Merger Policy in the E-conomy

Bachelor Thesis 2002 95 Pages

Law - Civil / Private / Trade / Anti Trust Law / Business Law



Chapter One: Introduction

Chapter Two: The E-conomy
Section 2.1.: The Peculiarity of the E-conomy
Section 2.1.1.: Investment and Increasing Returns
Section 2.1.2.: Network Effects
Section 2.1.3.: Output Properties
Section 2.1.4.: Pioneering Effects and Instant Scalability
Section 2.1.5.: The Winner-Takes-Most Effects
Section 2.2.: The E-conomy’s Essence in Antitrust
Section 2.3.: Dynamic v. Perfect Competition

Chapter Three: Implications for Competition Policy
Section 3.1.: The Commission’s Relevant Market Definition
Section 3.1.1.: The Substitutability Test
Section 3.1.2.: Entry Analysis
Section 3.1.3.: Market Integration
Section 3.1.4.: Market Shares
Section 3.2.: Treatment of Dominance
Section 3.3.: Accounting for the Risks

Chapter Four: A Regulatory Outlook
Section 4.1.: Pragmatic Analysis
Section 4.1.1.: The SSNIP - A Performance Interface
Section 4.1.2.: Barriers to Entry and Subtle Incentives
Section 4.1.3.: Market Power - The Volatile Incidence

Chapter Five: A Dynamic Intermarket Conception


Chapter One Introduction

This paper addresses the economic policy context surrounding the European merger regulation in high-tech industries. The rapidity of technological change raises questions as to the operation of the dynamic parameters underlying high-tech industries. While the identification of those parameters appears to be straightforward, the interpretation of the effects posed by the dynamics is rather controversial.

On the one hand, it is argued that the very dynamics of high-tech industries create or strengthen dominant companies whereby consumers run the risk of adopting inefficient technologies. However, the present paper is to contest this reasoning since performance competition and the resultant Schumpeterian process of disequlibria makes a so-called lock-in unlikely.

The second chapter is to identify the distinctive parameters of high- tech industries, whereby a contrasting analysis between the two dimensions of economic performance, establishes dynamic competition as best utilised to serve the furtherance of consumer welfare. The third chapter is to consider the implications of dynamic competition for current relevant market definition by discussing the deficiencies of current practice. Recent competitive developments appear to confirm a broad, intermarket and technologies-based competition among firms. The fourth chapter, therefore, seeks to propose analytical tools that are capable of evaluating the state of competition more accurately. To that end, the cornerstones of relevant market definition are redefined by including a performance based test, an enquiry into capability explanations and the setting of time frames to assess entry competition.

The final chapter is to conclude that although Schumpeterian dynamic competition deals with the expectation of innovation, the proposed analysis is the more accurate approach to intermarket competition. The goal of this paper is to provide a pragmatic framework that assists merger analysis in evaluating the ongoing transformation of industrial organisation in the high-tech environment.

Chapter Two The E-conomy

‘New economy’, ‘innovation economy’, ‘knowledge economy’ and ‘network economy’ are all terms which broadly seek to describe the ongoing transformation of industrial organisation and business strategies, but which are at best vague in scope.1 While ‘new economy’ bears a broad meaning by referring to virtually all sectors in the economy where information is the basic feature, which functions as output and input good,2 the ‘network economy’ may be very narrow in its scope.3 The present paper’s preference lies with the term ‘e-conomy’ termed by Cohen, Bradford DeLong and Zysman4 since it accurately reflects the economy and policy context that is sought to be addressed in the present paper.

The term ‘e-conomy’ describes the economic transformation, which is triggered by the development and dissemination of information technology based products and services comprising computer chips, broadband internet, wireless communication and software.5 While the origins of e-conomy firms can be traced, the competitive reality is about firms seeking to acquire each other’s strengths with a variety of business integrated. Consequently, AOL Time Warner could be defined as a media conglomerate with a focus on online services and media content, but it also has a significant stake in cable and telecoms networks6 as well as technology with its acquisition of Netscape in 1999.7

