A missing element

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Airtour’s landmark victory against the European Competition Commission signals the need for a reform of the system. More funding, and a rethink of what cases should be sent to Brussels are essential

Large companies and their advisers have been rubbing their hands with glee since the European Court overturned the Commission’s ban on the merger of Airtours and First Choice. European consumers should be less happy.

Thomson, Airtours, Thomas Cook and First Choice have about 80% of the package holiday market. They operate under a bewildering variety of names and keep changing them, but mostly it all comes back to these four. In the mid 1990s there had been a price war and everyone lost money. Since then the major operators had tried to restrict capacity and edge their businesses back into profit. In 1999 their market shares were about 30%, 20%, 20% and 10% respectively.

My rule of thumb is that a market with five large competitors is usually price competitive and one with two usually isn’t: three or four can go either way. The package holiday market had served UK consumers well but you would want to keep an eye on things. When a firm is limiting its own capacity while trying to buy its competitors, alarm bells should ring.

They rang loudly when Airtours proposed to buy First Choice. The principle of subsidiarity suggests that this merger should have been assessed in the UK. It involved two UK companies, their main activities were in the UK, and the issues it raised concerned the UK market. It was just large enough to require EU approval and Britain ceded jurisdiction to Brussels.

It was important to Airtours that the case should be dealt with by the EU rather than the Office of Fair Trading and the Competition Commission. In Britain, a merger will fail if it is against the public interest, or involves a substantial lessening of competition. In Europe, a merger can be prohibited only if it creates or strengthens a dominant position. Reducing the number of competitors from four to three lessens competition, but if no firm has a market share above 30% none can be dominant.

The European Commission has been aware of this defect, and Mario Monti, competition commissioner, has proposed changing the regulation to enable his officials to assess competition rather than dominance. In the meantime, the Commission tried to deal with the issue in an imaginative but ultimately far-fetched way. None of the companies was individually dominant, and they didn’t collude, but perhaps they were collectively dominant? To justify this theory, the Commission was forced to a more convoluted analysis, and on this the Court rightly struck them down.

The Airtours case is not one of rank injustice by an overweening bureaucracy. Rather the Commission tried to close a loophole in the law on behalf of British holidaymakers, and failed. Which brings us to the missing element in the case. Where were the customers?

A frequent and strident complaint about the EU procedure is that the Commission acts as both prosecutor and judge, and in a sense the complaint is justified. But the reason it is justified is that the prosecution is not there. Airtours was expensively and effectively represented –they spent an estimated $1.5m (£1m) on the appeal alone – but no equivalent resource, in fact virtually no resource at all, ever put the case for the right of holidaymakers to a choice of operators and a competitive market.

Sometimes the case against a merger is represented by the competitors. GE was angry that the Commission were being fed with material by hostile firms in the Honeywell investigation, and similar complaints are made by Carnival in the current P & O Princess case. And since the purpose of third party interventions is to make mischief, not to arrive at the truth, the complainants have a point. But the Commission usually has to make the case against a merger itself because no one else is equipped to do so.

And the Commission’s resources are small relative to those of the businesses ranged against it. The Court found the analysis presented by Airtours more compelling than the analysis presented by the Commission, and in their position I would probably have reached the same conclusion. But the real issue should not be who has the better lawyers and economists, but whether the merger promotes or hinders the development of the Common Market.

So it is time for change. There is a strong case for separating the Phase I investigation – does this merger raise a problem? –from Phase II – should the merger be allowed to go ahead? Even if the present process is fair, it is not seen that way. But with that change must come a dramatic increase in resources for investigation. Partly because work will have to be done twice, but mostly to enable the Commission to do a better job.

A levy of 0.1% of the value of the proposed consideration for mergers taken to Phase II would be a trivial sum relative to the other costs incurred in acquisitions, but would fund the best business economics research group in Europe. And since the phase 1 appraisal would now have the character of an investigation by a prosecutor, many more proposals should go to phase II.

Mr Monti should get his new ‘substantial lessening of competition test’, and he is also right to suggest the repatriation of more mergers, like Airtours, to the country mainly affected. The Airtours case should indeed provoke reform of Commission merger proceedings. Not to clip its wings, but to enable it to fly more confidently.

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