COMPETITION • EUROPEAN LAW •MERGERS
Input foreclosure arises where the new entity would be likely to restrict access to the products or services that it would have otherwise supplied if the merger had not taken place. The risk for competition relates to the effects on prices of increases in input costs for rivals on the downstream market.
According to the Guidelines on the assessment of non-horizontal mergers, input foreclosure may take the form of:
– supply restrictions, increases in the prices charged to rivals on the downstream market, or the existence of less favorable conditions to access to that downstream market than those prevailing without the concentration;
– use by the new entity of technologies which are not compatible with rivals’ technologies, refusal to grant licenses ;
– the deterioration of the quality of input supplied.
The foreclosure effect may arise only if input is significant for the product concerned on the downstream market and if the vertically integrated entity has a substantial market power on the upstream market. Incentive to foreclose depends on the level of profitability such strategy. The parties to a vertical merger will have an incentive to implement an input market foreclosure strategy where that transaction allows them to limit their competitors’ capacity expansion on the downstream market, to delay the completion of such projects or to prevent entry of potential competitors on the market.
Harm to competition is significant where elimination concerns either undertakings which play a major role on the downstream market, or potential competitors faced with barriers to entry. The simple fact that the new entity has the possibility of foreclosing the market may be sufficient to deter potential competitors.