The rationale for the e-conomy coverage lies in the importance of these sectors, in that they have been undergoing rapid change and growth in the past decade.8 In particular, computer and internet technology have revolutionised business practices and industry organisation across the globe by increasing efficiency through decentralising, outsourcing, downsizing, knowledge management and strategic alliances.9 The new technologies have thus enabled firms to avoid intermediaries, establish just-in-time production and diversify marketing efforts.10 In a nutshell, a new reality emerged with more entrepreneurial business that is capable of innovating and commercialising more rapidly.11 However, the growth of the e-conomy is also extended to the demand-side environment and non-business consumers. In particular, the internet penetration is continuing to grow in Europe. The graph below illustrates current estimated European internet coverage in the selected countries against the respective country’s population as of January 2002.12

Abbildung in dieser Leseprobe nicht enthalten


Source: Cyberatlas, January 2002.

European internet penetration is estimated to have increased from 18 per cent in March 2000 to 36 per cent in June 200113 and is expected to reach 255 million users by 2004.14 However, the upward tendency is endangered by the slowdown of internet penetration in Europe during the second half of 2001 due to a perceived lack of introducing fast broadband connections throughout Europe.15

Dynamic competition16 has a delicate influence on the complex ex ante merger analysis carried out by the Competition Commission’s Merger Task Force (MTF).17 The Schumpeterian conception of dynamic competition appears to correspond to the rapid growth that is enjoyed by the e-conomy. In following Schumpeter, competition is for the market replacing thereby the traditional emphasis on price competition. This is referred to as disequilibria achieved through innovation in terms of new products and technology.18

2.1. The Peculiarity of the E-conomy

The e-conomy’s essence is the creation of intellectual property and the initiation or adaptation to technological change.19 A central feature is that undertakings compete fiercely for emerging markets, because this will ultimately determine their future lead in market share. It is, therefore, necessary to explore as to how this is achieved in the e-conomy comprising the parameters of investment and increasing returns, network effects, output properties, pioneering effects and instant scalability, and ‘winner-takes-most’ effects.

2.1.1. Investment and Increasing Returns

Essential to gaining a competitive edge in the e-conomy is investment. The fixed sunk costs20 tend to be particularly high in the e-conomy, if investments have to be made into research and development (R&D) of software and/or hardware, or the setting up of delivery channels through physical networks, which cannot be fully recovered because of a concentrated market.21 Apart from maintenance and marketing costs, it is important to note that the subsequent production or service provision costs are low.22 This cost relationship is also referred to as the e-conomy exhibiting increasing returns. Particularly, software qualifies as exhibiting increasing returns, since an unusually high percentage of its cots are absorbed by initial fixed costs but subsequent modification costs are minimal.23

While this refers to increasing returns on the supply side potentially leading to a natural monopoly,24 there is also a demand side form of increasing returns in the e-conomy, which results in a more concentrated market.25 This phenomenon of demand-side increasing returns is also known as network effects.26

2.1.2. Network Effects

Network effects describe the phenomenon whereby the value of a good to a consumer is dependent not only on the characteristics of the product, but also on how many other users have adopted the same product.27 The success of a network product will occur if it attracts a ‘critical mass’28 of users, thus providing strong incentives to other potential users to join.29 An example of network effects would be applications such as AOL Instant Messenger or ICQ. The more people that use the same instant chat application (particularly if they know each other), the more sense it makes for the user to have that type of instant messenger.30

It appears that the Commission’s view is that omnipresent network effects tend to be inherent in the e-conomy and specifically the communications sector.31 Dominance is then created by the positive feedback effects, because the more users that join the network, the greater are the risks of them becoming locked into the technology. Consequently, the whole e-conomy may adopt inefficient standards, because of the early entry of service providers gaining dominance by confining innovation to them. This could even entail that other service providers offering better quality and/or quantity would not be able to displace the dominance of the pioneering service provider.32 However, one should be very cautious in defining the circumstances in which such a lock-in may occur, if at all, since empirical studies dispute very persuasively the existence of such a process.33

The nature of network effects coupled with the critical mass effect34 can lead to a natural monopoly which may be further strengthened in concentration through supply-side increasing returns discussed in the previous section. It is important, however, that network effects per se do not raise any competition concerns. The Commission is mainly concerned with so called bottleneck markets, whereby access to necessary infrastructure is restricted or foreclosed;35 the availability of good quality content is monopolised;36 or increasing convergence between related technologies is shifting the balance towards already dominant players.37

