50 Cf., e.g., Mueller, Public Policy Toward Vertical Mergers, op. cit., 152.

51 Scherer, Industrial market structure ... , op. cit., 315, who states that this Is not restricted to sales of Identical product units to different buyers at varying prices but also Includes the sales of identical units to the same buyer. For a further definition and a survey, cf. Koutsoylannls, Anna, Modern Microeconomics, 2nd ed., 2nd reprinting, London et al. 1981, p. 192-201.

may be distinguished in this context that must be satisfied for a seller to be able to practice price dlscrlmlnatlon:92

One of the consequences of vertical Integration that is largely neglected or underestimated by adherents of current theory may be the facilitation of price dlscrlmination.53 Whether price discrimination may be facilitated depends essentially on the properties of the particular goods Involved. Some properties of economic goods, such as high storage or re-packaging costs, or the Impossibility of concealing a resale from a low-price to a high-price segment, are likely to prevent customers from different segments from arbi**trage.** However, If goods are traded among Independent stages which do not possess these properties, vertlcal Integration may enable a firm to Install an equivalent mechanism and thus enforce price dlscrlmlnatlon. 54

52 Cf. Hovenkamp, Economics and Federal Antitrust Law, op. cit., 200; **Kay**sen/Turner, Antitrust Polley .•• , op. cit., 77 f.; Scherer, Industrial market structure ... , op. cit., 315. For a survey on the strategy and a comparison of U.S. American and German policy towards price discrimination, cf. Schmidt, Wettbewerbspolitlk und Kartellrecht, op. cit., 90-92; and ibid., US-amerlkanlsche und deutsche Wettbewerbspolltlk ••• , op. cit., 283-310.

53 Cf., e.g., Areeda/Turner, Antitrust Law ... , vol. 3, op. cit., § 725e; and Ibid., Antitrust Law ..• , vol. 4, op. cit., § 1012c; Hovenkamp, Economics and Federal Antitrust Law, op. cit., 199 f.; Kaserman, Theories of Vertical Integration •.. , supra, 503; and Warren-Boulton, Vertical Control of Markets ... , op. cit., 75.

54 Cf. the polish-sausage example by Hovenkamp, Economics and Federal Antitrust **Law,** op. cit., 200, who holds that the best way to enforce price discrimination and to prevent arbitrage for a monopoly manufacturer of polish sausages selling to grocery stores (home consumption) at a low price and to concessionaires (public events) at a high price, is to vertically Integrate Into the concessions business Itself and sell the sausages at high prices directly at public events and to grocery stores at low prices.

A difference In price elasticities of demand among segregated customer segments of an input monopolist enables the monopolist to increase monopoly profits by price discrimination If he acquires the buyer that faces the relatively highest of the price elasticities of the segregated market segments. This reduces the Incentive for arbitrage.55 Concerning the U.S. automobile industry, for Instance, a strong incentive for backward vertical integration was found to exist if price elasticity of demand on the market for new automobiles and spare parts differed from each other. This incentive was found to exist as long as the two economic goods were complementary to each other, as in the case of automobiles and spare parts, and the automobile market was characterized by a higher price elasticity of demand than the market for spare parts. 511

If we hypothetically assume that economic efficiency and welfare are the only real objectives of antitrust, then knowledge of the net effects on economic efficiency and welfare that determine the benefits or evils of price discrimination due to vertical Integration is essential to the evaluation of vertical lntegration.57

Although vertical integration seems to facilitate price discrimination, no generalizations are feasible, however. Price discrimination may have pro-competitive effects or effects which are detrimental to competition, depending on the many forms of price discrimination and their effects on different performance crlterla. 58 Furthermore, price discrimination may lead to a conflict between first line, second line, and possibly third and fourth line competition. For Instance, price discrimination may lead to a revitalization of competition In homogeneous oligopoly markets (first line) but to a disadvanta-

55 Cf. Hovenkamp, Economics and Federal Antitrust Law, op. cit., 200; and **Kaserman,** Theories of Vertical Integration ••• , supra, 503; and empirically Crandall, Robert, Vertical Integration and the Market for Repair Parts ..• , supra.

56 Cf. **again** Crandall, Robert, Vertical Integration and the Market for Repair Parts ..• , supra.

57 It Is unambiguous that price discrimination cause a transfer of wealth from consumers to producers, cf. Scherer, Industrial market structure ••. , op. cit., 319: "Price discrimination causes a redistribution of Income toward the discriminator and away from Its customers."

58 Some of the authors believe the effects to be generally beneficial rather than adverse, cf. Areeda/Turner, Antitrust Law .•• , vol. 3, op. cit., § 725e; and Bork, The Antitrust Paradox, op. cit., 240: "The law should be Indifferent to this possible use of vertical integration •.. ". For a survey on the different forms and their effects, cf. Scherer, Industrial market structure ... , op. cit., 317-319, and 325-333.

glng of firms that are exluded from the purchase at favorable conditions by price discrimination (second llne).58 This raises the question of whether there is Injury to competitors or Injury to competition or Injury to both, and If they are In conflict, which actually outweighs whlch:110

"Two sharply different objectives have been Incorporated In present law, without recognition of their difference. One is to prevent discriminations Injurious to market competition In the secondary line. This Is the counterpart of the objective of the law In the primary line .... The second objective Is to assure equality of opportunity for all competing enterprises that buy goods from the same seller .... Although Inequalities of opportunity may be of a kind and scope that have anticompetitive effects, there may also be Inequalities that have no necessary relation to the mal ntenance of competition."

Hence, price discrimination may not be judged as per se beneficial or per se detrimental to competitors and/or competition. An evaluation depends on the object to be protected, the objectives to be attained and the existence of the aforementioned conditions that make price discrimination feaslble.81 With regard to the price discrimination potential as a result of vertical integration, the extent of horizontal market power that the acquiring firm holds seems of primary lmportance.82

The assertion that vertical Integration Is beneficial In general Is further weakened by the evidence of possible output consequences which are believed to outweigh possible price raising effects and which we have treated supra. If It can no longer be assumed that vertical mergers are output Increasing, the net effect of a vertical merger Is completely Indeterminate for the general case.a

59 Cf. Schmidt, Wettbewerbspolltlk und Kartellrecht, op. cit., 122 f.; and Idem, US-amerlkanlsche und deutsche Wettbewerbspolltlk ... , op. cit., 91.

60 Edwards, Corwin D., The Price Discrimination **Law: A Review** of Experience, Washington D.C. 1959, pp. 638 f.

61 Cf. again Scherer, Industrial market structure ... , op. cit., 334: "Discrimination always causes a redistribution of Income whose merits cannot be assessed without Invoking value judgments. Some forms of discrimination Increase the efficiency of resource allocation compared to simple monopoly, others are essentially neutral, while still other types ... lead to serious Inefficiencies .•. Given these complexities, It Is necessary to Judge particular cases of discrimination on their Individual merits."

## **d. Impediments to New Competition**

There Is no consensus on the question of whether an increase In the degree of vertical integration also raises barriers to entry. Aside from the fundamental differences between the traditional theoretical approach and the theory underlying current antitrust policy In the U.S. which we already treated supra, studies on the Impact of vertical integration on barriers to entry are also rare, so that there Is no evidence, either theoretical or empirical, for the general case.M

In the case of a barrier-raising effect of vertical integration, the assertion that there Is no direct short-run increase in market share as a consequence of vertical Integration may still hold, but Is weakened under the impression that market power could emerge or be Increased as a result of the protection of barriers to entry. Hence one of the most common competitive objections to vertical Integration Is that It may raise barriers to entry to at least one of the relevant stages after vertical lntegratlon.85 To the extent that vertical Integration Impedes entry, there is an incentive to Internalize successive stages of the production and distribution process, even If short-run profits suffer, because the preservation of a powerful market position may help to extract monopoly rents for a longer period of time:ee

"To the firm, entry barriers are an asset which has value similar to that of a new machine or a well-received trademark, and, therefore, firms can be expected to adopt policies which can be explained only as an 'investment In entry barriers' •••. In this fashion, there may be a conflict **between** long-run behavior designed to promote entry barriers and a short-run profit maximizing behavior."

**Whereas** barriers to entry played a significant role In court cases In the attempt to determine whether market power would actually contribute to a lessening of competition or whether a firm would hold or Increase a market dominating position as a consequence of a vertical or conglomerate merger117, recent theoretical discussion emphasizes a position that denies or plays down an entry-barrier-raising-effect of vertical integration. This position has **been a** minority position thus far. 1111

The primary objective of antitrust theory Is to Isolate the conditions under which vertical Integration Is likely to have an entry-barrier-raising effect. In a two stage case of total integration - all firms at a production stage are vertically Integrated with the firms at the successive stage - there are no purchase or supply markets open to newcomers. Although vertical Integration would Increase barriers to entry to a maximum extent, the case is rather unlikely. In a two stage case with no barriers to entry at either of the stages, even a total vertical Integration would not erect barriers to entry. Vertical integration is unproblematic In this case.

The realistic case, however, Is the situation In which market entry Is Impeded at one of the stages in our two stage example and Is not impeded at the other stage. In this context, there are three reasons why a need to enter at more than one stage extends barriers to entry to the next stage:119

( 1) If for any reason new firms are forced to enter at more than one stage and have to overcome existing entry barriers at, for instance, stage A

67 Cf., e.g., the cases FTC v. Procter & Gamble Co., 1967 CCH Trade Cases § 72,061; Kfz-Kupplungen, WuW/E BGH 1501, 1504 ff.; and Revell-Plastics, WuW/E BGH 1620, 1621 ff.

68 Cf., **e.g.,** Bork, The Antitrust Paradox, op. cit., 240-242, esp. 241: "Clearly, however, If (the) more restricted case of the monopolist who seeks to block entry in this fashion proves untenable, the entire theory should be abandoned."; Hovenkamp, Economics and Federal Antitrust Law, op. cit., 206-208; Llebeler, Wesley J., Toward a Consumer's Antitrust Law: The Federal Trade Commission and Vertical Integration In the Cement Industry, 15 UCLALR (1968), pp. 1153-1202; and Peltzman, Issues in Vertical Integration Polley, op. cit., 172-176.

69 Cf., e.g., Monopol kommisslon, Hauptgutachten der Monopol kommlsslon I ••. , op. cit., para. 921.

in order to enter stage **B** as well, entry Is also Impeded at stage B because barriers to entry thus are factually present at stage B that would otherwise not be exlstent.70 Vertical Integration may conceivably exert influence on entry barriers because "the necessity of multistage entry will transmit this barrier, a *fortiori,* from the former to the latter (and) Integrated entry can be expected to be at least as difficult as single-stage entry at the most restricted stage''.71

(2) Capltal needs for potential entrants might Increase If entry at more than one stage Is required slmultaneously.72 This not only happens as a result of capita! market Imperfections but also due to the fact that a monitoring of large vertically Integrated firms may result In higher returns being required by investors. This In turn may drive up the costs of capital If It Is raised In the equity market.73 However, this view Is not shared by all scholars, particularly not by adherents to the current theoretical approach. *Posner,* for Instance, holds that this reasoning Is trlvial and contains "a meaningless usage, since It is obvious that **a new** entrant must Incur cost to enter the market, Just as his predecessors, the firms now occupying the market, did previously".74 Nevertheless, this criticism only considers the aspect of the capital which has to be raised. It does not take Into consideration that conditions on the **capital** market might alter to the disadvantage of new-

70 Cf. Areeda/Turner, Antitrust Law ... , vol. 4, op. cit., § 1011 b.

71 Kaserman, Theories of Vertical Integration ... , supra, 507; cf. as well Comanor, Vertical Mergers, ... , supra, 259; Fisher/ Sciacca, An Economic Analysis of Vertical Merger Enforcement Polley, op. cit., 42; Kaysen/Turner, Antitrust Polley ... , op. cit., 121 f.

72 Cf. Fisher/ Sciacca, An Economic Analysts of Vertical Merger Enforcement Polley, op. cit., 42; Kaserman, Theories of Vertical Integration •.• , supra, 507; Mueller, Public Polley Toward Vertical Mergers, op. cit., 157; Scherer, Industrial market structure ..• , op. cit., 303 f., who holds that "whether the Interaction between vertical Integration and capltal market Imperfections leads to significantly elevated entry barriers depends upon how large the required capital lump Is" and upon a number of other factors; and even an adherent to current theory partly accepts the capital argument, Peltzman, Issues In Vertical Integration Polley, op. cit., 173.

73 Cf. WIiiiamson, The Vertical Integration of Production •.• , supra. But cf. Bork, Vertical Integration and Competitive Processes, op. cit., 142, who argues that such an effect Is not likely.

74 Posner, Antitrust Law ••• , op. cit., 59. Cf. as well, Bork, The Antitrust Paradox, op. cit., 242: "Neither of the entrants will have a capital cost greater than If the manufacturer had not Integrated, and they will have a significant cost advantage over the monopolist."

comers trying to enter at more than one stage. Market entry at more than one stage reduces the production capabilities of newcomers because they have to start to produce at both stages. This Is the reason why well Informed capital lenders will demand a premium rate for Increased risk. This may particularly be so In the case of transaction-specific Investments that require large amounts of capital and If production processes are necessary at any stage that have to be supervised closely. 75 Emplrlcal evidence on the Issue Is ambivalent, however. Whereas evidence can be found that the amount of capital necessary and capital conditions pose a barrier to entry, the opposite Is found as weJl.78

(3) Vertical integration Is also believed to enhance product differentiation which Is considered a further reason why It Is believed to Increase barriers to entry.n \_Although product differentiation may be seen as a barrier to entry as well as a means of entry because of Its Informational function, as has been noted supra, It may stifle price competition In oligopolies Just because of Its dual character. 71

This has demonstrated that It is not as unlikely as assumed by Chicago theorists that vertical Integration raises barriers to entry. The majority of

75 Cf. Dlrrheimer/Wagner/HObner, Vertlkale Integration In der MineralOI- und chemlschen Industrie, op. cit., 17, concerning the capital market conditions; and WIiiiamson, Assessing Vertical Market Restrictions ... , supra, 926; and Idem, Economic Organisation ... , op. cit., 210 f., concerning the additional cost of transaction and information for newcomers.

