Merger Guidelines 2004 A merger in a concentrated market may significantly impede effective competition, through the creation or the strengthening of a collective dominant position, because it increases the likelihood that firms are able to coordinate their behaviour in this way and raise prices, even without entering into an agreement or resorting to a concerted practice within the meaning of Article 101 TFEU (para 39).

Horizontal Merger Guidelines 2004 Three conditions are necessary for coordination to be sustainable: the coordinating firms must be able to monitor to a sufficient degree whether the terms of coordination are being adhered to. discipline requires that there is some form of credible deterrent mechanism that can be activated if deviation is detected. the reactions of outsiders, such as current and future competitors not participating in the coordination, as well as customers, should not be able to jeopardise the results expected from the coordination (para 41)

Horizontal Merger Guidelines 2004 Reaching terms of coordination (paras 44-48) Coordination is more likely to emerge if competitors can easily arrive at a common perception as to how the coordination should work. the less complex and the more stable the economic environment, the easier it is for the firms to reach a common understanding on the terms of coordination Monitoring deviations (paras 49-51) - transparency in the market is often higher, the lower the number of active participants in the market.

Horizontal Merger Guidelines 2004 Deterrent mechanisms (paras 52-55)- Coordination is not sustainable unless the consequences of deviation are sufficiently severe to convince coordinating firms that it is in their best interest to adhere to the terms of coordination. Retaliation that manifests itself after some significant time lag, or is not certain to be activated, is less likely to be sufficient to offset the benefits from deviating. Reactions of outsiders (paras 56-57) Merger with a potential competitor (paras 58-60)