AOL Time Warner pioneered vertical integration in the e-conomy by combining digital distribution technology of an Internet Service Provider (ISP) with a range of media content of a traditional publishing business.38 The link up illustrates the Commission’s concern as to a bottleneck market in which the network operator internalises the network benefits by effectively “owning” the consumer.39 This would be achieved, if AOL were to develop a proprietary format for the digital distribution of music combined with its significant music library.40

In defence of network effects as phenomena of creating potentially natural monopolies, it can be argued that compatibility with many networks competing seems to be central to international connectivity in particular in the mobile phone industry. Network growth is thus perceived to increase consumer benefits and ultimately profits.41 An artificial creation of a fragmented service or product provision in an industry would effectively reduce consumer welfare.

In addition, the Commission’s claims derived from tipping the market, such as new subscriber growth will be captured by larger networks, is criticised on the basis that in the mobile phone industry later entrants have gained significant market share across Europe.42 Similarly, the ISP environment is subject to change, whereby newcomers have been able to build a significant stake in the market.43 This is because network effects operate symmetrically, so that excessive price increases or failure to correspond to consumer demand potentially causes the network in a downward spiral particularly in internet and mobile phone markets where demand substitution is easily realised by low switching costs.44

2.1.3. Output Properties

However, the extent and magnitude of substitution is also dependent on the attributes of the product or service in question, which in turn should help to define market power. The diversity of products and services in the e-conomy parallels that of the old economy. A new layer of developing and/or delivering mechanisms is added in the e- conomy, which could be viewed as distinct. It has been argued that those products in the e-conomy, such as games are durable goods and are offered at competitive prices, since the goods can be used and reused almost without limit.45 Consequently, companies in the e-conomy are always competing against their own benchmark of previous sales, which keep prices for new products low to create an incentive to substitution.46

The view that market power is less a problem in cases of durable goods seems to receive support.47 In taking matters further, this would mean that short lived, or less durable and perishable, products or services, raise potentially more competitive concerns in terms of market power. As an illustrative example the news publishers would qualify. News as a perishable product would have to be distributed as quickly and as widely as possible to be successful. Therefore, other undertakings would have to reach the equivalent productive and distributive standard to make a significant impact on competition.

In the e-conomy it is the vertical integration, which gains increasing importance witnessing the AOL Time Warner link up as a pioneer. The development is set to continue, but it is of paramount importance to accurately assess the effects on competition. The recent proposed acquisition by T-Online, Germany’s largest ISP, of Bild.de internet portal owned by publisher Axel Springer48 appears to be motivated by the vertical efficiencies generated through such an alliance. Although the decision is from the Bundeskartellamt, Germany’s Federal Cartel Office, it raises some important points applicable universally, when it comes to vertical integration in the media content e-conomy.49

The regulator’s concern in its initial warning is that through the 37 per cent acquisition of the online news portal, the ISP could offer its 8.8 million subscribers exclusive access to content, whereby it would increase its already dominant position. The Bundeskartellamt only cleared the transaction once the parties made undertakings that they (a) will not market a common internet portal, so as to avoid a further strengthening of T-Online’s dominant position; and (b) ensure that users are able to access subscription based content on portals of ISPs other than that of T-Online, so as to avoid exclusive access. The regulatory intervention is motivated by an attempt to avoid the creation or strengthening of a dominant position in the market for subscription based content, which is still in its infancy.50

However, the decision appears to be far fetched as it misses the point that vertical integration51 is the overarching organisational form of the e-conomy in which ‘Content’ is and will be the name of the game in the e-conomy.52 Many link ups of this nature are likely to follow in the next two to three years particularly as technology in terms of bandwidth capacity progresses and the infrastructure in Europe is established. Even if one is dealing with a perishable service, such as online news content, premature conclusions as to dominance are still a pitfall, which should be avoided. This is because all that the present link up yields is maintaining largely the same position of the respective players in the e-conomy environment, which is based essentially on the same content as available in the offline print version.