76 Affirmed by Orr, Dale, The Determinants of Entry: A Study of Canadian Manufacturing Industries, 56 RES (1974), pp. 58-73, 65; rejected by **Mas**son, Robert T., and Joseph Shaanan, Stochastic-Dynamic Limit Pricing: An Empirical Test, 64 RES (1982), pp. 413-423, 418. One should be aware of the cartel-like behavior of lenders and Incumbents, however, which **has**  been mentioned supra.

77 Cf. Bain, Barriers to New Competition, op. cit., 142; Comanor, Vertical Mergers, ... , supra, 262; Kaserman, Theories of Vertlcal Integration ... , supra, 507 f.: "Where firms manufacture their own Inputs, homogeneity of the final product will be less llkely to result since variations In Intermediate product specifications wlll be facilitated by an lnternallzatlon of the coordinating function."

78 Cf. Schmidt, Wettbewerbspolltlk und Kartellrecht, op. cit., 70 f., who emphasizes the **effectiveness** of price competition In comparison to non-price parameters, the use of which may make It more difficult to respond to a competitor's action In the short run. Cf. as well Comanor, Vertical Mergers, ... , supra, 262.

empirical evidence confirms this assertlon.79

# **L Collusive Effects**

Another possible anticompetitive consequence of vertical Integration may be the furthering of oligopolistic coordination, and hence collusion. For adherents of the current theoretical edifice, there Is no connection whatsoever between vertical Integration and colluslon. 111It Is thus appropriate at this point to recall briefly what the Chicago position on explicit and Implicit collusion actually Is.

The representatives of the theoretical approach underlying current U.S. antitrust policy judge explicit collusion, i.e., conspiracy or concerted action, and implicit collusion or spontaneous coordination, which Is not covered by U.S. antitrust **law,** In **a** different manner.81

In order not to reject American antitrust policy In toto Chicagoans express the opinion - partly for tactical reasons82 - that horizontal price conspiracies should be prohibited, since collective monopolies have the same effect on price and output as an Individual monopoly. The tendency towards conspiracy increases when concentration Increases and the number of competitors **decreases.** The necessity of public policy and legislation Is accepted at least to this extent. 113

79 Cf., e.g., Clevenger, Thomas s., and Gerald R. Campbell, Vertical Integration: A Neglected Element In Market Structure-Profit Models, 5 JIO (1977), pp. 60-66; Johns, J.C.H., The Economics of the National Hockey League, 2 CJE (1969), pp. 1-20; Orr, The Determinants of Entry •.. , supra.

80 This becomes obvious If one makes a general review of the relevant works, cf. Bork, The Antitrust Paradox, op. cit., 239-245; Posner, Antitrust Law ... , op. cit., 196-201; and Stigler, The Organization of Industry, op. cit., 134 ff. For scholars that assume evidence on such a connection, cf., e.g., Comanor, Vertical Mergers, ... , supra, 262 f.; Hovenkamp, Economics and Federal Antitrust Law, op. cit., 202; Kaserman, Theories of Vertical Integration ••• , supra, 510.

81 Cf. Posner, The Chicago School ••. , supra, 932 f. and 944-946.

82 Posner, The Chicago School •.. , supra, 932: "Partly, perhaps, for tactical reasons (not to seem to reject antitrust policy in Its entirety), the members of the Chicago School would sometimes denounce price fixing."

83 Cf., e.g., Demsetz, Harold, Economics as a Gulde to Antitrust Regulation, 19 JLE (1976), pp. 371-384, 383; and Bork, The Antitrust Paradox, op. cit., 406.

*Stigler,* certainly, regards tacit or Implicit collusion, I.e., spontaneous coordination, **as a** problem in markets with high interdependence due to a high degree of concentration. However, the other representatives of the Chicago School deny that implicit collusion actually restrains competition (Harvard School: conscious parallellsm). 84 The Chicago School does not deny that concentration is an Important factor in facllltatlng collusion; but the question which Interests them much more Is how excessive profits may be persistent without attracting newcomers in the long run since the entry of newcomers should actually cause a price decline.

Accordingly, market power positions that have not been caused by efficiency but rather by implicit colluslon would be eroded because of entry by newcomers or it would force firms to lower their prices In order to prevent newcomers from entering the market. However, this reasoning takes for granted Ideal markets without any barriers to entry - an assumption which we have already dealt with crltlcally in one of the preceding sections.

The tenet on vertical Integration and collusion formerly valid asserts that ollgopollsts may Increase their ability to coordinate their economic activities by vertical Integration because "structural and behavioral factors may Interact to open a route through which vertically integrated firms may bypass markets which resist oligopolistic control In favor of others which *do* not".8!5 This enables ollgopollsts to act like a collective monopolist and It enhances the likelihood of joint profit maximization. This may actually be the case, If at least one of two conditions is prevalent:•

(1) There are some chains of production and distribution, the different stages of which are characterized by extreme fluctuations in supply or demand. In the case of a second stage purchaser, for Instance, heavily

84 Cf. the omnibus volume on the economic and legal problems of conscious parallelism, 13 The Journal of Reprints for Antitrust Law and Economics 581 ff. (1982).

85 Comanor, Vertical Mergers, ... , supra, 262 f. Cf. as well, Chandler, The Visible Hand ... , op. cit., 367; and Warren-Boulton, Vertical Control of Markets ... , op. cit., 73 f.

86 Cf. Fisher/ Sciacca, An Economic Analysis of Vertical Merger Enforcement Policy, op. cit., 46, who state the Incorrect assumption that Input ollgopollsts have no interest in enforcing price discipline In the output market. As has been demonstrated supra, this holds only for restrictive conditions and for a transfer of the reasoning of a monopoly case to an oligopoly case.

fluctuating available supplies control his output In the sense that the output is determined by factors largely exogenous to the industry and not subject to effective oligopolistic control. Backward vertical Integration may now Install patterns of oligopolistic rationality at the supply stage.rn

(2) An elimination of Independent economic decision units along the chain of production **and** distribution of an industry by means of vertical Integration may lead to 'interdependent planning uncertainty' which Is likely to Improve the ability of firms to cooperate. This may have two separate effects. On the one hand, a vertically integrated ollgopollst who elimi**nates** frequent price changes as an external factor contributes to oligopolistic communication and harmonizes divergent interests among the leading firms.•

On the other hand, the costs of maintaining collusive behavior In an oligopoly may be reduced by vertical integration since the number of economic decision units Is reduced. This can be assumed to make the harmonization of divergent Interests easier and less costly on the horizontal level.89

However, there Is also a potential In vertical integration that may make pricing more competitive. In case where there Is a loose oligopolistic structure among sellers on one hand, and a tight oligopoly structure among buyers on the other, the presumed pattern of behavior Is more competitive than If the buyers' side were characterized by an atomistic structure. This effect may

87 For the classical example on the ollgopollstically structured U.S. steel Industry, cf. Adams/Dirlam, Steel Imports and Vertical Oligopoly Power, supra, who found out that the pricing discipline In the Industry In terms of final product prices was maintained because producers of steel were vertically integrated backward Into the Input market and controlled prices there. Cf. as well, Comanor, Vertical Mergers, ... , supra, 262-264; Perry, Martin K., Forward Integration by Alcoa: 1888-1930, 29 JIE (1980), pp. 37-53.

88 Cf. Comanor, Vertical Mergers, ... , supra, 263 f.; and Malmgren, H.B., Information, Expectation and the Theory of the Firm, 75 QJE (1961 ), pp. 339-421. This argument corresponds with the assertion that vertical Integration Increases the longevity of collusive agreements, cf. Kaserman, Theories of Vertical Integration ... , supra, 510.

89 Cf. Dirrhelmer/Wagner/H0bner, Vertlkale Integration In der Mlneral61- und chemlschen Industrle, op. cit., 16. There is some limited empirical evidence that vertically Integrated firms enjoy higher profit rates, cf. Clevenger/Campbell, Vertical Integration •.. , supra; but cf. the critique by Koch, Industrial Organization and Prices, op. cit., 264 note 31.

actually be strengthened If the tight oligopoly on the buyers' side Is asymmetric **(disruptive buyers). 90**This Is so because the buyer may receive concealed extra conditions from various suppliers which may vitalize price competition. The elimination of a disruptive buyer would tend to harm the intensity of price competition, enhance the potential for price discrimination, and thus deter effective competition.

There are a number of conditions, however, that potentially weakens the above conclusion:91

Contrary to current theory, we have seen that the arguments that vertical Integration enhances the ability to collude has some force, although only under specific condltions:92

"The anticompetitive story becomes more convincing when conditions at the manufacturing level are most conducive to oligopolistic coordination - for example, In mature, highly concentrated, homogeneous product industries with uniform cost conditions, significant entry barriers, and a comprehensive pattern of vertical integration Into distribution."

90 This argument Is based on the 'Concept of Countervailing Power', originally Introduced by Galbraith, John K., American Capitalism: Concept of Countervailing Power, London 1957, p. 111. Cf. on the aspects of antitrust as well, Areeda/Turner, Antitrust Law ..• , vol. 4, op. cit., § 1006; Hovenkamp, Economics and Federal Antitrust Law, op. cit., 212; and Fisher/ Sciacca, **An** Economic Analysis of Vertical Merger Enforcement Policy, op. cit., 46.

91 Cf. Areeda/Turner, Antitrust Law ... , vol. 4, op. cit., § 1006; and Scherer, Industrial market structure ... , op. cit., 310-312.

92 Fisher/Sciacca, An Economic Analysis of Vertical Merger Enforcement Polley, op. cit., 45. Cf. as well, Williamson, Assessing Vertical Market Restrictions ... , supra, 965.

The comprehensive pattern of vertical Integration seems to be of particular importance. Often, oligopolies show a behavioral pattern that rules out price competition. Price competition is replaced by nonprice competition through the acquisition of downstream enterprises. Disadvantaged rivals tend to have an incentive to buy further potential customers because of their fear of being foreclosed:93 "The first to integrate continued to dominate."

# **3. The Llkellhood of Anticompetitive Effects and Revised Polley Conclusions**

According to the aforementioned view, vertical strategies in general and vertical mergers in particular are perceived only to serve as a means for the achievement of an increase in productive efficiency and not to obtain monopoly power, since "firms cannot in general obtain or enhance monopoly power by unilateral action - unless, of course, they are irrationally willing to trade profits for position. **"!M**

Because a coherent economic approach underlying the anticompetitive effects of vertical mergers has not presented thus far and vertical Integration is viewed as primarily efficiency-enhancing, these arrangements should not merit legal scrutiny.95 According to *Bork,* U.S. antitrust policy has dealt with the effects of vertical mergers for more than 60 years without having succeeded in the development of an adequate theory that demonstrates the negative effects of such mergers on competition in a clear **way.** It is empha-

93 Chandler, The Visible Hand ... , op. cit., 365. Cf. Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 178; Scherer, Industrial market structure ... , op. cit., 306, who mentions the cement manufacturers that acquired ready-mix concrete companies, despite any prospect of efficiency enhancement or anticompetitive potential; cf. as well Allen, Vertical Integration and Market Foreclosure ... , supra.

94 Posner, The Chicago School ... , supra, 928. Cf. the critique on the anticompetitive emphasis associated with vertical mergers by Cease, Ronald H., Industrial Organisation: A Proposal for Research, in: Fuchs, Victor (ed.), Policy Issues and Research Opportunities, New York, 1972, pp. 59-73, 67: "If an economist finds something - a business practice of one sort or another - that he does not understand, he looks for monopoly explanation.

95 Cf. Bork, The Antitrust Paradox, op. cit., 228: "Vertical Integration is often believed somehow to cause or permit a firm to behave differently than it would in the absence of integration. Aside from the efficiency effect, however, it is clear that vertical Integration does not affect the firm's pricing and output policies."

sized that vertical mergers do not increase the firm's ability to restrict output because the ability to restrict output depends upon the market share in the market occupied by the firm. Whereas horizontal mergers increase market share, vertical mergers do not. Therefore, It is concluded that

"(a)ntitrust concern with vertical mergers Is mistaken. Vertical mergers are means of creating efficiency, not of injuring competition. There is a faint theoretical case, hardly worth mentioning, that vertical mergers can be used by very large firms for purposes of predation under exceptional circumstances, but it is highly doubtful that that narrow possibility has any application to reality". 96

In this context, *Posner* emphasizes that at least in academic circles a positive evaluation of vertical mergers is gaining ground. The peril that vertical mergers pose Is regarded as small or rare in occurrence due to underlying ci rcumstances.97

However, *Williamson* correctly emphasizes the likelihood of the occurrence of anticompetitive effects in that the attempt to realize an increase in efficiency may have adverse effects on competitors at the same time. While forward integration may represent an effort to realize private gains with resulting efficiency advantages at one stage, "it may constitute an unneeded restraint at a later stage and indeed may serve strategically to disadvantage rivals If it is contlnued". 98 We have pointed out conclusively that anticompetitive consequences are realistic outcomes of vertical integration under specific circumstances.

Efficiency considerations are important in evaluating vertical integration; nevertheless anti-competitive effects should not be left out of consideration.

