European policy on mergers is on the right track, but there is still room for improvement. That is the conclusion of Professor Tomaso Duso, Klaus Gugler and Florian Szucs, writing in the November 2013 issue of the Economic Journal.


Their assessment of over 350 merger decisions made by the European Commission since 1990, together with a major policy reform made in 2004, finds that policy has achieved some goals but not all. While the 2004 reform has increased the predictability of policy and reduced mistakes, there is still substantial room for greater prevention of mergers that will reduce competition and hurt consumers.


The researchers note that in terms of deterrence, the prohibition of a merger sends an especially clear signal to market participants. For example, after the European Commission blocked Ryanair''s acquisition of Aer Lingus in 2013, other mergers expected to reduce local competition will be strongly discouraged.


Professor Duso comments:


''A vigorous and skilfully enforced merger and competition policy is vital for improving economic performance, stimulating growth and boosting business and consumer confidence.


''Retrospective studies like ours – which try to understand whether policy is working and, if so, why – are important tools for enhancing policy effectiveness.''


Merger control is one of the load-bearing pillars of competition policies and it is the only area where antitrust authorities can prevent actions that might hurt consumers. Regulators can therefore create direct savings for consumers by preventing or modifying those mergers that substantially reduce competition.


In this study, the authors develop a comprehensive framework for evaluating merger policy and use it to evaluate the European Commission''s merger control enforcement between 1990 and 2007. In particular, they evaluate over 350 merger decisions made by the Commission and the major policy reform that was introduced in 2004.


To measure whether a merger hurts consumers, the authors build on the basic intuition that a merger''s effect on rival firms'' profitability can be informative about its effects on competition.


A merger can be pursued because it allows the merging parties to become more efficient. More efficient firms would reduce prices and increase their market shares, which in turn would benefit consumers and hurt competitors.


But a merger can also be pursued because it increases the merging firms'' ability to increase prices. This is generally a boost for their competitors'' profitability as well since it leads to a less aggressive pricing strategy. But such mergers would hurt consumers.


The merger''s profitability effect is measured by looking at the stock market reactions around the date of the merger announcement: a merger hurts consumers if the stock market reaction of rivals'' firms compared with the market is positive, while it benefits consumers if it is negative.


The results indicate that merger control in Europe is partially effective:


· By observing merger and firm-specific characteristics, it is possible to predict accurately the merger policy outcome over 70% of the time. The 2004 reform increased this predictability from 70% to 76%.


· The policy seems to be partially successful in preserving effective competition either by directly remedying or prohibiting the proposed mergers or by deterring anti-competitive ones. The prevention of mergers that hurt consumers seems to be an especially particularly successful, though seldom used, tool.


· When an anti-competitive merger is stopped, all rents generated are reversed. Moreover, an increase in the prohibition ratio to merger proposals by 1% decreases the likelihood of anti-competitive mergers by over 50%. An increased ratio of 1% would be considerable given that only 20 of the over 4,500 mergers notified between 1990 and 2007 were stopped.


· The reform significantly decreased the likelihood that mergers that are beneficial for consumers are erroneously remedied or prohibited by a factor of 10% to 30% depending on the chosen estimates.


''An Empirical Assessment of the 2004 EU Merger Policy Reform'' by Tomaso Duso, Klaus Gugler and Florian Szucs is published in the November 2013 issue of the Economic Journal. Tomaso Duso is Professor of Economics and Head of Department at Deutsches Institut für Wirtschaftsforschung, DIW Berlin. Klaus Gugler is Professor of Economics and Head of the Institute for Quantitative Economics at the WU University of Economics and Business, Vienna. Florian Szucs is at the DIW Berlin.