Impact case study database

This research has led both to substantial changes in (1) the practice of policy (2) the economic welfare assessment of specific merger decisions, and (3) the professional understanding of innovation.

(1) Impact on the practice of policy:

The whole economic annex (Annex 2) in the Dow/DuPont EC decision reproduces the economic analysis of the IToH in simplified non-mathematical form (see Source 5.5). The legal service of the European Commission advised that precedent required the exclusion of explicit reference to the underlying research papers or author names, as they were all working at the EC at the time, and the papers were not yet published.

The importance for practice is also reflected in the extensive interest that the IToH generated in the antitrust community, including key global antitrust conferences and symposia in which the authors presented in 2017 and 2018. Examples are the ABA (American Bar Association) Spring Meetings, Washington DC; the ICN (International Competition Network), Porto; ACE (Association of Competition Economics), Bologna; OECD Competition Committee Meeting, Paris; Meeting of the EU Chief Economists, Brussels; and the Competition Law Annual Conference, European University Institute. It is also reflected in the number of policy-oriented commentaries and reviews of their work published since 2016 (see Source 5.6), which have greatly extended the international reach of the impact of this work.

“[Valletti’s] work has been seminal in raising the awareness of innovation as a key dimension of the competitive assessment in mergers; and in emphasising the larger economic relevance of this assessment in terms of economic policy. Regulators now accept this is an important step forward: the innovation theory of harm needs to be in their toolkit” […] “The innovation theory of harm is now established in the profession and among regulators as one of the important areas of investigation in mergers involving firms with significant innovation capabilities.”

Dr Cristina Caffarra, Head of European Practice, Charles River Associates (Source 5.3)

(2) Impact on specific merger decisions:

When it comes to proving evidence of impact, there is a well-known challenge in any policy context since the counterfactual is difficult to identify. In the case of mergers, it is especially challenging since the effect is the avoidance of a negative consequence that would have happened (in the future) without the prohibition of a merger, or without the conditions required for allowing it. Still, the work of Professor Valletti on the IToH has drastically informed the merger policy process, which is an important effect in itself (Sources 5.1, 5.2, and 5.3).

The impact of the IToH on economic welfare can also be inferred by the remedies imposed as conditions in allowing mergers to proceed (Source 5.2). This is because, once a theory of harm is identified, a consequential remedy to address that harm follows.

The insights from Valletti’s research papers were:

“directly used in specific merger reviews. In Dow/Dupont and Bayer/Monsanto, innovation theories of harm were the core of the competition concerns and the mergers were approved subsequent to significant divestments offered by the merging firms.”

Margrethe Vestager, Vice President of European Commission and Commissioner for Competition, DG Competition (Source 5.1)

In the specific case of Dow/DuPont, the merger created significant overlaps in terms of innovation capabilities in herbicides, insecticides, and fungicides, in the entire EEA. The parties were ultimately required to divest the global R&D facilities of DuPont to FMC ($1.6 billion). Similarly, in the Bayer/Monsanto case, the divestment (to BASF) amounted to $9 billion. As reported in the Annual Activity Report of DG Comp 2018 (see Source 5.4), for instance, the European Commission writes, “[in] *2018, the Commission intervened in several proposed concentrations, which, in addition to price, quality and choice concerns, risked impeding innovation. In Bayer/Monsanto and BASF/Bayer divestment business the Commission identified concerns related to innovation. The Commission approved the Bayer/Monsanto transaction after the parties submitted an extensive divestiture package comprising in particular Bayer's global vegetable seed business and broadacre crop seed and trait business (including R&D), its glufosinate business and its digital agriculture activities. These divestitures addressed all competition concerns identified by the Commission, including those related to innovation. The divestiture businesses were sold to BASF. The acquisitions would allow the company to compete and innovate as actively and effectively against the merged firms, for the benefit of European farmers and consumers.*” (Page 33, emphasis added). The press release of the EC also states that, absent the remedies imposed, the Bayer/Monsanto merger “would have significantly reduced innovation, which is very important to develop seeds with a higher yield or pesticides that are less toxic, less damaging to the environment”.

As for a quantification of the effects, the same Annual Report states (page 13) that “[i]n 2018, total customer savings from merger interventions by the Commission (KPI 2) varied between EUR 15.0-25.0 billion”. While the publication does not apportion the overall benefits (which are calculated as NPV) from merger intervention to the level of the single transaction, the Bayer/Monsanto merger was the biggest one in 2018 (as was the Dow/DuPont merger in 2017, when total customer savings were estimated between EUR 2.5-4.2 billion).

These impacts are lower bound estimates since implementation in enforcement cases is still ongoing and has spread beyond the EU. For instance, the US Department of Justice investigated in 2020 the $360m merger between Sabre (the largest global distribution system for airline bookings) and Farelogix. The merger was abandoned in May 2020 because of the opposition it encountered from the UK’s Competition and Market Authority, and on the IToH grounds that innovation would have been negatively impacted by the merger (Source 5.12).

“In the UK, both Professor Valletti’s research and its application to EC cases have in recent years influenced the CMA’s attitude to potential innovation-related harms in merger control… the CMA continues to make efforts to ensure that its merger assessments capture potential harms relating to reduced incentives to innovate. This is perhaps most clearly reflected in our proposed new Merger Assessment Guidelines (MAGs), which the CMA is currently consulting on.”

Dr Andrea Coscelli, CBE, Chief Executive, Competition & Markets Authority (CMA), UK (Source 5.2)

The IToH is also relevant to frame the current debate in the digital economy as to whether Big Tech firms have been allowed to acquire a sub-optimally large number of firms in the past two decades. Publication [1] is referenced in the UK’s assessment of mergers in digital markets

(source 5.8), in the New Zealand Productivity Commission report on the digital economy in Australia and New Zealand (Source 5.9), and in the OECD Background Note on non-price considerations in merger control (Source 5.10). Publication [4] is specifically quoted in the draft of the UK’s CMA new Merger Assessment Guidelines, encapsulating more concerns around innovation theories of harm (Source 5.11).

(3) Impact on professional understanding:

The research also spurred several responses among academic-economists. The papers were written just over three years ago, but they have over 120 citations already (Google scholar). Other researchers followed on the topic, both proposing alternative theory models and conducting empirical assessments (see Sources 5.6 and 5.7 for some illustrative references of papers already in print). This has meant that the impact reach of Valletti’s research on the IToH has been global.

“All of this research has had a significant impact on how competition authorities think about innovation concerns in mergers, and has led to a more widespread use of innovation theories of harm.”

Dr Andrea Coscelli, CBE, Chief Executive, Competition & Markets Authority (CMA), UK. (Source 5.2)

“These discussions informed competition authorities around the world and contributed to advancing the understanding of when and how mergers can be harmful for innovation. Given the importance of innovation for economic growth, this literature and its advancement are highly relevant for competition authorities but also from a wider economic policy perspective.”

Dr Margrethe Vestager, Vice President of European Commission and Commissioner for Competition, DG Competition (Source 5.1)