96 Bork, The Antitrust Paradox, op. cit., 226; and idem, Vertical Integration and Competitive Processes, op. cit., 149.

97 Cf. Posner, The Chicago School ..• , supra, 937 f.

98 Williamson, Assessing Vertical Market Restrictions ... , supra, 965. Along the same line, cf. Areeda/Turner, Antitrust Law ••• , vol. 4, op. cit., §1015a, but see, ibid., § 1002, who denotes that vertical mergers are primarily efficiency-motivated and that there is no "reason to assume that a vertical merger which lowers costs and prices, thus benefltting consumers, Is 'unfair' to rivals in any reasonable antitrust sense of that term, particularly when those rivals can achieve comparable economies through vertical integration, by merger or otherwise."

This makes it necessary to determine the circumstances under which competition will be reduced unduly.99

The aforementioned line of reasoning emphasized three standards for presumptive illegality of a vertical merger. It should presumed to be Illegal if:

The actual problem is that these standards are hardly used in the enforcement process under the current guidelines, which becomes obvious If one considers the number of cases brought before court. If they were enforced, however, they would largely act as appropriate standards for the evaluation of vertical mergers.103

99 Cf., e.g., Areeda/Turner, Antitrust Law •.• , vol. 4, op. cit., § 1015; Sullivan, Handbook of the Law of Antitrust, op. cit., 667-669; and Williamson, Oliver E., Vertical Merger Guidelines: Interpreting the 1982 Reforms, 71 CLR (1983), pp. 604-617, 614. This reasoning was accepted in the 1982 Merger Guidelines but the threshold for challenging non-horizontal mergers was set rather high. It would have been better to lower the threshold and to Introduce an efficiency defense with the burden of proof on the defendant.

# **IV. Concludlng Remarks**

Unlike in the case of antitrust policy towards horizontal mergers, there is no consistent economic approach underlying the policy regarding vertical mergers, i.e. there exists no theoretical basis comparable to the concentration collusion-doctrine.

Whereas vertical integration traditionally used to be associated primarily with anticompetitive effects, recent research has emphasized possible economic advantages of contractual linkages and vertical integration, particularly in comparison to the market mechanism, which are supposed to lead to real resource and cost savings. This resulted in a strong notion among economists that vertical arrangements in general and vertical mergers in particular are efficiency-enhancing, carry little or no anticompetitive effects, and therefore should not be considered per se illegal. The possible occurrence of both desirable efficiency effects as well as undesirable anticompetitive effects seems to make necessary an economic trade-off between these two effects. As far as our view is concerned, the multiple-goal perspective of antitrust policy has to be born in mind.

The question whether efficiency-enhancement really represents the sole motivation of merging firms for vertical integration or whether vertical integration is also performed because it may be a source and carrier of market power strongly determines the effectiveness of the transaction-cost approach as an adequate basis for the evaluation of efficiency-effects of vertical mergers. Vertical integration is indeed a source and carrier of market power, which makes the trade-off lose its explanatory power concerning the transaction mechanism chosen. Even if the cost of an economic transaction by the market were less than the intra-corporate coordination costs for an economic transaction, there would remain a motivation to merge, until the excess profits from a monopoly or limit price strategy would equal the total cost difference resulting from the two transaction mechanisms. Such a rationale is ruled out by the adherents of current theory, however, because of restrictive premises and assumptions. Under realistic premises and assumptions, the generality of the pro-efficiency argument is not tenable. Private efficiency gains and social efficiency gains must be separated from each other in such **a** case.

A trade-off is certainly needed for the determination of the counteracting effects of vertical integration or vertical mergers. However, it has to be performed on a positive as well as on a normative level of analysis, encompassing the shortcomings of current theory on the positive level and the intentions of legislation on the normative one.

The achievement of efficiencies has to be demonstrated because we may not presume a priori that efficiency-enhancement is the only objective of an economic agent, at least not In the sense of overall economic efficiency that translates on a one-to-one basis into consumer welfare. Thus we have to include qualifications to the unrealistic assumptions of current theory, i.e., bear in mind that real world markets do not work in a frictionless manner, barriers to competition do exist, and are often significant, and that a comparison of organization costs with transaction costs of the market is often unfeasible.

On a normative level, public goals other than just consumer welfare have to be taken into account. This Is considered a legitimate Intention because the incipiency doctrine still considered valid by the courts has to be viewed as a result of the legislator's willingness to maintain unconcentrated structures and eventually sacrifice efficiencies in order to maintain competition.

A variety of empirical studies have tried to find support for the implications of the transaction-cost approach by citing evidence that **transaction-cost specific market characteristics** pose an incentive for vertical integration:

None of the empirical studies on cost savings from increased vertical Integration show **quantitative results on marginal transaction-costs across different mechanisms of ooordlnatlon** along the various stages In the chain of production and distribution. This seems particularly important concerning

the isolation of motives underlying an increase in vertical integration. In the case of a net increase in efficiency there would be an affirmation of the efficiency-enhancement hypothesis, although we would not be sure whether this increase would necessarily be passed on to consumers as current theory contends. However, empirical findings which show a decrease in efficiency in the case of increased vertical integration - reversing the reasoning - suggest a motivation other than efficiency-enhancement. Empirical studies on this aspect are scarce and their results are ambiguous, to say the least.

The main obstacle to unambiguous conclusions is the problem of distinguishing efficiency, i.e. cost saving effects from all other consequences, such as market power, price discrimination, evasion of regulation, tax avoidance, and the like. The crucial deficiency seems to be that the results are compatible with an efficiency as well as with a market power explanation.

Thus, the use of a marginal transaction-cost approach which leads to the aforementioned trade-off, seems plausible at first sight. However, It remains ineffective and thus an empty box as long as It is not possible to determine the correct amounts In order to perform the trade-off.

Furthermore, the general applicability of the transaction-cost approach and similar approaches to a theory of institutional change has to be questioned. The microeconomic concept of efficiency is to been seen as crucially important for the application of the transaction-cost approach. The ability of the price system to alter economic systems in the direction of efficient economic arrangements in vertical terms depends on sufficient competitive pressure in horizontal terms. It may be realistically asserted, however, that economic equilibrium is absent in most If not all of our markets and furthermore that market imperfections and oligopolistic structures prevail. In this case, economic logic supports no causal inferences about the role of efficiency in determining social or organizational structures. The market imperfections make It less likely that the most efficient competitors will prevail in the end. Concerning the assumption of an essentially frictionless and perfectly competitive market, as assumed by the adherents of current theory, it can be held that the imperfections actually found in reality may finally be responsible for the fact that financial and market power, not economic efficiency, may determine the winners in the competitive process.

The assertion that meaningful barriers to competition do not exist and, hence, sufficient competitive pressure is continuously present - regardless of the existing structural features of the markets Involved in vertical Integration - tends to define market power problems away, as well as the likelihood of anticompetitive consequences. The absence of power results in efficiency and this efficiency is considered synonymous with consumer welfare.

The terms transaction-costs and organization costs are difficult to handle and in specific cases they can neither be determined in a precise manner empirically nor quantitatively measured. The terms are largely used in a way that allows justification of certain phenomena ex post; this leads to the possibility that any development can be justified - but only ex post and crudely. **As a** result, the concept tends to become tautologous.

Whereas horizontal mergers increase market share, vertical mergers do not. However, one must emphasize the likelihood of the occurrence of anticompetitive effects Insofar as the attempt to realize an Increase in efficiency may have adverse effects on competitors at the same time. While forward integration may represent an effort to realize private gains with resulting efficiency advantages at one stage, it may constitute a restraint at a later stage and Indeed may serve strategically to disadvantage rivals If It Is continued.

Although a coherent economic approach on anticompetitive effects of vertical mergers has not been presented thus far and antitrust policy has dealt with the effects of vertical mergers without having succeeded in developing an **adequate** theory that demonstrates the negative effects of such mergers on competition In a clear **way,** there may be anticompetitive effects under cer**tain** conditions that have to be anticipated from vertical mergers. In this context, large market shares as a proxy for Individual market power at the Integrating firm's stage, creation or elevation of market barriers at either stage, and/or the existence of a tight oligopoly at the stage of Integration should be considered appropriate to serve as standards for presumptive Illegality.

#### **R'8ym6e: Application of the Results of an Analysis of the Chicago School Approach Towards Industrial Concentration**

This resumee will deal mainly with the question of whether the German Act Against Restraints of Competition (ARC) needs a reform along the lines of *Chicago School* theory. The evaluation will be based on the conclusions resulting from this contribution.

In order to derive conclusions from the developments in the Unites States which are relevant to the Fifth Amendment of the German Act Against Restraints of Competition, we have to inquire into the question of whether a basic comparability of the two bodies of law may be established. 1

Furthermore, we have to analyze to what extent policy elements based on Chicago theory have already found introduction into German antitrust enforcement and jurisdiction. Finally, and In the ligth of our conclusions on the hypotheses of Chicago theory, we will evaluate proposals for the Fifth Amendment of the ARC which are currently discussed.

# I. **The Legal Treatment of Industrial Concentration**

In Part 1 we have briefly evaluated different approaches that can be taken by public policy-makers toward restraints of competition. Control over industrial concentration and in particular mergers, with a view to limiting and controlling economic power, is carried out according to various criteria. The different approaches that we are able to distinguish emphasize either market structure, market conduct, or a combination of both factors, the so-called market process test: these variations are analogous to the approaches of public policy **already** presented. 2

Public policy intervention in cases where undue economic power accumulates needs specification by operational criteria on the basis of antitrust theory. These criteria have to be laid down by legal statutes and should determine the point at which undue economic power can be said to emerge. 3

On the comparability of the two legal systems, cf., e.g., Markert, Kurt, Stand und Entwicklungstendenzen des US-Antitrustrechts 1987 aus der Sicht eines deutschen Kartellrechtsanwenders, In: FIW (ed.), Schwerpunkte des Kartellrechts 1985/86. Verwaltungs- und Rechtsprechungspraxis Bundesrepublik Deutschland, EG und USA, Koln et al. 1987, pp. 201-224, 203 f.

2 Cf. Nagel, Bernhard, Fusion und Fusionskontrolle, in: Cox, Helmut, et al. (eds.), Handbuch des Wettbewerbs, M0nchen 1981, pp. 331-365, 337 f.

3 Cf. Giesel, Harald B., Unternehmungswachstum und Wettbewerb, Baden-Baden 1975, 195.

We will first present the approach that the U.S. American and the German legislators have chosen, also comparing the statutes and the prerequisites for application. We will then go on to compare the two legal systems and the way by which they have solved the three fundamental problems common to every merger control system4, namely:

We will conclude by showing recent tendencies with regard to the development of the statutes in both countries.

#### **1. The Approach**

The approaches in both countries can be characterized as structural approaches, which attempt to prevent the emergence of anticompetitive market structures.5 As a rule, both approaches are ex post-control approaches,

4 Cf. Hopt, Klaus J., Merger Control in Germany: Philosophies, Experiences, Reforms, in: Hopt, Klaus J. (ed.), European Merger Control: Legal and Economic Analyses on Multinational Enterprises, vol. 1, Berlin and New York 1982, pp. 71-99, 79.

5 Cf. Adams, Walter, and James W. Brock, The Bigness Complex: Industry, Labor, and Government in the American Economy, New York 1986, p. 155, who note that it is "easier to maintain competitive market structures than to reestablish them once they had been destroyed through acquisition and consolidation", p. 153; Neiser, Jens, Die Praxis der deutschen Fusionskontrolle, Berlin 1981, p. 54; Ruppelt, HansjUrgen, Wettbewerbspolitik und wirtschaftliche Konzentratlon, TUbingen 1978, p. 194, who emphasizes the **advantages** of such a preventive merger control system (p. 185); Schmidt, Ingo, Wettbewerbspolitik und Kartellrecht: Eine EinfUhrung, 2nd ed., Stuttgart 1987, pp. 178 and 277. As documented by Chief Justice Earl Warren of the U.S. Federal Supreme Court in Brown Shoe: " ... , It is apparent that a keystone in the erection of a barrier to what Congress saw was the rising tide of economic concentration, was its provision of authority for **arresting mergers** at a time when the trend to a lessening of competition in a line of commerce was still In **Its Incipiency"** (emphasis added), Brown Shoe Co. v. U.S., 1962 Trade Cases § 70,366 at p. 76,489; this is also documented in the papers of the government bill on the Second Amendment to the ARC, cf. BegrUndung zum Regierungsentwurf eines Zweiten Gesetzes zur Anderung des GWB, BTDr. VI/2520, p. 29.

making exemptions from this rule only under certain conditions. These conditions will be dealt with infra.

In the Federal Republic this ex post-control by means of postmerger notification was introduced by the Second Amendment to the Act Against Restraints of Competition in 1973 and replaced a mere obligation to notify a limited class of mergers.a The requirement for this postmerger notification exists in two cases. First, if a market share of 20 percent is reached or surpassed in the relevant market as a result of the merger, or, second, if the two merging parties had a combined turnover of DM 500 millions or at least 10,000 employees In the year preceding the merger. The German *Bundesgerichtshof* (Federal Supreme Court) has extended the requirements on information subject to publication and has therefore made this postmerger notification effective.7 The same amendment introduced an ex ante-control for mergers as well.

The Fourth Amendment In 1980 was primarily aimed at large sized companies, including an obligation to prenotify mergers in which one of the merging parties had DM 2,000 millions turnover or alternatively, each of the merging parties involved had a turnover of DM 1,000 millions or more.a

In addition, the ARC contains a check on abuses of market dominating enterprises in cases In which this dominance emerged from internal growth of companies in particular markets or from uncontrolled external growth in the past. 9

Sec. 7 Clayton Act, as amended by the Cellar-Kefauver Act in 1950, is the main merger law In the United States. In addition to this instrument, a premerger notification has been institutionalized in 1976 by the Hart-Scott-Rodino Improvement Act, requiring firms to give the antitrust enforcement

6 Cf. Moschel, Wernhard, Recht der Wettbewerbsbeschrlinkungen, Koln et al., pp. 465 f.; Ruppelt, Wettbewerbspolitik und wirtschaftliche Konzentratlon, op. cit., 206; and Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 160.

