The EU is currently going through unprecedented economic challenges, which are sewing disruption to the bloc’s economy and the daily lives of its citizens. The Draghi Report has indicated these challenges are not set to diminish anytime soon.

From maintaining competitiveness, to the rise of digital markets, increasing decarbonisation efforts, and other external shocks, the EU must find a way to face these challenges head-on; through the success of the single market and accompanying regulatory instruments – including merger control.

In renewing the EU Merger Guidelines, or Guidelines, the Commission must navigate a difficult trade-off:

• introducing greater flexibility into its assessments, including an ability to broaden its focus to include a longer-term view on the wider economic context of transactions; whilst
• safeguarding the independent and evidence-based decision making process, strongly protected from political influence or other vested interests, to prevent this wider lens being abused by a lack of hard evidence and sound economics.

Our purpose in responding to this consultation is to try to put forward new frameworks that can help the Commission retain rigour in its economic assessments, whilst also taking a broader view, particularly in complex and dynamic markets.

It remains critically important that the Commission retains its faith in the power of markets to allocate and reallocate resources. Mergers play a vital role in this process, absorbing assets and capabilities that can be put to better use. Europe now has far more, and far too many, so-called ‘zombie’ firms, which act as a drag on investment and productivity. And it is well-established that barriers to exit are barriers to entry. These are barriers that Europe can ill afford if it is to achieve the scale of transformation that will be required across its economy over the next decade and beyond.

Below we highlight three recommendations for updating merger control, and summarise how existing frameworks might be further developed in each of these areas.

1. The existing approach to efficiency assessments is not working and must be updated. The emergence of dynamic industries where such efficiencies are even more likely to occur means that they should be integral to the competitive assessment. We propose a new “ability and incentive” framework for integrating efficiencies effects.
2. The existing toolkit is insufficient for market definition and competitive analysis in rapidly evolving and highly innovative industries, such as digital, with a high degree of uncertainty and more focus on innovation as a parameter of competition. We propose a capability‑based framework for assessing competitive effects in dynamic markets.
3. There are circumstances where the Commission must look beyond short-run consumer welfare effects. Since the Guidelines were published, the EU has seen a marked shift towards decarbonisation practices and experienced significant external and internal shocks perturbating economy and daily life. We propose a broader view of welfare, including resilience of supply chains and sustainability benefits.

In this joint article by our economists Dave Foster, Mette Alfter, James Baker, Carlotta Bonsignori, Malcolm Tan, Federico Bruni, Sara Del Vecchio, Romain Defoort and Juste Kapustaite, we summarise the frameworks that we have proposed to the Commission.

Efficiency effects: an economic framework for incentive analysis

The Guidelines set out clear criteria for assessing merger efficiencies: efficiencies must be verifiable, merger-specific, and likely to benefit consumers. However, this analysis is not integrated into the competitive assessment, and the evidentiary threshold is so high that it is rarely (if ever) met in cases where efficiencies might be reasonably expected. In practice, the Guidelines provide limited direction on the types of evidence likely to be most relevant for meeting these criteria.

We propose an “ability and incentive” framework to assess efficiencies, especially those relating to investment and innovation. This framework allows one to better establish whether claimed efficiencies are merger-specific and verifiable and offers a more structured way for merging parties to present a credible efficiencies narrative. The framework also prompts the right questions, aligning with economic principles and guiding the most relevant evidence.

• Ability refers to whether a merger enables the parties to engage in pro-competitive behaviour that would otherwise not be feasible. For example, a merger may unlock the financial, technical, or organisational capacity to undertake investments that would not have been viable on a standalone basis. Such investments can lead to direct consumer benefits, including lower prices, improved quality or greater product variety.
• Incentive considers whether the merged entity would choose to undertake those investments if it has the ability to do so. The merger must not only make these strategies commercially viable, but must also make them the most profitable course of action relative to alternatives.

In particular, efficiencies should be “incentive compatible” – in other words, the merged entity should have a greater incentive to deliver them post-merger relative to the counterfactual. Absent the transaction, the merging parties should be able to demonstrate that they would not have the incentive to make equivalent investments. In economic terms, this means showing that pursuing these efficiencies becomes the most profitable (and hence economically rational) strategy only as a result of the merger.

Typically, claimed efficiencies will be contingent on the merged entity making certain investments – for example, investments that reduce marginal costs and/or improve the quality of the merged entity’s products/services. Assessing incentives involves determining whether the commercial benefits from these investments outweigh their costs (e.g. by increasing market share or reducing churn).

