Originally published in Blakes Bulletin on Competition Law, September, 2007
On August 9, 2007, the Competition Bureau published an independent report on innovation and dynamic efficiencies intended to help in the development of a framework for considering technological change and dynamic efficiencies in the merger review context. The report, entitled Innovation and Dynamic Efficiencies in Merger Reviews, was prepared by CRA International.
Dynamic competition concerns the contest amongst firms to introduce new products, to develop better quality products or reduce production costs through technological advancements over time. The report recognizes that, in general, businesses do not invest enough in innovation and that to make such investments worthwhile, firms must charge more for the resulting products than they would in a traditionally competitive marketplace.
In markets that can be characterized as dynamic, the report recommends ignoring so-called "innovation markets" and focusing on the impact of a merger on future competition. Because of the inherent uncertainty associated with innovation, such an analysis will be highly fact-specific. The report proposes a five-question framework for evaluating mergers:
- Is innovation important to the industry?
- Can the type or identity of firms that will participate in the future goods market be identified?
- But for the merger, would the parties likely compete in an identifiable future market?
- Will investment in R&D fall as a result of the merger so as to likely reduce innovation?
- Will the merged entity be able to raise prices in the future market?
Where the answer to either of the last two questions is ‘yes’, a merger may result in a substantial prevention of competition and be subject to challenge by the Bureau.
The report also recognizes the role dynamic efficiencies can play in the statutory efficiency defence. The efficiency defence provides that where a merger is likely to bring about gains in efficiency that are greater than, and offset, a merger’s anticompetitive effects, and these efficiencies would be lost if an order against the merger were made by the Competition Tribunal, the Tribunal is prohibited from making such an order. The report discusses the role mergers may have in enhancing product and process innovation in the Canadian economy, the report notes, however, that though proving these efficiencies will be difficult in practice.
As the Competition Bureau continues to develop a framework for dealing with the dynamic effects of mergers, businesses will need to consider the impact of potential transactions on markets both today and in the future.
The report can be found on the Bureau’s Web site at: http://www.competitionbureau.gc.ca/internet/index.cfm?itemID=2376
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