7 Cf. Sec. 23 para. 1, lit. 1 and 2 ARC; and Hopt, Merger Control in Germany ... , op. cit., 82.

8 Cf. Sec. 24a para. 1; OECD (ed.), Guide to Legislation on Restrictive Business Practices, vol. 1, Germany, p. 12; and Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 160.

9 Cf. Sec. 22 ARC; and Schmidt, Ingo, Different Approaches and Problems In Dealing with Control of Market Power: A Comparison of German, European, and U.S. Polley towards Market-Dominating Enterprises, 28 AB (1983), pp. 417-460, 435 ff.

agencies advance notice of certain mergers. The merging parties become subject to the jurisdiction of the FTC "where the transaction involves acquisition of firms with sales or assets of \$ 10 million or more and the acquiring firm, or the combined firms, have sales or assets of \$ 250 million or more." 10 Mergers falling within this category can be stopped by preliminary injunctions imposed by the courts or administrative law judges. Unlike the ARC, United States law does not provide for control of possible abuses of market dominating enterprises with regard to a bad performance.11

# **2. The Relevant Statutes**

Secs. 24 ARC and 7 Clayton Act, as the central statutes, are aimed at all possible mergers regardless of whether they are horizontal, vertical or conglomerate. 12 Sec. 24 ARC connects the control and prohibition of mergers to the criterion that the actual merger is expected to create or strengthen a dominant position in a market. This allows for two kinds of cases. An enterprise is in a dominant position, firstly, if a buyer or seller has no competitor in a relevant market (monopoly), or secondly, the enterprise is not subject to any substantial competition, i.e., it dominates the market by a paramount position in relation to its competitors (dominant firm). Essentially, the same applies for tight oligopolies with or without a noncompetitive fringe under Sec. 24 ARC. 13

12 Cf. Sandrock, Otto, Vertikale Konzentrationen im USamerikanlschen Antltrustrecht, Heidelberg 1984, p. 175; and Adams/Brock, The Bigness Complex ... , op. cit., 154. Actually the relevant legal statutes encompass the Secs. 23, 24, 24a, 24b ARC and the Secs. 7, 7A and 8 Clayton Act. We will extract Issues from these sections as far as necessary in the following.

10 OECD (ed.), Guide to Legislation on Restrictive Business Practices, vol. 4, U.S.A., part 2.0, pp. 26 f.; cf. as well Sec. 7A Clayton Act; FTC Merger Notification Program, 1 CCH TRRer, § 4455; Neiser, Die Praxis der deutschen Fuslonskontrolle, op. cit., 54; and Schmidt, Ingo, US-amerikanische und deutsche Wettbewerbspol iti k gegenuber Marktmacht, Berl In 1973, p. 157.

11 Cf. Schmidt, Wettbewerbspolitik und Kartell recht, op. cit., 181; and idem, Different Approaches and Problems •.. , supra, 421-432. The U.S. statutes try to treat the emergence of dominant positions in their incipiency by prosecuting attempts to monopolize under Sec. 2 of the Sherman Act. Insofar, there is a parallel to Sec. 22 ARC.

13 Cf. Hopt, Merger Control in Germany •.• , op. cit., 80; OECD (ed.), Guide to Legislation: Germany ... , op. cit., 12.

The U.S. legislator has connected interference by public policy to the criterion of the creation of a monopoly and/or to a substantial lessening of competltion:14

"With limited exceptions, Section 7 forbids the acquisition by one corporation in commerce of the stock or assets of another corporation In commerce where the effect may be **substantially to lessen competition**  or the **tendency to create a monopoly** in any line of commerce in any section of the country" (emphasis added).

The point of intervention is therefore earlier in the U.S.A.

#### **3. The Merger Tenn In the Statutes**

The merger control law definition of mergers is different from the narrow one used in corporate law.

With regard to Sec. 23 para. 2 ARC the definition encompasses a variety of forms. Mergers within the meaning of this section are:

Sec. 7 Clayton Act is not as specified as Sec. 23 para. 2 ARC. It just refers to stock and assets in that the Act forbids any corporation engaged in commerce to "acquire, directly or indirectly, **the whole or any part of the stock or other share capital** ... (or) **the whole or any part of the assets** of any other such corporation ... , where in any line of commerce .•• " (emphasis ad-

14 Sullivan, Lawrence A., Handbook of the Law of A~titrust, St. Paul, Minn. 1977, p. 601; cf. as well Adams/Brock, The Bigness Complex ... , op. cit., 154; and OECD (ed.), Guide to Legislation: U.S.A .... , op. cit., part 1.2, 5.

15 Cf. Hopt, Merger Control in Germany ... , op. cit., 83-85; OECD (ed.), Guide to Legislation: Germany .•. , op. cit., 11.

ded). 18 This resembles more or less a catch-all clause strongly emphasizing whether competition is substantially lessened or a monopoly created, regardless of the quantity of stock or assets that is responsible for this.17

# **4. The Minimum Thresholds**

As noted above, the choice of minimum thresholds is supposed to determine at what point mergers are sufficiently relevant to merit legal scrutiny. 1a

Firstly, under German law the combination of two originally separate enterprises must be a merger in the sense of Sec. 23 para. 2 ARC. Second, there is a de minimls-conslderation in the ARC, which views mergers as legally relevant only if the combined turnover of the participating enterprises equals or exceeds 500 million DM. 19

With regard to the U.S. antitrust statutes, there are no such minimum thresholds in the laws. There are only thresholds that are created by the antitrust agencies by means of administrative enforcement rules such as the Merger Guidelines and the Vertical Restraints Guidelines of the Antitrust Division of the Department of Justice, which make the circumstances explicit under which the agencies will interfere.20 These enforcement rules are not legally binding, however, and are therefore subject to the discretion of the courts.

#### **5. The Point of Intervention**

The point of public intervention determines the conditions under which mer**gers** are subject to legal prohibition. This point of intervention Is actually

16 OECD (ed.), Gulde to Legislation: U.S.A .... , op. cit., part 1.2, 5; and Sulli**van,** Antitrust Law •.. , op. cit., 592.

17 For **a** fundamental treatment of the differences, cf. Harms, Wolfgang, Zusammenschlu13 und Merger - rechtsvergleichende Anmerkungen zum **Be**reich der Fuslonskontrolle, in: Gamm, Otto Friedrich Freiherr von, et al. (eds.), Strafrecht, Unternehmensrecht, Anwaltsrecht: Festschrift fur Gerd Pfeiffer, Koln et al. 1987, pp. 501- 515.

18 Cf. Hopt, Merger Control in Germany ••• , op. cit., 79 f.

19 Cf. Hopt, Merger Control in Germany •.• , op. cit., 80; cf. as well Nagel, Fusion und Fusionskontrolle, op. cit., 340; and Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 276.

20 Cf. Neiser, Die Praxis der deutschen Fusionskontrolle, op. cit., 52; and Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 180.

an attempt to specify the wording of Secs. 24 para. 1 ARC and 7 Clayton Act. 21

As has been noted, German law makes intervention dependent on the expectation that the actual merger will create or strengthen a dominant position in a market; in this respect a certain level of probability of its occurence is sufficient. The dominant position Is evaluated first by defining the relevant market and then it is evaluated with regard to the criteria enumerated in Sec. 22 para. 3 ARC which constitute rebuttable presumptions of market dominatlon.22 An enterprise Is seen as having a dominant position if It possesses a share of the relevant market of at least one third, unless it had a turnover of less than DM 250 million in the year preceding the merger. For a group of enterprises (oligopoly) this applies if three enterprises or fewer possess a joint share of the relevant market of 50 percent or more, or five enterprises or less possess a share of the relevant market of two thirds or more. This does not apply if the turnover was less than DM 150 million each, in the year prior to the merger.23

Moreover, the German law has specified refutable presumptions In Sec. 23a ARC covering typical groups of vertical and conglomerate mergers which tend to be subject to these presumptions and are thus assumed to create or strengthen a dominant position. This applies to mergers of single dominant firms (Sec. 23a para. 1 ARC) as well as to a group of enterprises dominating a market (Sec. 23a para. 2 ARC). The latter paragraph reverses the burden of proof, which now rests on the firms participating in the merger. 24

Sec. 7 Clayton Act uses the criterion of the creation of a monopoly or of a substantial lessening of competition as **a** point of intervention. The statute is viewed as a preventive Instrument which attempts to rule out anticompetitive effects that can be expected with **reuonable probablllty** in statu nascendl **(Incipiency doctrlne).25** The guidelines that are Issued by the Antitrust Division of the Department of Justice deserve special attention, as has been

21 Cf. Hopt, Merger Control in Germany ... , op. cit., 80.

22 Cf. OECD (ed.), Gulde to Legislation: Germany ••• , op. cit., 10.

23 Cf. Hopt, Merger Control In Germany •.. , op. cit., 80; Sandrock, Vertlkale Konzentratlonen ... , op. cit., 175 f.; and Schmidt, Wettbewerbspolltl k und Kartell rec ht, op. cit., 160.

24 Cf. MOschel, Recht der Wettbewerbsbeschriinkungen, op. cit., 551 f.

25 Cf. Schmidt, Wettbewerbspolitlk und Kartellrecht, op. cit., 178.

noted above, since they determine the point of intervention from the **view** of the enforcement agencies.

The criteria of the statutes, however, have been operationalized by decisions of the U.S. Federal Supreme Court. The court ruled a horizontal merger presumptively illegal on the basis of the evaluation of the participants' market shares, the concentration ratio of the four or eight largest enterprises in the relevant market, and the concentration trend in the past.

No definite market share was postulated, but the court noticed that a market share of 20 to 30 percent was considered undue. 211 Somewhat of a change has been brought about by the Federal Supreme Court's decision ruling that circumstances in addition to the market share and concentration ratios would have to be evaluated In an actual case (e.g., future competitiveness).27

Vertical mergers were judged by the foreclosure effect they were bound to initiate, the nature and purpose of the merger, the probability that squeezing of non-Integrated competitors will occur, the trend towards future vertical integration, the effect on barriers to entry, and the financial capabilities of the participating parties. 28As in the case of horizontal mergers, market shares of 20 to 30 percent were considered undue.29

With regard to conglomerate mergers, only geographic or product extension mergers and mergers allowing for reciprocal dealings, deserve special attention with regard to past cases. 30 The U.S. Federal Supreme Court has essentially postulated three criteria of intervention.31 The merger is deemed unlawful if:

The Federal Supreme Court has not thus far been able to develop criteria for judging pure conglomerate mergers,32

# **6. Overall Justification**

Overall justification specifies the defenses which are available in order to have an illegal merger exceptionally declared legal.33 This is not aimed at procedural issues but at substantive merger rules.

Sec. 24 paras. 1 and 3 ARC contain a relief in two cases. Firstly, the merger can be declared exceptionally legal by Sec. 24 para. 1 ARC if it will also lead to improvements in competitive conditions and these improvements, at the same time, outweigh the anticompetitive effects of the market dominating position brought about by the merger. The burden of proof lies with the enterprise.34

Second, on the basis of Sec. 24 para 3, the merger can be declared legal by the German Federal Minister for Economic Affairs if the detrimental effects on competition are balanced by overall economic advantages or Justified by an overriding public interest.35

Sec. 7 Clayton Act does not contain such an arbitrary disposition as a kind of rule of reason. 38However, two defenses have been Introduced by adjudication, i.e. the so-called failing-company defense and the defense due to perceived efficiencies as a result of a merger.37

32 Cf. Aarts, Jacobus W., Antitrust Policy versus Economic Power, Leiden 1975, p. 285.

33 Cf. Hopt, Merger Control in Germany ... , op. cit., 80.

34 Cf. Sandrock, Vertikaie Konzentrationen ... , op. cit., 178; Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 160.

35 Cf. Hopt, Merger Control in Germany ... , op. cit., 80; Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 160.

36 "We are clear •.. that a merger the effect of which 'may be substantially to lessen competition' is not saved because, on some ultimate reckoning of social or economic debits and credits, it may be deemed beneficial. A value choice of such magnitude is beyond the ordinary limits of judicial competence, ..• ", U.S. v. Philadelphia National Bank, op. cit., at p. 78,271.

37 Cf. the *Introduction* to this contribution; and Sandrock, Vertikale Konzentrationen ... , op. cit., 153-160 for a detailed analysis and 178 for this evaluation; Schmidt, Wettbewerbspolitik und Kartellrecht, op. cit., 180. For the contrary position cf. Areeda, Phillip, and Donald F. Turner, Antitrust Law: An Analysis of Antitrust Principles and Their Application, Boston and Toronto 1980, vol. 4, § 941, p. 151: "In our view, neither the language nor the legislative history of §7 forecloses an economic defense. Limited case law suggestions to the contrary are dicta, internally contradictory, unsupported, or otherwise unpersuasl ve."

Mainly because of the former accord of antitrust policies in the United States and the Federal Republic of Germany and their currently diverging patterns, the question arises as to whether there is a new state of the art in antitrust theory based on recent findings, and whether, albeit with a certain time-lag, these may soon beginn to exert influence on German antitrust policy.1

# **1. The Use of Economic Evidence In Enforcement and Adjudication**

In comparison to (current) antitrust policy in the United States, German legislation does not offer as much room for economic evidence. Although this applies to a somewhat lesser extent to efficiency considerations In the field of merger control 2, the German law is statutory law and legislature has decided to **be** restrictive on the use of economic evidence which also implies that there is not much room for a broad application of a rule of reason. This is considered binding for the courts. 3

This basic attitude is enforced by the philosophy underlying the ARC. It is much more influenced by what has been described as the ordollberal view of competition in this contribution, because it "is understood as an lndlspens-

Cf., e.g., Herdzlna, Klaus, Mogllchkelten und Grenzen einer wlrtschaftstheoretlschen Fundierung der Wettbewerbspolltik, Tublngen 1988, pp. 39 f. The question is of particular relevance because of the assertion that this former accord has been terminated by recent changes In U.S. antitrust policy, cf., e.g., Kantzenbach, Erhard, The Treatment of Dominance in German Antitrust Policy, in: de Jong, Henk W., and William G. Shepherd (eds.), Mainstreams in Industrial Organization - Book 2, Dordrecht et al. 1986, pp. 273-285, 282 f.