It is difficult to see a legitimate rationale for the wide undertakings sought, since the link up is very unlikely to preclude competition. It would have been sufficient to secure an undertaking from the parties that were to allow access to subscription based content through other websites, but to prevent the creation of a common website between parties to market their content, destroys the very essence of vertical integration. This sets the wrong signs for a meaningful competitive and commercially legitimate development of content markets in the future.53

2.1.4. Pioneering Effects and Instant Scalability

The output properties will also determine the extent to which a product or service is subject to pioneering effects and instant scalability. The e-conomy often features market entrants pioneering with a new product that creates a new category of competition altogether capturing a significant share of the market. In terms of operating systems one can evidence this development through the replacement of the earlier ‘industry standard’ CP/M dominating until the early 1980s when PC/DOS and MS/DOS were successfully challenging this position.54

For the displacement of existing monopolies to occur, it is crucial that this requires the creation of a new product or service that demonstrates a significant improvement in quality.55 Empirical studies in the software industry with a particular focus on spreadsheets and Word Processors market developments show that price has, if at all, a secondary impact on market share, while the overriding importance is determined by quality or performance.56 This is explained by the crucial role of consumer choice. Consumers are alerted in respect of e-conomy products and the quality sensitivity is maintained from a variety of sources, such as tests and product reviews in PC Magazines and an innumerable amount of online resources which keep the consumer up-to-date by means of technology forums or e-mail newsletters.

It is therefore crucial to acknowledge that a lock-in effect in the sense that consumers adopt a less efficient technology appears to be absent in the software industry. While innovation in the e-conomy has the potential to do both, the displacement of existing monopolies and the replacement with new monopolies, one should be reluctant to accept this divergent potential of innovation that is one towards opening up the industry and the other towards dominating the market, as a regulatory justification to focus on market access.57

The decisive role of consumer choice has shown its impact in terms of market share. In addition, high market share can also be explained by the very important phenomenon of what Liebowitz and Margolis termed instant scalability, which distinguishes a firm from its old economy


1 Cohen, S., Bradford DeLong, J., Zysman, J. ‘ Tools for Thought: What Is New and Important About the E-conomy ’ BRIE Working Paper No. 138, 27 Feb. 2000, at pp. 3 et seq. available at: http://www.j-bradford-delong.net./OpEd/ virtual/technet/Tools_for_Thought.doc. See also Minda, G. ‘ Antitrust regulability and the new digital economy: A proposal for integrating "hard" and "soft" regulation ’ 2001 Antitrust Bulletin Vol. 46(3), 439.

2 Klodt, H. ‘ The Essence of the New Economy ’ Kiel Discussion Paper 375, Kiel Institute of World Economics, Kiel 2001. Also available at http://www.uni- kiel.de:8080/IfW/pub/pub.htm.

3 Network economy may cause confusion by referring only to physical networks

such as telephone networks, airline networks etc. which are also described as ‘real’ networks as opposed to ‘virtual’ networks. See further Shapiro, C. and Varian, H. Information Rules: A Strategic Guide to the Network Economy (Boston: Harvard Business School Press, 1999), at p. 174.

4 Cohen, S. et al. (2000), at p. 3.

5 Ibid.

6 This is, however, limited to AOL Time Warner’s operations in the USA.

7 Hoover's Company Profile Database - American Public Companies 2002, LoadDate: 4 Feb. 2002.

8 Given the increasing importance as a major force behind economic growth, heightened antitrust scrutiny is believed to be mandatory according to the view of Balto, D., Pitofsky, R. ‘ Antitrust and high-tech industries: The new challenge ’ 1998 Antitrust Bulletin 43(3/4), 583, at p. 584. See further section on the risks.

9 Cohen, S. et al. (2000), at pp. 3 ff.

10 Cusumano, M.A., Yoffie, D.B. Competing on Internet Time (New York: Touchstone, 2000) at p. 6. For example, Dell utilised the internet to realise just- in-time production for PCs, see also MSNBC.com ‘ The ‘ New Economy ’ re-examined: It boomed, it burst and its technological innovations changed the way Americans thought about business … maybe ’ of 17 Mar. 2002. An example of diversifying marketing operations would be the vertical integration exhibited by the AOL Time Warner structure which raised fears as to anticompetitive effects. See further AOL/Time Warner (COMP/M. 1845)2000 OJ C130/8, at p. 14, paragraph 53. The issue is further explored in the context of network effects.

