COMPETITION • FRENCH LAW • MERGERS
A concentration is called vertical where the transaction is between operators situated at different levels of the chain of production.
Vertical mergers are usually less harmful to competition than horizontal mergers: they do not eliminate competition between the parties and are likely to generate efficiency gains. They may however produce negative effects where they render the access of competitors to the market of the new entity more difficult by the excluding or the foreclosing of access of the latter.
The vertical merger must not lead to market foreclosures. Foreclosure can be the result of the refusal to sell an input to downstream competitors (or imposing a high price) or the refusal by the downstream division of the integrated undertaking to buy or distribute the products of independent upstream producers. To assess whether this is occurring, the Competition Authority will look into whether the new entity is able to foreclose the market, whether it has any incentive to do so and whether a foreclosure strategy produces a restrictive effect on the markets at issue.
Like with horizontal mergers, the market power of the merged undertaking is a decisive criterion: a market share of less than 30% makes improbable any interference with competition in the case of a vertical concentration. Competitors’ ability to react is also a factor of assessment. That ability depends on their own degree of integration. The presence of vertically integrated competitors with production capacities and internal outlets precludes the risk of market foreclosure. There is little risk of market foreclosure in the absence of barriers to entry. For pressure from potential competitors to be considered sufficient, their entry on the market must be possible, able to take place in a timely manner and the pressure must be real.
Going beyond market characteristics, the Authority also examines whether the new entity is able to adopt foreclosure strategies. The merged undertaking may be motivated to foreclose the market where, in the long term, it will be able to profit from the reduction of the sales of inputs to downstream competitors or from the stopping of input supplies to its upstream rivals. The gains resulting from the weakening or elimination of competitors depend on profit levels and margins achieved up- and downstream. There is no likelihood of a foreclosure strategy where the losses incurred by the new entity on a market on which it achieves high margins cannot be offset by the development of market shares on a market where margins are low, if the new entity cannot cope with the demand diverted from its competitors, does not have sufficient capacity to sell their share of production or the market is characterized by diversity in terms of product ranges.