2 Cf. the exception in Sec. 24 paras. 1 and 3 ARC, dealing with the efficiency defense that may be granted by the Minister for Economic Affairs. This does not apply for increases in Internal business efficiency, however. Furthermore, the criteria for the determination of the degree of domination In Sec. 22 para. 1 lit. 2 allow for an immediate Influence of economic evidence.

3 Cf. Geberth, Rolf, and Thomas Janicki, Kartellrecht zwischen Kontinuitiit und Anpassung, 37 WuW (1987), pp. 447-463, 453; Kartte, Wolfgang, Marktstruktur und voikswirtschaftliche Effizienz - ein Wlderspruch?, in: FIW (ed.), Neuorlentlerung des Wettbewerbsschutzes, Koln et al. 1986, pp. 49- 60, 49; Moschel, Wernhard, Use of Economic Evidence in Antitrust Litigation in the Federal Republic of Germany, 32 AB (1987), pp. 523-550, 524 f., 544 and 550.

able correlative of an economic order which rests on freedom of action". 4 Based on this understanding, there is a restrictive position towards **a** tendency to increase the use of economic evidence in general and efficiency considerations in particular because of the ambiguous nature of the latter kind. 5

This reasoning is affirmed by recent adjudication, which is rather unwilling to accept economic evidence contrary to recent tendencies in U.S. enforcement and jurisdiction. For instance, conglomerate mergers were not permitted if a large-sized, financially strong firm merges with a firm that Is dominant in a market characterized by small business, although this might eventually have resulted in efficiencies. 8

# **2. An Evaluation of Trends and Tendencies**

On the basis of the structure approach and market domination, the German Federal Cartel Office (FCO) has developed a unified standard of reference, which is largely affirmed by the courts. 7 In the following, we will try to reveal to what extent current U.S. antitrust policy and thus efficiency considerations have found Introduction into current enforcement and how these are to be evaluated in the light of our findings.

#### **a. Determining Market Dellneatlon**

Demarcation of the relevant market is considered to be the essential prerequisite for the determination of market domination because the more restric-

4 Moschel, Use of Economic Evidence ... , supra, 524; cf. Idem, Wettbewerbspolitl **k aus** ordoliberaler Slcht, In: Gamm, Otto Friedrich Freiherr von, et al. (eds.), Strafrecht, Unternehmensrecht, Anwaltsrecht: Festschrift fur Gerd Pfeiffer, Koln et al. 1987, pp. 707-725, 707 f.

5 Cf. Geberth/Janicki, Kartellrecht zwischen Kontinuitiit und Anpassung, supra, 453.

6 For the case, cf. Edelstahlbestecke, WuW/E BGH 2150; and for criticism of the ruling, Moschel, Wernhard, Finanzkraft und konglomerater Zusammenschlu13, 29 AG (1984), pp. 257-260.

7 Cf. Niederleithinger, Ernst, Praxis der Fuslonskontrolle und der Mil3 brauchsaufslcht 1985/86, in: FIW (ed.), Schwerpunkte des Kartellrechts 1985/86. Verwaltungs- und Rechtsprechungspraxis Bundesrepubllk Deutschland, EG und USA, Koln et al. 1987, pp. 21-82, 39-54; Monopolkommission, Hauptgutachten der Monopolkommission V: Okonomlsche Krlterlen fur die Rechtsanwendung, Baden-Baden 1984, para 422. This does not apply to the retailing sector, however, cf. Kirschner, Ulrich, Fusionskontrolle Im Lebensmitteleinzelhandel: Anmerkungen zum Fall Coop-Wandmaker, 37 WuW (1987), pp. 789-796, 789 f.

tive, i.e. the more narrowly the market is delineated, the more likely a merger is found to violate Sec. 24 para. 1 ARC.8

Although generalizations beyond an evaluation of single cases and actual facts are not possible, the underlying concept of substitution possibilities in consumption, which we have proposed supra, Is accepted as a common basis for the definition of the relevant market, i.e. if the products are held to belong to the same relevant market, then in respect of consumers' needs the products should be substitutable for each other.9

This basic Idea of substitution has led to the attempt to measure these flexibilities by cross-price elasticities of demand. On the demand side the concept holds that goods belong to the same relevant market if they show significant cross-price elasticlties. 10

Although theoretically correct, attempts to calculate precise numerical values for these elasticities, in addition to a 'soft' and qualitative evaluation of the substitution possibilities, is unrealistic because impracticable.

The attempt to determine whether buyers would respond to a 5% price increase by shifting to other products within a particular period of time, or whether entry of potential competition would occur, in no way furthers a realistic definition of the relevant market. This is the reason why attempts in current U.S. antitrust policy to introduce such a quantitative analysis should not be adopted. 11 This procedure would not substitute taking into consideration qualitative criteria such as particular characteristics and par-

316

8 Cf., e.g., Bechthold, Rainer, Die Entwicklung des deutschen Kartellrechts von 1981 bis 1983, 37 NJW (1984), pp. 145-152; Emmerich, Volker, Fusionskontroiie 1986/87, 32 AG (1987), pp. 357-368, 358; Pfeiffer, Gerd, Von der Autokupplung bis zu Chanel No. 5, in: Heimrich, Herbert (ed.), Wettbewerbspolitik und Wettbewerbsrecht: Zur Diskussion um die Noveilierung des GWB, Koln et al. 1987, pp. 209-220, 212.

9 Cf. Emmerich, Fusionskontrolle 1986/87, supra, 358 f; Monopolkommission, Hauptgutachten V ... , op. cit., paras. 606 f. and 611 f.; and Schmidt, Wettbewerbspoliti k und Kartellrecht, op. cit., 52.

10 Cf. Schmidt, Wettbewerbspoliti k und Kartellrecht, op. cit., 51; Sosnick, A Critique of Concepts of Workable Competition, 72 QJE (1958), pp. 380-423, 401.

11 Cf. the attempt in the U.S. Merger Guidelines to quantify these considerations, Harris, Robert G., and Thomas M. Jorde, Market Definition in the Merger Guidelines: Implications for Antitrust Enforcement, 71 CLR (1983), pp. 464-496, 481; these findings are obviously agreed upon by Knopfle, Robert, Aktuelle Probleme der ZusammenschluBkontrolle, 40 DB (1987), pp. 1-20, 4. For criticism, cf. Monopol kommlssion, Hauptgutachten V ... , op. cit., para. 618;

ticular uses of a product. 12As has been demonstrated by this contri butlon, this criticism also applies to the attempt to consider potential competition within a concept of the relevant market determined by production flexibilities, as has been made by the U.S. Merger Guidelines. 13

The procedure used by the Monopolies Commission to distinguish the relevant market from an area that is close enough to it to encompass substitution possibilities and potential competition, is adequate insofar as the procedure is based on a reliable definition of the relevant market. Although this definition Is rather restrictive, the area close to the relevant market is nevertheless considered additionally through a comprehensive view of the deli neatlon. 14

Contrary to widespread opinlon15, the international competitiveness of German firms is thoroughly appreciated and taken account of by this two stage procedure and particularly by a comprehensive view. This makes it unnecessary to adopt the current policy approach in the U.S. because this approach attempts to take into consideration foreign competition directly through the definition of the relevant market. 18

#### **b. Determining Market Domination**

A merger is prohibited according to Sec. 24 para. 1 ARC if it is to be *expected* to *create* or *strengthen* a *market dominating position.* The confirmation

12 For an encompassing criticism, cf. Harris/Jorde, Market Definition in the Merger Guidelines ... , supra, 476-486. Cf. as well this contribution supra.

13 Cf. Merger Guidelines 1984, CCH TRR No. 655, June 18, 1984, Part II, pp. 33-37 and 38 f ..

14 Cf. Monopolkommission, Hauptgutachten V ... , op. cit., para. 609.

15 Cf. Berg, Hartmut, Internationale Wettbewerbsfahlgkelt und nationale Zusammenschlu13kontrolle, Koln et al. 1985; and Holzler, Heinrich, Der Marktanteil In der Fusionskontrolle bei internationaler Wlrtschaftsverflechtung, In: Gamm, Otto Friedrich Freiherr von, et al. (eds.), Strafrecht, Unternehmensrecht, Anwaltsrecht: Festschrlft fur Gerd Pfeiffer, Koln et al. 1987, pp. 517-529, 518 f.

16 Cf. Kartte, Wolfgang, Internationale Wettbewerbsfahlgkeit und Zusammenschlu13kontrolle, in: Gamm, Otto Friedrich Frelherr von, et al. (eds.), Strafrecht, Unternehmensrecht, Anwaltsrecht: Festschrift fur Gerd Pfeiffer, Koln et al. 1987, pp. 531-536, 531 f., who views this as an overt attempt to introduce Chicago ideas; Monopolkommlsslon, Hauptgutachten der Monopolkommlssion III: Fusionskontrolle bleibt vorranglg, Baden-Baden 1980, paras. 619 ff., and again Idem, Hauptgutachten der Monopolkommission IV: Fortschritte bei der Konzentrationserfassung, Baden-Baden 1982, paras. 515 ff.; and Pfeiffer, Von der Autokupplung bis zu Chanel No. 5, op. cit., 212.

of a *market dominating position* requires the proof of a lack of sufficient competition (Sec. 22 para. 1 lit. 1 ARC), resp. a superior market position on the part of the merging parties (Sec. 22 para. 1 lit. 2 ARC), or the creation of an oligopoly (Sec. 22 para. 2).17 Since the lack of sufficient competition is of minor practical importance, we will emphasize the superior market position and the oligopoly as factual findings.

# **aa. Superior Market Position**

The confirmation of a superior market position in turn is based primarily on a comprehensive evaluation of the essential structural factors of the particular market in question, which may allow a firm to have at its disposal a free **area** of conduct which is insufficiently controlled by competition. 1B

# **(1) Market Structure**

On the basis of Sec. 22 para. 1 lit. 2 ARC a certain dominance of market share, financial strength, and market barriers as crucial structural criteria for the determination of a superior market position has evolved in legal proceedlngs.19 It is of importance at this point to analyze whether recent developments in U.S. antitrust influenced enforcement and adjudication In the direction of the propositions of the Chicago School and thus **weakened**  structural predominance. We must therefore evaluate the developments on the basis of our crucial findings in this contribution.

17 Cf. Kantzenbach, Erhard, Grol3fusionen bed0rfen einer expliziten politlschen Legitimation, 66 WO (1986), pp. 379-382, 381; and Pfeiffer, Von der Autokupplung bis zu Chanel No. 5, op. cit., 211 f., who emphasizes that the presumptions have a normative character and are thus subject to interpretation on the basis of changes In fundamental knowledge in antitrust theory.

18 Cf. Emmerich, Kartell recht, op. cit., 268; Knopfle, Aktuelle Probleme der Zusammenschiul3kontrolle, supra, 2-5, Markert, Kurt, Zur Bedeutung von Marktstruktur und -verhaiten in der materiellen Fusionskontroile des GWB, in: FIW (ed.), Neuorientlerung des Wettbewerbsschutzes, Koln et al. 1986, pp. 123-135, 123-125, for a survey on the current majority view; Moschei, Use of Economic Evidence .•. , supra, 542; and for the cases Kfz-Kupplungen, WuW/E BGH 1501, Klockner-Becorit, WuW/E BGH 1749, 1754 f., Mannesmann-Brueninghaus, WuW/E BGH 1754, and Rheinmetail/WMF, WuW/E BGH 2150.

19 Cf. Holzier, Der Marktanteil in der Fusionskontrolle •.• , op. cit., 519-523; Mestmiicker, Ernst-Joachim, Zur Fusionskontroile in der Wettbewerbspolltik, 31 AG (1986), pp. 181-187, 183; Moschel, Use of Economic Evidence ... , supra, 542.

# **(a) Market Share**

For the characterization of real circumstances in a relevant market, German merger control ascribes **a** crucial role to the criterion of market share. It becomes obvious that on the basis of legislation in Secs. 22 paras. 1 lit. 2 and 3 lit. 1, and 23a para. 1 enforcement and jurisdiction currently view market share as the central element of market structure. The underlying reasoning does not hold that market share and relative market share are determinants of market power, but rather that they are direct or Indirect indicators of it in the sense of refutable presumptions. 20 Decreasing market share differences among competitors over time are tendentially viewed as refuting the presumption of a superior market position. Accordingly, all cases - either in enforcement or before the courts - in which a superior market position was confirmed were based on persistent and substantial market share differences among competitors in the relevant market,21

However, this majority view22 is challenged on the basis of recent findings by the Chicago School on the role of market structure in determining competitive conduct. They hold that market share expresses efficiency only and that there is no connection between market share and the extent of competitiveness of conduct or the extent of individual market power23, or that market share will at the most play only a minor role in the future because of

20 Cf. Emmerich, Volker, Kartellrecht, 4th ed., Munchen 1982, pp. 268 and 271; Holzler, Der Marktanteil in der Fuslonskontrolle ... , op. cit., 519; Pfeiffer, Gerd, Entwlcklung der deutschen Rechtspraxis In der Bestimmung von Marktmacht, In: FIW (ed.), Neuorlentlerung des Wettbewerbsschutzes, Koln et al. 1986, pp. 61-82, 71.

21 Cf. Monopolkommission, Hauptgutachten V ... , op. cit., para. 781 f. For the cases, cf. GKN/Sachs, WuW/E BGH 1501, 1510; Pillsbury/Sonnen-Bassermann, WuW/E OLG 3759, 3764; Rewe-Florimex, WuW/E OLG 2862, 2865.