11 Cohen, S. et al. (2000), at p. 21.

12 NETstatistica European Internet Economy 2002. Available at http://www. netstatistica.com/pdfs/netstatistica_europe_022002.pdf.

13 See further FT.com, ‘ Brussels warns of plateau in EU internet take-up ’ , of 12 Feb. 2002.

14 eMarketer study available at http://www.netstatistica.com/index.cfm?gn=6&id= cg_ eu.

15 This tendency seems to be confirmed by national statistics. See further FT.com, ‘ Brussels warns of plateau in EU internet take-up ’ of 12 Feb. 2002 and ‘ Oftel reports slowing growth in internet traffic ’ of 15 Feb. 2002. The broadband rollout in Europe is viewed as being crucial not only for the take-off of the content e- conomy, but also as a continuation of the liberalisation process. See FT.com, ‘ Broadband's failure to connect Europeans ’ of 2 Dec. 2001.

16 For the purposes of the present paper the more descriptive terms dynamic and static competition are utilised instead of the synonyms technical progress and economic efficiency respectively to be found in economic literature.

17 The relevant legislation is the European Community Merger Regulation (ECMR), Council Regulation 4064/89 on the control of concentrations between undertakings, 1989 OJ L395/1, as amended by Council Regulation 1310/97,1997 OJ L180/1.

18 Compare Schumpeter, J.A. ‘ The Process of Creative Destruction ’ in Capitalism, Socialism and Democracy (London: George Allen & Unwin Ltd., 5th edn., 1976) at p. 84. Schumpeter disputes the textbook economic theory’s modus operandi of competition along price because it collapses if quality competition and sales efforts are admitted. Instead he refers to capitalist reality which dictates competition on the basis of a new commodity, new technology etc. which strikes at the very existence of the firms’ lives as opposed to their profit margins.

19 Compare Ahlborn, C. ‘ Competition Law in the New Economy: Is European Competition Law up to the Challenge? ’ 2001 ECLR 156.

20 Sunk costs are all costs associated with entry. Zero sunk costs refers to a

situation in which a firm is enabled a costless exit because of the costs being fully recoverable. See also Viscusi, W.K., Vernon, J.M., Harrington, J.E., Jr. Economics of Regulation and Antitrust (Cambridge, Massachusetts: MIT Press, 3rd Edition, 2000) at pp. 160 - 161.

21 See also Ahlborn, C. (2001), at p. 159. In proceeding on the assumption that a market is concentrated and an exiting firm has to sell its assets at a scrap price, because of a lacking market for the assets. See further Viscusi, W.K. et al. (2000) at pp. 160 - 161.

22 See Klodt, H. (2001) referring to the creation of substantial firm economies as a result of low marginal costs of information goods. See also Minda, G. (2001) at p. 439.

23 Margolis, S.E., Liebowitz, S.J. Winners, Losers, & Microsoft: Competition and

Antitrust in High Technology (Oakland: Oakland Independent Institute, 1999) at p. 82. However, as the authors emphasise, it is important to note that one has to study increasing returns in the individual case since other high-tech sectors, such as chip makers may not experience the same increasing returns as software, since the initial costs in developing a chip may be significantly less than the subsequent fixed costs of fabrication plants. See also McKenzie, R.B., Dwight, R.L. ‘ How digital economics revises antitrust thinking ’ 2001 Antitrust Bulletin 46(2), 253.

24 Further examples would include Value Added Networks (VANs) like Reuters FX and Email systems, which are characterized by large fixed costs and low variable costs. Heal, G. ‘ Price and Market Share Dynamics in Network Industries ’, in Heal, G. (ed.) The Economics of Increasing Returns (Cheltenham: The International Library of Critical Writings in Economics, An Elgar Reference Collection, 1999). Industries displaying scale economies tend to be more concentrated than others see Viscusi, W.K. et al. (2000) at p. 150.

25 See ‘Foreword’ at p. x by Hirshleifer, J. in Margolis, S.E., Liebowitz, S.J. (1999).

26 Synonymously, demand-side increasing returns are referred to as demand-side scale economies see Veljanovski, C. ‘ E.C. Antitrust in the New European Economy: Is the European Commission ’ s View of the Network Economy Right? ’ 2001 ECLR 115; McKenzie, R.B. and Dwight, R.L. (2001) at pp. 253 - 298.

