Blog Post

UPS-TNT: the eternal struggle between harm and efficiencies

After Olympic/Aegean and Deutsche Börse/NYSE, today’s decision on UPS/TNT is Joaquin Almunia’s third merger prohibition since he became the European Union's competition chief in 2010. Mr Almunia’s predecessor as competition commissioner, Neelie Kroes, ended her five-year mandate having barred two mergers.

By: and Date: January 30, 2013 Topic: Innovation & Competition Policy

After Olympic/Aegean and Deutsche Börse/NYSE, today’s decision on UPS/TNT is Joaquin Almunia’s third merger prohibition since he became the European Union’s competition chief in 2010. Mr Almunia’s predecessor as competition commissioner, Neelie Kroes, ended her five-year mandate having barred two mergers. The previous negative decisions hinged on potential harm to consumers and whether harm could be offset by increased network efficiencies. Remedies were offered but were not deemed effective enough to tilt the balance in favour of efficiencies and ensure that the merger would not have anti-competitive effects.

Dg-Comp merger activity 2005 – today

Source: DG-Competition – http://ec.europa.eu/competition/mergers/statistics.pdf.

The market: UPS, TNT, DHL and FedEx are ‘global integrators’. They combine trucks and planes and can guarantee overnight express deliveries throughout Europe. According to the Commission, local players lack the tools to offer such a service, particularly for cross-border shipments. The express business-to-business small packages delivery segment could therefore have been qualified as a de-facto self-standing market in which only four major players could significantly exert reciprocal competitive pressure.

The concern: In at least one of the markets affected by the transaction, UPS/TNT therefore would qualify as a “4-to-3” merger: after the transaction, only three players would be able to offer a quick and reliable Europe-wide service. Moreover, the four players have not been considered equally close competitors. FedEx’s coverage of the EU market is less homogeneous than DHL’s and FedEx would not exert enough competitive pressure on the remaining two competitors to prevent price increases, should the transaction be approved. Conversely, TNT is often considered as a low-price alternative to UPS or DHL. Eliminating such a ‘maverick’ would relax competition and, therefore, leave scope for price increases. Arguably, the growing wide spread of e-commerce would not help to mitigate the European Commission’s concerns. Even if the sector is likely to experience a boom in the near future, the prospect of higher profits might not be enough to trigger timely entry. It has been widely stressed that the high "barriers to entry" characterising the integrator market would make it hard for new players that lack their own networks of hubs and warehouses to enter and efficiently compete against incumbent players. Shielded by this potential external pressure, the remaining players could find it profitable to increase their prices or reduce the quality of their services. That could occur ‘unilaterally’ i.e. each player would have a greater incentive to increase prices because that would increase their profits (less competition in the market means that fewer customers flow to competitors when prices are increased). Or for ‘coordinated effects’, i.e. with fewer competitors in the market, players would be more likely to reach a mutual (not necessarily explicit) understanding on prices that would maximise collective profits (i.e. collusive prices).

Efficiencies: Network efficiencies were put by the parties on the other side of the balance. Network efficiencies arise whenever the value of a product to its customers increases with the number of potential or actual customers of that very same product. Postal services are naturally prone to network efficiencies and it is indeed possible that, in the absence of anti-competitive effects, the merger would have had a positive effect on consumer welfare, bringing together the UPS and TNT networks. The Commission must have considered those efficiencies to be not large enough to counterbalance the likely harm caused by the loss of competition. Most interestingly, even if all but one of the affected markets would have benefited from the transaction, it would have been sufficient to warrant a prohibition decision that efficiencies would not have been enough to counterbalance harm in the one market in which concerns are particularly strong. In other words: if, for example, domestic standard deliveries’ customers would benefit overall from the bigger network offered by UPS/TNT, it would nevertheless be enough that harm in the cross-border business-to-business small parcels delivery segment is not compensated for by efficiencies. This would qualify the merger as anti-competitive. EU law and practice do not allow for the balancing of efficiencies and harm between different markets. That is understandable: balancing welfare across markets would imply expressing a value judgment, and antitrust authorities must refrain from performing ‘political’ exercises. But, broadly speaking, pursuing a more integrated European single market still begs the question: couldn’t efficient balancing mechanisms be conceived of, such that overwhelming and widespread benefits do not run the risk of being dismissed, on principle, if accompanied by comparatively small harm in minor markets in which those benefits do not arise? We do not know whether that is the case in UPS/TNT. But the principle is worth discussing.