22 Cf., e.g., Mestmii.cker, Ernst-Joachim, in: Immenga/Mestmii.cker (eds.), Gemei nschaftskommentar zum GWB, 1981, § 24, sec. 66; Monopol kommlssion, Hauptgutachten V ... , op. cit., para. 781 f.; Pfeiffer, Entwicklung der deutschen Rechtspraxls in der Bestimmung von Marktmacht, op. cit., 71.

23 Cf. Berg, Internationale Wettbewerbsfii.hlgkelt und natlonale Zusammenschlu'3kontrolle, op. cit.; Harms, Wolfgang, in: Immenga/Mestmii.cker (eds.), Gemei nschaftskommentar zum GWB, 4th ed. 1981, § 23, sec. 205; Knopfle, Robert, Indlziert der Marktantell den Wettbewerbsgrad?, 37 BB (1982), pp. 1805-1814, 1814; Idem, Aktuelle Probleme der Zusammenschlu'3kontrolle, supra, 6.

the globalization of markets and the worldwide scale of the competitive game. 24

The Klockner-Becorit decision in the German Federal Supreme Court has led to speculations on whether this ruling has diminished the role of market structure and market share as presumptions in determining a superior market posltlon.25 This can not be confirmed generally, however, because the Court has emphasized that the reasoning applies only to this particular case and its circumstances. This becomes even more obvious and plausible If one acknowledges that the FCO and courts have ruled cases illegal in which a market share of only 12% was considered to be criticai2&, while others in which market snares !'.mounted to roughly 50% have not been subject to legal examination at all. 27This option for discretionary decisions results from the comprehensive view that enforcement agencies and jurisdiction by the courts take of concerning the actual circumstances of individual cases.

Thus, general criticism on the role that market share and relative market share play as legal presumptions seems inappropriate28, although such a case can be made in the circumstances of a particular instance. Apart from this, scholars who plead for the adoption of principles underlying current antitrust policy in the U.S. neglect the fact that the current Merger Guidelines of the U.S. Department of Justice almost encompasslngly adopted the

26 Cf., e.g., Rewe-Florimex, op. cit., 2863 f.

24 Cf., e.g., Hi:ilzler, Der Marktanteil In der Fusionskontrolle ... , op. cit., 524 f. We have demonstrated that this reasoning does not seem very convincing, cf. again, Kartte, Wolfgang, Internationale Wettbewerbsfii.higkeit und Zusammenschlul3kontrolle, op. cit., 531 f. For more moderate criticism, cf. Herdzina, Klaus, Wettbewerbstheorie und Wettbewerbspolitik: Stand und Entwicklungstendenzen, 66 WO (1986), pp. 525-532, 529, who holds that the final evaluation on whether market share expresses efficiency or power is still heavily disputed; but see the results of our contribution.

25 Cf., e.g., Markert, Zur Bedeutung von Marktstruktur und -verhalten ... , op. cit., 125-127; and for the case Klockner-Becorit, op. cit., 1759.

27 In an Internal discussion paper the FCO mentions Dyckerhoff/Kli:ickner, Siemens/Garbe Lahmeyer, Nukem/British Nuclear Fuels, and Henkel/Loctite. Cf. as well the Fichtel & Sachs/Mannesmann merger with a market share of roughly 50%, cf. Kurzinformationen, 37 WuW (1987), pp. 445 f., 446.

28 Cf., e.g., Berg, Internationale Wettbewerbsfii.higkeit und nationale Zusammenschlu13kontrolle, op. cit.; Hi:ilzler, Der Marktanteil In der Fusionskontrolle ... , op. cit., 524 f.; Kni:ipfle, Indiziert der Marktantei I den Wettbewerbsgrad?, supr~ 181~

comprehensive view of the German FCO and the German courts, acknowledging a structural predominance,29

As we have emphasized in our contribution, recent research strongly focuses on the role of market share as a predominant indicator of individual market power. 30 This allows us to reject a line of reasoning that asserts that the market share orientation Is based on plausibility considerations that lack **a**  profound theoretical basls. 31The use of strategic planning and of portfolio and associated techniques by the management of modern corporations demonstrates the importance of elements of market structure, particularly that of (relative) market share for profitability and thus partly for market power (Michael E. *Porter.* "Key factors of success"). 32

# **(b) Financial Strength**

As a rule, the confirmation of a superior market position is based on a comprehensive view of market share and (financial) resources. This applies in the sense that a firm possessing a large market share is unlikely to be considered to hold a superior market position vis-a-vis its competitors if it clearly succumbs to its competitors on the basis of Its (financial) resources. 33 The underlying reasoning is based on the so-called entrenchment-doctrine. This holds that the alleged anti-competitive effect of financial resources lies within their potential for discouraging smaller rivals from competing aggres-

31 Cf., **e.g.,** Holzler, Der Marktanteil in der Fusionskontrolle ... , op. cit., 519 and 524 f. For the contrary position, cf. Monopol kommission, Hauptgutachten V ... , op. cit., para. 781 f.

32 Cf., e.g., Abell, Derek F., and John S. Hammond, Strategic Market Planning: Problems and Analytical Approaches, Englewood Cliffs, N.J., 1979, pp. 283-289; and Porter, Michael, Competitive Advantage: Creating and Sustaining Superior Performance, New York, London 1985, pp. 221-226.

33 Cf. Emmerich, Kartellrecht, op. cit., 271 f. Fundamental criticism of this view is found in Knopfle, Aktuelle Probleme der ZusammenschluBkontrolle, supra, 6-8; and Moschel, Wernhard, Finanzkraft und konglomerater ZusammenschluB, 29 AG (1984), pp. 257-260.

29 Cf. Emmerich, Kartellrecht, op. cit., 271. This means that the rigid prohibition policy demonstrated in several cases (e.g., United States: U.S. v. Philadelphia National Bank, 1963 Trade Cases § 70,812, p. 268; Germany: GKN/Sachs, op. cit., 1510) has largely been harmonized now on the basis of a comprehensive view in which even the U.S. Merger Guidelines have neglected to adopt some important principles underlying Chicago theory. Concerning court findings, this is pointed out by Markert, Stand und Entwicklungstendenzen des US-Antitrustrechts 1987 ... , op. cit., 210.

30 Cf. again for a survey on empirical studies, Pautler, Paul A., A Review of the Economic Basis for Broad-Based Horizontal-Merger Policy, 28 AB (1983), pp. 571-651.

sively in the market or for discouraging potential competitors from entering the market.34 In the case of conglomerate mergers, in the context of which financial resources are primarily of relevance, this is enhanced by a potential for decreasing the sales volume of competitors by reciprocal dealings.

Thus, if we appeal to the position which we have presented In the case of vertical mergers, conglomerate mergers cannot currently be regarded as harmful to competition because they are not output-restricting and must as a rule therefore be primarily considered efflciency-enhancing.35 The conceptions that have been developed by the traditional theory for determining the negative effects of conglomerate mergers allow the conclusion to be drawn that such mergers should in no case be impeded. 311

However, this position is not held unanimously. Moderate representatives of the Chicago School or independent scholars regard conglomerate mergers in specific situations as a problem. In this context, it is held that "(p)ubllc policy will be served by identifying specific instances where conglomerates pose problems rather than by mounting a broadscale attack".37

34 For severe criticism, cf. Harms, Gemeinschaftskommentar zum GWB, op. cit., § 24, sec. 467; Knopfle, Aktuelle Probleme der Zusammenschlul3 kontrolle, supra, 6 f.; and somewhat more moderate, Moschel, Wernhard, Abschreckungstheorie und Fusionskontrolle, in: FIW (ed.), Schwerpunkte des Kartellrechts 1984/85. Verwaltungs- und Rechtsprechungspraxis Bundesrepublik Deutschland, EG und USA, Koln et al. 1986, pp. 1-13. Tendentially approved, however, by Emmerich, Fusionskontrolle 1986/87, supra, 364; Monopol kommission, Hauptgutachten der Monopol kommlssion VI: Gesamtwirtschaftllche Chancen und Risi ken wachsender Unternehmensgroi3en, Baden-Baden 1986, para 454; and for the cases, cf. GKN/Sachs, op. cit.; Mannesmann-Brueninghaus, op. cit.; and Pillsbury/Sonnen-Bassermann, op. cit.

35 Cf., e.g., Bork, The Antitrust Paradox: **A** Policy at War with Itself, New York 1976, 248: "It seems quite clear that antitrust should never interfere with any conglomerate merger. Like the vertical merger, the conglomerate merger does not put together rivals, and so does not create or increase the ability to restrict output through an increase in market share. Whatever their other virtues or sins, conglomerates do not threaten competition, and they may contribute valuable efficiencies."

36 Cf. again Bork, The Antitrust Paradox, op. cit., 262: "We have examined all the major theories of the ways in which conglomerate mergers may injure competition and found that none of them ( ... ) bears analysis. The conclusion must be, therefore, that conglomerate mergers should not be prohibited by judicial Interpretation of Section 7 of the Clayton Act."

37 Williamson, Oliver E., Markets and Hierarchies: Analysis and Antitrust Implications, New York 1975, p. 170.

Based on this reasoning and the fact that the use of the entrenchment-doctrine has disappeared in enforcement and jurisdiction in the U.S.38, there is a strong tendency for enforcement agencies and courts' jurisdiction in Germany to assert that financial resources on the part of firms possessing market dominant positions pose no problem whatsoever, and may even be essential to the rigor of competition. 39It is believed that firms with large resources are the driving motor of the economy, and enable structural change and a revitalization of markets that are often rigid and uncompetitive. A more moderate view that emphasizes a comprehensive approach and the consideration of particular circumstances does not want to apply the entrenchment-doctrine in an undifferentiated manner. 40 It becomes obvious that this reasoning alms at an adoption of current U.S. antitrust policy.

It is undisputed that an accretion of financial resources does not pose a competitive problem per se, and is thus not necessarily detrimental to competitive conditions. However, there has to be an Inquiry into the actual circumstances of the individual case in the context of a qualitative analysis. 41 For even if we confirmed that conglomerate mergers were unharmful **as a**  rule, this does not provide evidence that the accretion of financial resources in combination with a market dominating share can also be judged unharmful. 42

The criticism that rejects the whole notion that an accretion of financial resources can act as a restriction of competition does not consider all the possible cases. Even if potential competition Is not deterred at the moment, the merger may lead to that deterrence effect in the future. Furthermore, we should not forget that capital markets and the market for corporate control do not work as frictionlessly as assumed. This tends to produce a leverage effect In favor of financially strong firms vis-a-vis their smaller (potential) competitors. There is every reason to be careful in the application of the entrenchment-doctrine and to look for further refinements; however, there is no reason for the time being to drop It completely. 43

#### (c) **Market Barriers**

The use of financial resources is also closely connected with the importance and height of market barriers. Superior market shares and financial resources are necessary conditions as a rule, although not sufficient ones. Their relevance may only be determined In the light of additional structural factors, such as market barriers, market stage, technological development, structure of demand, etc. Market barriers, and particularly entry barriers, are a further element indicating whether a superior market position in an actual case may be confirmed. 44

Low market barriers indicate rather strong potential competition which should be able to control free areas of conduct among Incumbent competitors, even If they may be superior In terms of other structural features. The FCO as well as the courts have emphasized this aspect as well as the comprehensive view of market share and market barriers in relevant cases.

43 Cf. Emmerich, Kartellrecht, op. cit., 276 f. There Is some criticism that the German Federal Supreme Court neglects this carefulness, cf. Bechthold, Rainer, Die Entwicklung des deutschen Kartellrechts seit Ende 1983, 39 NJW (1986), pp. 3053-3061, 3060.

44 Cf. Moschel, Use of Economic Evidence ... , supra, 542 and 549; Monopolkommisslon, Hauptgutachten V ... , op. cit., paras. 786 ff.

This applies particularly to the combination of low barriers and aggressive foreign competitors.45

Thus, the existence and height of market barriers have been considered sufficiently in actual merger cases, and there seems to be no dispute that they have to be considered if they exist. 48We have demonstrated that according to our definition, market barriers do exist and often tend to impede the proper working of the competitive mechanism. Thus, as a rule they should be taken Into account. This also applies to the case of International competition, which **we** have emphasized in the context of the relevant market. It is often asserted that the globalization of competition renders the market barriers concept obsolete because there is always sufficient competitive pressure. Nevertheless, despite some liberalization tendencies in world trade, sufficient legal and factual barriers to new competition exist which tend to impede sufficient competitive pressure in such cases. We should be aware of that these markets often do not work frictionlessly. In this context, it is of crucial importance to what extent the national market is interwoven with international competition and what the circumstances of the individual case are.47

However, the concept of market barriers is limited in application because there are extreme difficulties of operationalization in terms of measurement. This leads to rather significant ambiguities as to the nature and meaning of market barriers. In the contribution submitted, **we** have pointed out that

45 Cf. Monopolkommission, Hauptgutachten V ... , op. cit., para. 803 ff. Just recently the Mannesmann Co. has acquired the Fichtel & Sachs Co. because its market share decreased from 80 to roughly 50~ over ten years, whereas in 1978 it was prohibited for Guest, Keen & Nettlefold to acquire Fichte! & Sachs because of its dominant position. Prof. Markert of the FCO has in essence argued that increasing globalization tended to lower market barriers and that this changed the ruling, cf. Kurzinformationen, supra, 446.

46 This seems to be a matter of restrictive qualitative judgment on the basis of the comprehensive **view** mentioned. For instance, in the Rewe-Florlmex case the Federal Supreme Court prohibited a merger with a share of only 12~ of the relevant market, despite extremely low barriers, because the rest of the market showed an almost atomistic structure concerning individual competitors' shares, cf. Rewe-Florimex, op. cit., 2865; and as well Llnde-Agefko, WuW/E BKartA 2213, 2220, and Pillsbury/ Sonnen-Bassermann, op. cit., 3764, that also considers market barriers.