Figure 1 below sets out an economic framework for assessing incentives. The left hand side shows the choice of potential investment strategies absent the merger, whilst the right hand side shows the same strategies with the merger. For simplicity, we characterise this as a choice between a “low investment” and “high investment” strategy, though in practice there could be a large number of alternative strategies that vary in terms of both the level and nature of the investment

As illustrated by the vertical arrows on the left and right in Figure 1, the following two conditions must hold for the efficiencies to be incentive-compatible:

1. With the merger: the “high investment” (efficiencies-generating) strategy must be more profitable than alternative (“low investment”) strategies. Therefore, it would be unprofitable (and not economically rational) for the merged entity to scale back investment post-merger.
2. Absent the merger: it must be unprofitable for the standalone businesses to replicate the “high investment” (efficiencies-generating) strategy. In other words, the “low investment” strategy that the standalone businesses would expect to pursue absent the merger must be more profitable than the “high investment” strategy.

Assessing the relative profitability of these alternative scenarios can be based on financial modelling: comparing the discounted free cash flows, internal rates of return (IRRs) and/or net present values (NPVs) of each scenario. The appropriate time horizon for this analysis will vary depending on the nature of the businesses and the investments. In particular, for investments in long-lived assets (e.g. telecoms infrastructure), the analysis should be based on a suitably long time period and a terminal value in order to reflect the long-term nature of the investments.

For example, this was the approach taken by the merging parties in the Vodafone/Three merger, and was assessed in detail by the CMA (see paragraph 14.148 et seq of the final report). This approach allowed the parties to demonstrate that the merger would likely lead to efficiencies that would not be realised absent the merger. This ultimately paved the way for a more flexible approach to remedies, in particular the use of an investment commitment remedy to reinforce the parties’ incentive to invest post-merger.

Finally, using this approach will provide the Commission with a robust way to take a better approach to its assessment of merger specificity. In particular, it is critical that the Commission must take a single consistent view of the counterfactual across both its efficiency and competitive assessments.

In the past, the Commission’s assessments of merger specificity have erred because the Guidelines force it to take a purely hypothetical view of alternative possible counterfactual outcomes that might make efficiencies possible (e.g. network sharing arrangements), without grounding that assessment in the likelihood that those counterfactuals would ever materialise. For example, in Hutchison 3G UK/Telefonica UK (2016), the Commission considered that the network efficiencies claimed by the merging parties could be achieved in the counterfactual through alternative means, such as spectrum sharing arrangements. 

In reality, however, these counterfactual scenarios did not materialise in the years after the Commission’s prohibition decision. By contrast, in Vodafone/Three (2024), the CMA concluded explicitly that it did not consider it likely that the merging parties would in the counterfactual enter into further network sharing agreements or a network-only merger (NetCo) that could generate similar efficiencies.

Innovation: a capability‑based framework for predicting competitive effects in dynamic markets

Dynamic markets – by definition – can be characterised by high degrees of uncertainty. Such uncertainty relates not only to the market structure but also to the merging parties’ overlapping pipeline products in the future. In dynamic merger assessments defining an overlapping product may be difficult if not impossible and, therefore, such notions like ‘innovation space’ have been introduced.

Our proposed framework instead focuses on the merging parties’ capabilities as a proxy for their future products and, thus, allows for a structured way to assess mergers with a significant degree of uncertainty, where innovation is an important parameter of competition and where merger effects may materialise in the long-run. The framework also captures well merger-specific efficiencies which dynamic mergers are more likely to generate.

Our proposed capabilities framework is based on the academic paper by our colleagues Iain Boa and Dave Foster, along with Matthew Elliot from the University of Cambridge. This framework should not replace the current product-based approach, but integrate it for the subset of mergers for which dynamic effects are relevant in the competitive assessment. The framework is set out in Figure 2.

For an overview of the capabilities approach, see “Assessing mergers in innovative industries”, by our economists James Baker and Catalina Guerrero.

As illustrated in Figure 2, the capabilities framework comprises the following steps:

• First, we identify the merging parties’ respective capabilities. Capabilities, sometimes also called core competencies, include firm specific expertise such as technological know-how, patents, key human capital, relationships with suppliers, the customer base of a firm, the data a firm has collected about its customers, technology, laboratories, natural resources, infrastructure and so forth. Such capabilities can often be identified from a careful reading of the parties’ shareholder reports and through targeted requests for information.
• Second, we establish the extent to which these capabilities overlap between the merging parties.
• Third, if the capabilities materially overlap, we assess whether these overlapping capabilities are scarce. If a number of rival parties have these capabilities and/or if they are easy to acquire, then the merger would be unlikely to give rise to competition concerns. By contrast, if the capabilities are unique or difficult to acquire, this could indicate potential concerns.
• Fourth, if the merging parties’ capabilities are scarce and difficult to build-up, we assess any potential pro-competitive effects brought by the merger (such as innovation benefits from combining non-overlapping capabilities).
• Finally, we balance merger benefits and risks to establish whether the potential benefits outweigh the potential harm.