27 See Hirshleifer, J., op. cit. See also Heal, G. (1999) at p. 192.

28 Critical mass is not further defined, since the exact number of users required will depend on product or service specific factors.

29 Heal, G. (1999) at p. 192.

30 Compare Ahlborn, C. (2001) at p. 159. The principle of network’s value increase to each user with network growth is referred to as Metcalfe’s law. See also Cohen,

S. (2000) as well as Shapiro, C. and Varian, H. (1999) at pp. 173 - 225 arguing that the positive feedback effects can equally result in a rapid growth decline.

31 Ungerer, H. ‘ Access Issues under EU Regulation and Anti-trust Law - The Case of Telecommunications and Internet Markets ’ , address to Panel on Substantive Comparative Antitrust Issues in Japan, the U.S. and the European Union, 23 - 24 Jun. 2000, Washington D.C., at p. 4.

32 Monti, M. ‘ Defining the boundaries competition policy in high tech sectors ’ UBS Warburg Conference Europe 20/20, Barcelona, 11 Sep. 2001, DN: SPEECH/01/375. See also id. ‘ Competition in the New Economy ’ 10th International Conference on Competition, Bundeskartellamt, Berlin, 21 May 2001, DN: SPEECH/01/232.

33 The issue is further addressed in section 2.1.4.

34 See further Heal, G. (1999). A firm is dependent on it reaching a certain scale as well as concurring with overall industry growth, because otherwise a capturing of the rise is unlikely.

35 The MCI WorldCom/Sprint (Comm/M.1741),2000 OJ C143/4 transaction would have resulted in such a dominant force so as to enable the undertaking to prevent competitors and customers from having universal access to the internet. See also Langer, J. ‘ The MCI Worldcom Sprint merger decision reviewed ’ 2001 EU Focus 88/89, 2 - 5.

36 The Time Warner EMI merger was finally abandoned by the parties, since the Commission had concerns in respect of the created dominance in desirable music copyrights and the potential for leveraging this strength into the digital delivery of music.

37 See Abbamonte, G.B., Rabassa, V. ‘ Foreclosure and Vertical Mergers - The

Commission ’ s Review of Vertical Effects in the Last Wave of Media and Internet

Mergers: AOL/Time Warner, Vivendi/Seagram, MCI WorldCom/Sprint ’ 2001 ECLR 214.

38 See Abbamonte, G.B., Rabassa, V. (2001) at pp. 222 ff. See also FT.com, ‘ AOL set to pay $6.75bn for Bertelsmann stake ’ of 4 Jan. 2002. Examples of follow-up developments would include the merger between Vivendi/Canal+/Seagram (COMP/M.2050),2000 OJ C311/3 leading to a pooling of Universal’s music arm with Vivendi’s multi-access portal Vizzazi, or the joint venture between T-Online, Germany’s leading ISP, with publisher Axel Springer’s marketing arm to create Interactive Media, see FT.com, ‘ T-Online takes Springer online stake ’ of 17 Oct. 2001.

39 See Veljanovski, C. (2001) at p. 116. See also Balto, D., Pitofsky, R. (1998) at pp. 593. The authors’ view in the latter article seems to correspond with the Commission’s concern in that older dominant networks are competing through cheaper or better services, if they are faced with competition, but these are only the short term benefits of network externalities, which would not outweigh the longer term benefits of cheaper or newer technologies.

40 See AOL/Time Warner Decision in particular pp. 8 - 9 at paragraph 29 and p. 14 at paragraphs 53 - 55. See also Rubinfeld, D.L. ‘ Antitrust enforcement in dynamic network industries ’ 1998 Antitrust Bulletin 43(3/4), at pp. 859 - 882 emphasizes the difficulties to entry which may arise through the conditioning by a proprietary format. For economically beneficial effects of vertical integration see Mueller, T., von der Groeben, E. ‘ EU Merger Clearance in the New Economy ’ 2001 GCR 27 - 29, at p. 29. The interaction with intellectual property issues makes this area particularly complex. For a discussion see FT.com, ‘ Cyberspace copyright protection reinforced ’ of 5 Mar. 2002 for new Wipo international treaty; the Notes ‘ Exploitative Publishers, Untrustworthy Systems, and the Dream of a Digital Revolution for Artists ’ 2001 HLR, 114(8), 2348; Sheremata, W.A. ‘ New issues in competition policy raised by information technology industries ’ 1998 Antitrust Bulletin, 43(3/4) at pp. 568 - 573.

41 See Veljanovski, C. (2001) at p. 116.

42 Id. ‘ Mobiles, Mergers and Network Effects ’, Case Associates, 2001 available at http://www.casecon.com.

43 See further the discussion in section 3.1.4.

44 At least in these markets the network externalities as expressed in Balto, D., Pitofsky, R. (1998) at pp. 593 - 594 are irrelevant, because of the negligible switching costs involved.

45 Ahlborn, C. (2001) at p. 159.

46 Klodt, H. (2001) suggests that in countering potential market failure undertakings would have to bundle and version products, attract free riders, and establish reputation as the most important business strategies for the new economy.

47 Ahlborn, C. (2001) at p. 159 referring to Tirole, J. The Theory of Industrial Organization (Cambridge: MIT Press, 1988).

48 Bild.de is a mass market daily equivalent to the British Sun. See further FT.com, ‘ German regulator blocks T-Online's media plan ’ of 28 Feb. 2002.

49 Efficiencies and pro-competitive effects may include an improvement in distribution technology or the quality of profits, and the economization of information. See Rubinfeld, D.L. (1998) at pp. 859 - 882.

50 Bundeskartellamt, Press Release ‘ Bundeskartellamt gibt T-Online/Bild.de unter bestimmten Voraussetzungen frei ’ of 08 Mar. 2002 available athttp://www.bundeskartellamt.de/08_03_2002.html. The Bundeskartellamt required actually three undertakings, the last one related to the billing procedure, which is of no direct relevance for the present discussion.

51 It is at best unclear as to how vertical mergers should be treated under competition law, but in general they should be viewed as producing pro- competitive effects. See Abbamonte, G.B., Rabassa, V. (2001) at p. 215.

52 Firms will have to position themselves in order to maintain a competitive position in the next-generation platforms for distributing media content. See also MSNBC.com ‘ The ‘ New Economy ’ re-examined: It boomed, it burst and its technological innovations changed the way Americans thought about business … maybe ’ of 17 Mar. 2002. For a Commission view on the future of content development see Ungerer, H. ‘ Convergence in Regulatory and Competition Law paradigms ’ Brussels, 17 and 18 Sep. 2001, COMP/C/2/HU/rdu at pp. 6 ff.

53 While a link up between a local telecom company with a content provider can build a significant market share, this does not mean that this position goes unchallenged as the success of Microsoft’s portal shows. See further FT.com, ‘ Microsoft claims the lead in portal war ’ 27 Mar. 2002.

54 See further the study by Evans, D.S., Nichols, A. and Reddy, B. ‘ The Rise and Fall of Leaders in Personal Computer Software ’ of 7 Jan. 1999 at pp. 4 ff. available at http://www.neramicrosoft.com/NeraDocuments/ Analyses/rise_and_ fall.pdf, National Economic Research Associates (NERA). See also Shapiro, C. and Varian, (1999) at p. 173.

55 See Ahlborn, C. (2001) at p. 160.

56 For empirical coverage of software markets see Chapter 8 in respect of Word and Spreadsheet packages as well as Chapter 9 in respect of other software or middleware such as Internet Explorer in Margolis, S.E., Liebowitz, S.J. (1999) and main findings at pp. 227 ff. The same conclusion is advanced by Pleatsikas, C. and Teece, D. ‘New Indicia for Antitrust Analysis in Markets Experiencing Rapid Innovation’ in Ellig, J. (ed.) Dynamic Competition and Public Policy: Technology, Innovation and Antitrust Issues (Cambridge: Cambridge University Press, 2001) at p. 110 ff after examining hardware technologies such as diagnostic imaging devices.

57 Peritz, R.J.R. Competition Policy in America: Historic, Rhetoric, Law (New York: Oxford University Press, Revised Edition, 2000) at p. 305 observing that the double edged sword of innovation led antitrust authorities to focus on market access. See also R. Balto, D., Pitofsky, R. (1998) at pp. 583 - 607.


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Title: Merger Policy in the E-conomy