47 In the aircraft manufacturing industry, In ship-building, or the engineering of industrial plants, for Instance, even a structural monopolist in a national market might be controlled by sufficient competition on a global scale.

this seems to be a major reason for problems of appllcation. 41Hence, the potential for an application of the market barriers concept seems rather limited which tends to give it a qualitative nature. 49Thus far, there is no adoption of a more lenient line of U.S. antitrust policy concerning market barriers in the context of mergers. Furthermore, there is no necessity to follow the trend.

# **(2) Market Conduct**

The comprehensive view necessary to confirm a superior market position is not only based on structural features of the relevant market but eventually on actual competitive conduct also, although structural elements prevail.!IO However, the severe criticism by the advocates of the theoretical edifice underlying current U.S. antitrust policy has revived the discussion on the Importance of market structure vis-a-vis market conduct. In this context, it is argued that there is assumed to be a tension between a structural perspective and the consideration of conduct. A dilemma is believed to arise in having to perform evaluations on a case-by-case basis whereas one is only able to judge on the basis of a general interrelation between structure, conduct, and performance, the theoretical foundation of which has been seriously challenged.51

If we presuppose that the legal market domination criteria In Sec. 22 para. 1 lits. 1 and 2 are real alternatives to one another then a superior market position may be confirmed regardless of whether substantial competition is confirmed. In this context, structural predominance is interpreted in the sense that if structural features point unambiguously towards a superior market position the question of whether substantial competition is present, which Is believed to control free areas of conduct becomes meaningless.52 In these cases It is not expected that a superior area of free conduct will be controlled permanently by substantial competition.

Actual market conduct Is only taken into account in terms of a comprehensive view If a superior market position is not confirmed unambiguously on the basis of the underlying structural features. 53 A number of recent court decisions demonstrate that there Is no tendency to weaken the structural dominance criterion in the sense that market conduct is taken into account on the basis of equlvalence. 54

Even if substantial competition Is con fl rmed, despite an ambiguous result concerning structural features it becomes necessary to determine whether substantiality results from structural conditions and whether these are changed by the merger. Intensity and permanence of competition, as well as the strength of the structure-based superior market position have to be predicted. 55This leaves ample room for evaluation and judgment, particularly in the face of ambiguities concerning the Interrelation between structure, conduct, and performance.se

On the basis of our findings in the contribution submitted that most of the hypotheses (e.g., the new learning) underlying current antitrust policy In

52 Cf. Lange/Niederlelthinger/Rltter/Schmidt, Kommentar zum Kartellgesetz, 6th ed., Neuwled and Darmstadt 1982, Sec. 22, para. 46; Moschel, Wernhard, Recht der Wettbewerbsbeschrii.nkungen, Koln et al. 1983, p. 307 f.; and for the most recent case, Kfz-Kupplungen, op. cit., 1504. Cf. as well Holzler, Der Marktantell In der Fusionskontrolle ... , op. cit., 522; Markert, Zur Bedeutung von Marktstruktur und -verhalten ... , op. cit., 126; GKN/ Sachs, op. cit., 1506; Rheinmetall/WMF, op. cit.

the United States cannot for the time being be confirmed unambiguously in empirical terms, we are able to conclude that for the most part these hypotheses represent more or less reinterpretations of traditional findings, although based on a different set of values and beliefs. 57This applies particularly to the hypothesis underlying current merger policy In the U.S. that market structure is virtually of no importance for the determination of actual conduct within a relevant market.

There is no doubt about the notion that deterministic kinds of statements on structure-, conduct-, performance-relationships are of little use. This is not disputed by the adherents of the traditional tenet, however. The knowledge of this deficiency results in the necessity for a comprehensive analysis of the structural factors of a relevant market Including actual conduct in ambiguous cases.58 This Implies, for instance, that factors in addition to the ones listed In Sec. 22 para. 1 lit. 2 must be considered. This applies for example to the use of the market stage as a structural criterion for the determination of a dominant position. 59

Contrary to current antitrust policy in the U.S., however, our findings indicate that a structural predominance must be confirmed; at the same time, however, the traditional paradigm faces a rather severe modification as now the emphasis is placed on superior market positions of individual firms rather than on collective domlnation.eo

60 Cf. the main results of Part 3 of this contribution.

57 Cf. again, e.g., Scherer, Frederic M., On the Current State of Knowledge In Industrial Organization, in: de Jong, Henk W., and William G. Shepherd (eds.), Mainstreams in Industrial Organization - Book 1, Dordrecht et al. 1986, pp. 5-22.

58 Cf. Kantzenbach, Erhard, and Hermann H. Kallfass, Das Konzept des funktionsfahlgen Wettbewerbs - workable competition, in: Cox, Helmut, et al. (eds.), Handbuch des Wettbewerbs, Munchen 1981, pp. 103-127, 105 f. To speak of a complete breakdown of the structure-, conduct-, performance paradigm must be considered a strong and false exaggeration, cf. for this exaggeration, e.g., Markert, Stand und Entwicklungstendenzen des US-Antitrustrechts 1987 ... , op. cit., 221; and Scherer, On the Current State of Knowledge in Industrial Organization, op. cit., 5 f.

59 It Is pointed out, for instance, that there Is no need for a merger control In markets that are in an introductory or growth stage because competition will sufficiently control market power. This does not render merger control obsolete In a later stage (e.g., stagnation of a market), cf. Berg, Internationale Wettbewerbsfahigkeit und natlonale Zusammenschlu(3kontrolle, op. cit., 142 ff.; and for a case, Klockner-Becorlt, op. cit., 1754.

# **bb. Ollgopollstlc Domination**

Alternative to a proof of a superior market position on behalf of the merging parties, the confirmation of a market-dominating position can also be conducted by proving the *creation or strengthening of an oligopoly,* i.e. by collective domination (Sec. 22 para. 2).81

Collective domination via oligopoly encompasses two relevant aspects. Firstly, there is a necessity to analyze the intensity of competition within the oligopoly core, and secondly, we have to determine whether the oligopoly core Is exposed to substantial competition by the fringe of firms which do not belong to the core. 112

Based on traditional oligopoly theory, it was asserted In the first case that with the emergence of an oligopoly there would be a tendency for mutual interdependence among the ollgopolists which would lead to conscious parallelism, I.e. collective monopolist conduct. 83In the contribution submitted we have found that the studies which attempted to prove the traditional concentration-collusion doctrine were largely flawed due to aggregation biases. **We** have concluded that Individual market dominance rather than collective dominance poses the essential antitrust problem. Thus, with increasing concentration the tendency towards conscious parallelism was not confirmed In general.'14 This implies that additional structural features of the market in the sense of a comprehensive analysis have to be considered in order to provide evidence on whether the potential for conscious parallelism is really increased.85

The German courts allow for these findings by setting relatively high standards concerning the proof that competition within the oligopoly core does

61 Cf. Emmerich, Kartellrecht, op, cit., 272; Pfeiffer, Von der Autokupplung bis ZU Chanel No. 5, op. cit., 211 f.

62 This was emphasized again in the context of the Fourth Amendment of the ARC, cf. Markert, Die Fusionskontrollpraxis des Kartellamts im Wandel?, supra, 178.

63 Cf. Reglerungsbegrundung zum Entwurf elnes Zwelten Gesetzes zur Anderung des Gesetzes gegen Wettbewerbsbeschrankungen, BTDr. VI/2520, p, 23.

not **exist.ee** This has shifted the emphasis towards an application of the qualified oligopoly presumption in Sec. 23a para. 2, which reverses the burden of proof to the defendant. Experience thus far shows that even in highly concentrated markets, where the market share presumptions are met, effective competition may still be present, particularly in the context of a specific market stage.

Refutation of the qualified oligopoly presumptions can only be attained by application of structural crlterla.87 For the prognosis on the development of future Intensity of competition the existence of substantial competition before a merger serves as an indicator of whether these competitive conditions will persistently exist after the merger has been performed. Thus there is reference to structural criteria again. There is no tendency In court cases to give up the underlying reasoning.ee However, there is a rather wide area of uncertainty regarding the conditions which are thought to provide for substantial competition within an oligopoly. This is the case on the one hand because the conditions providing for substantial competition differ from industry to industry, and on the other, possibly because there is still ambiguity about the nature of the qualified presumptions in Sec. **23a**  para. 2 **ARC. 89**

As a rule, the refutation is carried out successfully by the defcnrtant on the basis of structural criteria. These include particularly low market barriers, technological developments, specific sales conditions for investment goods, and structural overcapacity in an Industry. Whereas for a variety of cases in the retailing sector this refutation was rejected by the FCO, the Berlin Court of Appeals as well as the Federal Supreme Court have reversed a

66 Cf. Texaco/Zerssen, WuW/E BGH 2025; and Tonolli/Blei- und Silberhutte Braubach, WuW/E BGH 1824.

67 Cf. Emmerich, Kartellrecht, op. cit., 282 f. This policy of the FCO has been affirmed by the Berlin Court of Appeals, cf. Klockner-Becorit, op. cit., 1749.

68 Cf. Emmerich, Fusionskontrolle 1986/87, supra, 366 f., presenting a variety of recent cases decided by the FCO and the Berlin Court of Appeals, notes 127-132. Cf. as well Bundeskartellamt, Tii.tlgkeitsbericht 1985/86, op. cit., 59, 63, 70 f., 73, and 93.

69 The reasoning underlying the government proposal of the Fourth Amendment tends to view Sec. 23a para. 2 ARC as a rule for per se-prohibition for ollgopollsts with exemptions by the possibility for refutation, cf. Regierungsbegrundung zum Entwurf eines Vierten Gesetzes zur Anderung des Gesetzes gegen Wettbewerbsbeschrii.nkungen, BTDr. 8/2136, p. 21 f. In contrast, It is asserted that the provision Just provides a relief regarding the burden of proof, cf. Harms, Gemeinschaftskommentar zum GWB, op. cit., § 23a, sec. 233.

great number of these rulings because of structural features which in the Court's opinion would provide for sufficient competition even after the merger.70

# c. **Strengthening Market Domination**

All the factors that are used to prove the emergence or existence of a superior market position can principally also be used to prove the confirmation of a strengthening of this position, regardless of the intensity of the strengthening.71 Confirmation of the strengthening does not necessarily entail proof of a further worsening of competitive conditions. However, there has to be a market relevant impact.n This leaves ample room for discretionary judgment.

Concerning horizontal merger cases, confirmation of the strengthening of a superior rAarket position does not pose serious problems, since market shares of the merging parties are added to each other and recalculated on the basis of the disappearance of one business unit. So far, it has been ruled that even marginal market share accretions suffice to generate a market relevant impact.73

The problems which arise in confirming a strengthening in a conglomerate case have partly been discussed supra in the context of financial resources. **We** have emphasized that an analysis of the individual case has to be performed considering the likelihood of anticompetitive effects under actual circumstances. Market interrelatedness and the purpose of the merger (e.g., diversification) are considered to be the relevant criteria. 74 As a rule, the generation of a market relevant impact is assumed in cases of entrepreneu-

70 Cf. Emmerich, Fusionskontrolle 1986/87, supra, 367. For a listing of successful refutations cf. ibid., 366 f. notes 127-132; and for the AEG/Daimler-Benz case, Kni:ipfle, Aktuelle Probleme der Zusammenschlu13kontrolle, supra, 13 f.

71 Cf. Monopolkommission, Hauptgutachten VI ... , op. cit., para. 449; and Springer/Elbe Wochenblatt, WuW/E BGH 1691; and for more cases, cf. Kni:ipfle, Aktuelle Probleme der Zusammenschlu13kontrolle, supra, 8 note 49.

72 Cf. Emmerich, Kartell recht, op. cit., 270.

73 Cf. Coop Schleswig Holstein/Deutscher Supermarkt, WuW/E OLG 3591 in which the Berlin Court of Appeals has ruled that accretions of 1 or 2% suffice to confirm the strengthening, although circumstances of the individual case have to be taken into consideration; cf. as well Coop/ Wandmaker, WuW/E BKartA 2161; and recently, EGWA/L. Fiebig GmbH in the report of the FCO, Bundeskartellamt, Ta.ti g keitsbericht 1985/ 86, op. cit., 59.

74 Cf. GKN/Sachs, op. cit.; and Rheinmetall/WMF, op. cit.

rial diversifications but not in cases of financial ones.

**We** have emphasized that it is undisputed that an accretion of financial resources does not pose a competitive problem per se and thus does not necessarily generate a market relevant impact. It becomes obvious once again that we have to inquire into the actual circumstances of the Individual case in the context of a qualitative analysis. 75

The so-called toehold-acquisition poses a specific problem in the context of the strengthening of oligopolistic market domination. Legislation has emphasized that a toehold-acquisition may be used as an particular argument for the refutation of the qualified presumption of oligopoly in Sec. 23a para. 2 ARC. As a rule, this does not apply to members of the oligopoly core. Advantages resulting from an improvement in competitiveness vis-a-vis the market leader have to be balanced against the disadvantage resulting form a deterioration of the competitive situation of the members of the oligopoly fringe. 78

## III. **An Evaluation of the propositions for a Reform of Merger Control in the Fifth Amendment of the ARC**

Although Its permanent function as a sort of "constitution of economic order" was emphasized when the German Act Against Restraints of Competition was passed, its public policy objectives are nevertheless based on knowledge from antitrust theory and are thus changeable. Changed economic conditions as well as new knowledge in antitrust theory are basically able to alter this constitution. This applies to the instrument of merger control as well. Thus far, only the German Association of Manufacturers (Bundesverband der deutschen Industrie) seems to have adopted explicitly and without any major modifications the theory and reasoning underlying Chicago School antitrust pol icy. 1

75 Cf. Bundeskartellamt, Tatigkeitsberlcht 1985/86, BTDr. 11 /554, pp. 12 and 61 f., referring to the AEG/Dalmler-Benz case; Emmerich, Fusionskontrolle 1986/87, supra, 364, who notes that this is the guiding principle of current application; Markert, Stand und Entwicklungstendenzen des US-Antitrustrechts 1987 ... , op. cit., 222; Monopolkommission, Hauptgutachten VI ... , op. cit., para. 449; and Pfeiffer, Von der Autokupplung bis zu Chanel No. 5, op. cit., 216.

