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*Giovanni Pitruzzella is the President of the Italian Antitrust Authority
Thank you very much for this invitation. The digital revolution is transforming the economy. And it is fair to ask whether it should also transform competition policy. After all, creative destruction might well affect institutions as well as markets.
Merger control, static and dynamic competition
As it is clearly stated in the EU merger regulation, innovation and dynamic competition lie at the heart of merger control. Industry restructuring through mergers can be an important vehicle for improving operators’ competitiveness and their ability to sustain increased investments. In turn, efficient and globally competitive companies and high level of investments are key to fuel economic growth.
However, merger control is about ensuring that the process of reorganization does not result in lasting damage to competition, negatively affecting the competitive structure of entire sectors of the EU economy. Competition is not a cost for the economy. It is a driver of both consumer welfare (through lower prices) and economic competitiveness (through lower input costs). But, more importantly, competition is the key driver of the dynamic process whereby firms strive to innovate, which in turn is the key driver of economic growth. So, identifying always more competition with prices and less competition (i.e. mergers) with innovation would be a mistake.
Let’s be clear. I am not suggesting that that more competition would always deliver more innovation. It is true that in some fiercely competitive markets, when competitive intensity rises companies may be less able to monetize their investment and so may invest less. However, innovation is intimately related to the ambition to go ahead one’s rivals and to the fear of falling behind more dynamic competitors. In other words, innovation is intimately related to (dynamic) competition.
So, the key challenge of merger control is to juggle three balls at once:
- the potential positive impact of merger efficiencies in terms of investments and innovation
- the potential negative impact of the merger on prices (static competition)
- the potential negative impact of the merger on dynamic competition
It is not an easy task. In fact, it is a very complex balancing exercise, which I think should be approached by looking at three main elements:
- The nature of the industry.
- Our analytical ability to make predictions on the future evolution of the industry.
- The approach that competition authorities should follow in balancing the risks of over-enforcement and under-enforcement.
The nature of the industry
The first issue is about the nature of the industry. Let me say it simply. A static industry requires a static approach. A dynamic industry warrants a dynamic approach. Fortunately, after the modernisation of 2004, European merger control looks more directly at the competitive relationships among firms that operate in a market. The analysis comprises a number of elements that go beyond market structure:
- The closeness of competition between the merged parties
- Whether the merger removes an important competitive force in the market
- The merged entity’s incentives to compete after the merger
- The likely reaction of competitors
All stakeholders should be reassured by the depth of the economic analysis being put forward by competition authorities to evaluate the impact of mergers on static competition. However, the real challenge is to use this flexible toolbox to address dynamic as well as static competition. The shift from a narrow focus on market structure to a comprehensive analysis of competitive relationships in a market certainly helps. In fact, this moves the attention away from the (sterile) discussion about the relationship between market structure and innovation and focuses on rivalry and competitive pressure. These are very relevant to understand dynamic as well as static competition.
Our analytical ability to make predictions on the future evolution of the industry
This brings me to the second point. Our analytical ability to make predictions on the future evolution of the industry. Assessing investment and innovation dynamics is much more difficult than assessing static competition. The analytical economic framework for doing this might not be as well developed and solid as that for assessing static competition. But – in those market where dynamic competition is key – we should do our best to use state-of-the-art economics to assess the impact that dynamic competition and merger synergies may have on innovation.
We can do so by looking at the specific characteristics of individual markets; by blending together different branches of economics; by being prepared to do without certain quantitative refinements that are feasible only when we look at static competition; by cultivating more empirical research and ex post studies. But also by being prepared to look at a future which, by its very nature, does not look as sharp as the present. Dealing with innovation and investments in dynamic environments normally involves the unavoidable risk of making predictions about an uncertain future. Uncertainty and complexity are hallmarks of dynamic market environments. This is not a reason for putting dynamic considerations aside in merger control, but a reason for developing the right tools to deal with such environments and for managing effective decision-making in uncertain environments.
The approach that competition authorities should follow in balancing the risks of over-enforcement and under-enforcement
In order to manage uncertainty we need to be prepared to deal with and to balance two unavoidable risks: the risk of over-enforcement and the risk of under-enforcement. In some cases, competition authorities might block or impose conditions on mergers that do not actually restrict competition. In other cases, competition authorities might let through mergers that would significantly impede competition. I am sure not all of us would agree on how we should balance these two risks in dynamic markets. I personally think that, in a truly dynamic market, we should give a great deal of weight to the risk of hampering investments and innovation. Because these are the real drivers of consumer welfare. But also because innovation drives competition as much as competition drives innovation.
Conclusions
So, to conclude. I think that there is no need for an overhaul of merger control in order to tailor it to the digital age. Competition law, thanks to its flexible economic analytical toolbox, is in many ways future proof. But in a fast-moving innovation-centric world, the toolbox needs also to be smartly upgraded if we are to answer the relevant questions that arise in dynamic markets. We also need to accept that, after all, when dealing with dynamic markets, antitrust might not be able to escape some form of myopia. Not because antitrust does not want to look at the more distant future. But because doing so often involves looking into a blurred picture subject to many uncertainties. I think that the real challenge for antitrust authorities is indeed effectively managing these uncertainties in their decision-making process.
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