Beyond Immediate Price Effects: A Broader View of Welfare

The updated Guidelines will need to recognise that the impact of transactions can spill beyond the immediate customers in the affected markets. Whilst conventional merger analysis focuses heavily on short-term price and output effects, market consolidation can also influence how firms perform in times of crisis, and how production decisions align with wider societal costs. The updated Guidelines will need to support parties and their advisors in assessing these dimensions through a more holistic lens: one that treats resilience and sustainability as testable, evidence-based outcomes of the competitive process.

Resilience

At its core, resilience means the ability of firms and markets to anticipate, absorb, and recover from shocks. These shocks may be firm-specific, such as cyberattacks or supply failures, or systemic, such as pandemics, wars, or sudden regulatory changes.

Seen through the lens of allocative efficiency, markets are efficient only if prices reflect the full costs and benefits of supply. During disruptions, however, outcomes often fail to internalise the social cost of fragility. Shortages that leave demand unmet, or price spikes that ration critical goods, result in misallocations which are as serious as monopoly overcharges. Integrating resilience into merger control ensures that markets allocate output in line with societal needs under stress as well as in equilibrium.

We recommend that the updated Guidelines recognise that market consolidation can impact resilience in two ways.

• It may undermine resilience if a transaction removes redundancies, concentrates risk, or eliminates fallback options for customers and suppliers. This is most concerning in “tight” markets where capacity is scarce, scaling up takes time, and shocks propagate quickly.
• At the same time, mergers can also strengthen resilience, for example by allowing firms to invest in duplication, diversify suppliers, or build scale economies in continuity planning.

To distinguish between these two scenarios, we propose to use the ‘crisis counterfactual’ approach. The counterfactual has so far been used to establish how prices (or other parameters of competition) are expected to evolve absent the merger under normal conditions. However, resilience matters only when conditions are not normal. The updated Guidelines should therefore provide a framework to analyse how markets perform during disruptions: Do fulfilment rates hold up? Do recovery times shorten? Are customers better able to switch to alternative suppliers?

It is in this crisis counterfactual that resilience-related theories of harm should be assessed. For example, one channel through which mergers could impact resilience is reduced supplier robustness: if short-term savings take priority over long term reliability, following the merger firms may cut back on resilience investments (e.g., cybersecurity, inventory, or multi-sourcing). Another channel is weaker fallback options: if credible alternatives disappear, downstream customers may face rationing or severe price spikes during shocks. Both dynamics can increase systemic fragility across supply chains.

As we argue in our response to the Guidelines review, these effects can be measurable, using sector-specific indicators such as service continuity during disruptions, recovery times, fulfilment rates, lead-time variability, and input substitutability. Network science can also contribute to this debate with concepts and indicators such as node centrality, redundancy, or contagion rates. Economic valuation tools, such as risk-pricing or insurance-equivalent calculations, can help translate resilience improvements into avoided output losses or reduced interruption costs.

Sustainability

In our submission, we argue that the treatment of sustainability must go beyond narrow consumer price effects. A core insight is that allocative efficiency – where resources are used so that the marginal benefit of consumption equals the full marginal cost of production to society as a whole – requires recognising environmental costs.

Markets characterised by environmental externalities are not allocatively efficient. Prices in such markets sit below the “fully costed” marginal cost of production because pollution, carbon emissions, and other harms are not factored in. In these settings, low prices are not a sign of efficiency but of failure: they encourage overconsumption of goods that damage wider society. As Commissioner Ribera recently observed, cheap can sometimes mean destructive (paywall).

Some mergers can help correct this imbalance – for example by enabling greener production processes, rationalising supply chains, or unlocking economies of scale for sustainable investment. In some instances the move to greener production processes that these transactions unlock may raise prices – but in ways that reflect the real cost to society. Where a merger reduces environmental harm, the result is an improvement in allocative efficiency, even if direct consumers face higher costs. In other words, sustainability gains are not an offset to efficiency – they are efficiency.

This requires the Commission to widen its assessment of merger benefits. Many sustainability effects accrue outside the relevant product market, from cleaner air and water to reduced global warming impacts. To ignore these out-of-market benefits is to miss the bulk of the welfare gains, and to risk blocking transactions that make society better off overall.

We therefore urge the Commission to make sustainability an integral part of its efficiency framework. By explicitly recognising that green efficiencies can improve allocative efficiency, the Commission can bring merger control into line with the EU’s climate and sustainability objectives. The goal should not simply be low prices today, but a market that uses resources in ways that truly maximise societal wellbeing.