76 Cf. Emmerich, Fusionskontrolle 1986/87, supra, 365, who mentions the case AEG/Daimler-Benz.

Cf. Kantzenbach, The Treatment of Dominance ... , op. cit., 282.

However, with some exceptions this has not led to an attempt to modify the antitrust laws in the direction of Chicago School theory but to an attempt to retain the status quo.2

# **1. Polltlcal and Economic Order: Thoughts on Structural Complementarity**

The aim of competition policy as it is understood by German and European Community Law is to maintain or help to establish competitive market structures. In this view, competition is the only means of ensuring that entrepreneurial forces are mobilized and the full potential of the efficiency of firms is exploited. This process leads not only to greater overall economic efficiency and competitiveness, but also to increased consumer welfare. Competition, in this sense, can be viewed as an unlimited sequence of moves and responses In which profits can be seen as a motive for initiation and imitation of economic efforts. The time competition needs to erode these profits indicates the degree of effectiveness of competition, i.e., determines whether competition itself performs its function in a sufficient manner and exerts sufficient competitive pressure which cannot be controlled by the incumbents. Although structure-orientated, this makes it obvious that this view of competition is a dynamic one. 3

The maintenance of these competitive structures requires merger restrictions, which should be pre-merger control, as well as a legal instrument for deconcentrating industries. Until now there has been no divorcement instrument under German or European antitrust law; the EEC law contains practically no merger control at all, though the European Court of Justice has just recently pointed out in the Reynolds/BAT case that Art. 85 Treaty of

2 Cf. Geberth/Janicki, Kartellrecht zwischen Kontinuitiit und Anpassung, supra, 447 ff.; Lambsdorff, Otto Graf, Fur eine JS.nderung der gesetzlichen Kriterien besteht keine Veranlassung, 66 WD (1986), pp. 384-388; Schlecht, Otto, Konsequente Anwendung des Rechts erforderlich, 66 WD (1986), pp. 382-384; Weizsiicker, Carl-Christian von, Mul3 der Leistungswettbewerb starker geschutzt werden?, 37 WuW (1987), pp. 706-709; Wissenschaftlicher Beirat beim Bundesministerium fur Wirtschaft ... , op. cit., 32; n.n., "Der Novellierungszweck darf nicht der Schutz vor dem Wettbewerb seln", in: Handelsblatt, July 24/25, 1987; and n.n., "Kein Anla13 fur eine Novelle", in: Handelsblatt, September 22, 1987.

3 Besides, the structure-approach is much more conducive to the functioning of a free enterprise system than an approach that tries to control competitors' conduct, cf. Geberth/Janicki, Kartellrecht zwischen Kontinuitiit und Anpassung, supra, 452 and 458.

Rome might be applied to mergers as well. Besides, the European Commission is pressing on the European Ministerial Council to adopt a merger control system proposed by the Commission in various forms since 1973.4

Furthermore, an essential aspect of competition policy is what came to be called by the German ordoliberal economists, the "'ordnungspolitische'" function.5 This view emphasizes that competition also has a sociopolltical function which should be deemed at least as important in value as its economic function of enhancing consumer welfare. In this sense, competition, acting as a controlling, selecting, and driving force through decentralized decisionmaking units, becomes the only appropriate counterpart and basic economic principle appropriate for free democratic states because it deprives economic aggregations of their power. 6

To this extent, this view on competition and competition policy coincides with the one that was traditionally put forward by United States antitrust policy in numerous court cases until the early 1970s.7 In these court decisions, based on undisputed economic foundations, competition law was understood as a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. The unrestrained Interaction of competitive forces, it was argued, would yield the best allocation of the economic resources, the lowest prices, the highest quality, and the greatest material progress, while at the same time providing an environment conducive to the preservation of democratic, political, and social institutions.

**4** Cf. BNA, Antitrust & Trade Regulation Report No. 1343, December 3, 1987, p. 863; and Vorschlag einer Verordnung (EWG) des Rates Ober die Kontrolle von UnternehmenszusammenschlOssen, 38 WuW (1988), pp. 405-412.

5 Cf., e.g., Moschel, Wernhard, Wettbewerbspolitik aus ordollberaler Sicht, in: Gamm, Otto Fried rich Frei herr von, et al. (eds.), Strafrecht, Unternehmensrecht, Anwaltsrecht: Festschrift fur Gerd Pfeiffer, Koln et al. 1987, pp. 707-725.

6 Cf. Adams, Walter, and James **W.** Brock, Antitrust and Efficiency: A Comment, 62 NYU LR ( 1987), pp. 1116-1124, 1116; Moschel, Wettbewerbspoliti k aus ordoliberaler Sicht, 714 f. Aside from this, the coherent development of fundamental ideas underlying the ARC is another crucial reason why an abrupt reorientation of German antitrust legislation towards Chicago ideals is rather unlikely, cf. Herdzlna, Moglichkeiten und Grenzen einer wirtschaftstheoretischen Fundierung ... , op. cit., 37 f.

7 Cf. Northern Pacific Railway Co. v. U.S., 1958 CCH Trade Cases § 68,961. Cf. as well Schmidt, Ingo, and Jan B. Rittaler, Die Chicago School of Antitrust Analysis: Wettbewerbstheoretische und -politische Analyse eines Credos, Baden-Baden 1986, pp. 37-44.

This fundamental socioeconomic idea has been given up by the Chicago School, which may be viewed as a laisser-faire or "Nihilist" School. 8 In essence, as **we** have pointed out, this school advocates dismantling the entire institution of antitrust, since competition develops almost of its own accord if the public, the government, and its agencies refrain from taking measures to control and shape **it.9**

Giving up this ordoliberal idea and thus omitting non-economic objectives can have serious effects, since highly concentrated markets lead to decreased flexibility of large companies and to an increase in their (potential) political influence. 10This may lead to the use of economic power to exercise political pressure in order to get protection from competition or direct government subsidies. *Adams* and *Brock,* for instance, have stressed the close links between politics and economic organization, referring to "voluntary" export quotas in the U.S. steel and automobile industries or government subsidies as in the Lockheed or Chrysler cases: 11

8 Cf. the fundamentally different opinion of Edwards, Corwing D., Maintaining Competition, **New** York et al. 1949, p. 8: "But although the maintenance of competition will not guarantee that the economy will work well, impairment of competition by monopolistic restrictions, public or private, increases the chance that it will work badly"; cf. as well Audretsch, David, Divergent Views in Antitrust Economics, 33 AB (1988), forthcoming; and Moschel, Wettbewerbspolitik aus ordoliberaler Slcht, 714 f.

"Contrary to current apologetics, bigness does not meekly submit to the rules of the global competitive game when confronted with the consequences of delinquent economic performance. Instead, giant corporations - often in concert with allied interest groups - reach out to manipulate the state in order to change the rules of the game, to avoid the competitive market's sanctions for poor performance, and to shift them onto society. In reality, bigness mobilizes the vast political resources at its command - funds, employees, executives, labor unions, subcontractors, suppliers, governors and mayors, senators and representatives, Republicans and Democrats - to neutralize global competition through government-imposed import quotas, tariffs, 'voluntary export' restraints, 'orderly' marketing agreements, and the like."

This kind of cooperation between industry, labor, and government leads to an economic oligarchy that strongly resembles that of a centralized planning economy. 12

Competition policies in the European Community, the Federal Republic of Germany, and the United States should have nothing in common with these extreme positions. In both continents, one actually departs from the assumption, and accordingly the laws distinctively state as much, that certain forms of behaviour and action by firms are not permissible on grounds of competition considerations. Both sides, it seems, start from the basic idea that, in assessing such matters, economic criteria are ultimately of crucial importance. Competition is an economic phenomenon which is taken as fact. However, legal rules must be drawn up and adopted so as to ensure certainty and clarity as to the meaning of law, and to avoid arbitrariness.

#### **2. The Object of Protection: Competition vs. Competitors**

Basic differences concerning the law's object of protection become obvious if one compares the emphasis of 1984 U.S. Merger Guidelines to that of the ARC. Whereas the ARC protects the freedom of competition and thus views competition as a controlling, selecting, and driving force through decentralized decision-making units, current U.S. antitrust policy, although verbally emphasizing competition as the object of protection, puts efficiency considerations in the centre of its concern. Implicitly, a permanent dilemma or conflict between efficiency-enhancement and maintaining competition is

12 Cf. Tinbergen, Jan, Do Communist and Free Societies Show a Converging **Pattern?,** 12 Soviet Studies (1961 ), pp. 333 ff.

assumed; in contrast, the German legislator did not presume such conflict as the rule. 13

The tendency to protect competitors and not competition can also be found in the discussion on the reform of the ARC. In this context, it is held that the competitiveness of firms in the national economy vis-a-vis global competition is much more important than the protection of competition as an institution.14 In addition to Industrial policy via promotion of sector- or product-orientated innovations, there also seems to be a renaissance of antitrust-specific protectionism. This includes export cartels, legalized cartel-like cooperations and an untrammeled laissez-faire pol icy towards external corporate growth.

In a general sense, the alleged goal conflict between maintaining competition and enhancing efficiency is not confirmed by the empirical studies reviewed and the conclusions drawn in our contribution. There is no case thus far, that proves the inability of German firms to compete on a global scale because of the strict merger control. Besides, in cases where a real conflict actually occurs the ARC has provided for a solution by a political decision on the part of the German Federal Minister for Economic Affairs. Aside from the aspect of global competitiveness, the aforementioned reasoning presumes that it is not the rigor of competition but relief from that rigor that makes firms more competitive. This argument may easily be reversed, however, by asserting that it was the restrictive cartel law that in the past made German firms competitive on a global scale. 15

13 The ARC allows for efficiency considerations only in a few exceptional cases, whereas the permanent conflict assumed in the Merger Guidelines led to a more lenient attitude towards competition as an object of protection, cf. the Merger Guidelines of 1984, supra.

14 Cf., e.g., Berg, Internationale Wettbewerbsfahigkeit und nationale ZusammenschluJ3kontrolle, op. cit.; Harms, Wolfgang, Fehlentwicklungen in der Wettbewerbspoliti k gegenuber marktbeherrschenden Unternehmen, in: FIW (ed.), Schwerpunkte des Kartellrechts 1981/82. Verwaltungs- und Rechtsprechungspraxis Bundesrepublik Deutschland, EG und USA, Koln et al. 1983, pp. 95-128, 106; Holzler, Der Marktanteil in der Fusionskontrolle .•. , op. cit.; and Knopfle, Robert, Wettbewerbsbeschrankung durch Anwendung des GWB bei Zusammenschl Qssen, 37 JZ ( 1982), pp. 521-530.

15 The German foreign trade balance does not show any signs of a weakness concerning the abillty of German firms to compete on a global scale; cf. also Stellungnahme der Bundesregierung zum Tatigkeitsbericht des Bundeskartellamtes 1985/86, op. cit., IV.

The same tendency may be confirmed by the argument that small business has to be protected particularly because the legislator considered maintaining a small business structure an objective in itself. However, small business is best protected if the freedom to compete and thus competition as an institution are protected, provided that there are no substantial competitive impai rments.1e

It can be confirmed that the protection of freedom to compete and the protection of competition as an institution are closely interwoven with each other and that they may not be considered separately without endangering the workability of the competitive mechanism permanently. 17 A reorientation would thus not improve the functioning of the free enterprise system.

#### **3. An Evaluation of the Proposals on the Basis of Our State of Knowledge**

There is as yet no consensus among relevant participating groups in the Federal Republic about whether the German ARC needs a reform by the addition to it of a Fifth Amendment. Nevertheless, with regard to the legal treatment of mergers there are a variety of specific pondering questions. Although we want to present most of the proposals discussed in the context of the Fifth Amendment, we will only evaluate the ones important within the context of the Chicago emphasis in the contribution submitted.

#### **a. The Proposals**

Concerning merger control, a variety of proposals for improvement of this instrument in the ARC are currently under discussion by German scholars. Subsequent proposals are either valid for a general reform of merger con-

16 For affirmation of this tendency and strong criticism, cf. Geberth/Janicki, Kartellrecht zwischen Kontinuitat und Anpassung, supra, 454-456, and 455: "Such a reasoning can neither be based on the history of the Act nor on the ratio legis. It is in strict opposition to fundamental knowledge in antitrust theory on how the competitive mechanism works and faces substantial reservations concerning competition and small business", (translated by the author).

17 Cf. Geberth/Janicki, Kartellrecht zwischen Kontinuitat und Anpassung, supra, 455; and Immenga, Ulrich, in: Immenga/Mestmacker (eds.), Gemeinschaftskommentar zum GWB, 4th ed. 1981, note 11 to § 1 ARC.

trol or are particularly aimed at preventing concentration tendencies in the retailing sector:1a

An uncoupling of the criterion of intervention from the aspect of market dominance has been stated in two forms thus far:

According to the paper of the ad hoc-Council of Experts with the Ministry of Economic Affairs which was passed by the German Cabinett of Ministers, June 29, 1988, the criterion of market dominance in sec. 22 para. 1 ARC should be supplemented by adding three criteria to sec. 22 para. 1 lit. 2:

Another area of reform concerns the legal presumptions in terms of secs. 22 para. 3 and 23a para. 2 ARC: