The existence of spare capacity is traditionally an important element in the assessment of horizontal mergers in homogeneous goods industries. In principle, non-merging firms with spare capacity can react to a price increase by the merged entity and expand output. This output expansion could make such price increase unprofitable for the merged entity and ultimately offset it. But when do competitors have an incentive to expand output to such an extent as to avert anticompetitive effects? Conversely, when do they have an incentive to follow a price increase by the merged entity?
In previous case practice, the European Commission (Commission) often focussed its assessment on the degree of spare capacity available to competitors, i.e., on competitors’ ability, rather than incentive, to expand output. In some of these cases, the mere existence of a large amount of spare capacity at industry level was considered as sufficient to eliminate the risk of unilateral price effects.
In two recent important merger cases, the Commission carried out an in-depth analysis of spare capacity that was not only focussed on competitors’ ability to react, but also on their incentive to do so: Outokumpu/Inoxum and INEOS/Solvay/JV. As we explain in more detail in this article, these two cases show that normally competitors of a merged entity do not have an incentive to react to a post-merger price increase sufficiently to alleviate competition concerns. This approach is consistent with the Commission’s Horizontal Merger Guidelines, and supported by sound economic analysis and empirical insights.World Competition