Remedies: The parties attempted to dispel the Commission’s concern by offering a package of remedies which included the sale of part of TNT’s assets to DPD, a French parcel services supplier. In order to be considered a viable competitor in express delivery services across Europe, however, DPD would have needed access to UPS/TNT’s aircraft capacity, lacking its own fleet. UPS was ready to commit to release capacity for a five-year period at a ‘competitive rate’. But most likely the Commission was unimpressed particularly by this aspect of the package. The Commission is traditionally very careful about so-called ‘behavioural remedies’, through which the parties commit to offer to abide by a set of defined rules after the transaction is adopted. Compared to ‘structural remedies’, whereby parties permanently divest part of their assets, behavioural remedies require constant monitoring (meaning: drain of public resources for a complex, rarely fully successful task) and may introduce unwanted distortions in the price-setting process (linking the commitment to benchmark prices, they may create incentives to act on the benchmarks in order to relax the constraint on the commitments).

UPS/TNT was one of the four phase II mergers under deeper investigation by the European Commission. After today’s prohibition, the remaining cases are: Ryanair-Aer Lingus (a decision is expected by March, 6); Munksjö- Ahlstrom (May, 16) and Syniverse-Mach (May, 30).


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Upcoming Event

Nov
21
12:30

Start-ups' scale-up and innovation

What role is there for policy to address the funding barrier for scaling-up? Do we need a reorientation of the currently pursued policies in European countries?

Speakers: Rudy Aernoudt, Johan Cardoen, François Véron, Reinhilde Veugelers and Louis Papaemmanuel Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Nov
29
11:00

Mergers and innovation

At this closed-door, off-the-record event we will discuss the impact that mergers have on innovation.

Speakers: Justus Haucap, Carles Esteva Mosso, Jorge Padilla and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Nov
29
12:30

Antitrust Concerns in Digital Markets

Following our past events on the topic of antitrust concerns in zero price markets and on big data, digital platforms and market competition, this November we are hosting an event on antitrust concerns in the digital markets.

Speakers: Svend Albaek, Cristina Caffarra, Justus Haucap, Jorge Padilla and Georgios Petropoulos Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Dec
12
12:30

The impact of Brexit for Research & Innovation in Europe

This event will feature a new and interactive format, with a restricted and high-level on-site audience and in parallel, it will be livestreamed on our website to remain public and attract the widest participation

Speakers: Alastair Buchan, Matt Dann, David Earnshaw, Kurt Deketelaere, Maryline Fiaschi, Martin Muller, Christian Naczinsky and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Past Event

Past Event

Crowd Employment

This event aims to discuss the various nuances and diversity that characterize crowd employment.

Speakers: Cristiano Codagnone, Valerio Michele De Stefano, Irene Mandl, Georgios Petropoulos and Amit Singh Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 5, 2017
Read article Download PDF More by this author

External Publication

An innovation deficit behind Europe’s overall productivity slowdown?

Reinhilde Veugelers' chapter in "Investment and Growth in Advanced Economies", conference volume of the European Central Bank’s Forum on central banking in Sintra.

By: Reinhilde Veugelers Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: October 2, 2017
Read article More on this topic

Blog Post

Can roaming be saved after Brexit?

The referendum where UK voters chose to exit the European Union has many unanticipated consequences. One that is gaining visibility in the UK just now is the impact of Brexit on mobile roaming arrangements. How might the UK maintain roaming arrangements with the EU in the event of a hard Brexit?

By: J. Scott Marcus and Robert G. Clarke Topic: Innovation & Competition Policy Date: September 21, 2017
Read article Download PDF

Policy Contribution

Capital Markets Union and the fintech opportunity

Fintech has the potential to change financial intermediation structures substantially. It could disrupt existing financial intermediation with new business models empowered by intelligent algorithms, big data, cloud computing and artificial intelligence. Policymakers need to consider four questions urgently: Develop a European or national fintech market? What regulatory framework to pursue? Should supervision of fintech be exercised at the European level? What is the overall vision for the EU’s financial system?

By: Maria Demertzis, Silvia Merler and Guntram B. Wolff Topic: Finance & Financial Regulation, Innovation & Competition Policy Date: September 15, 2017
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: Carlos Sallé Alonso, José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Matthias Buck, Grégory Claeys, Zsolt Darvas, Jean Luc Demarty, Maria Demertzis, Anna Ekström, Lowri Evans, Ferdinando Giugliano, Sandro Gozi, Peter Grünenfelder, Reiner Hoffmann, Levin Holle, Kate Kalutkiewicz, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Matti Maasikas, Steven Maijoor, Reza Moghadam, Nathalie Moll, James Murray, Johan Van Overtveldt, Julia Reinaud, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Jean-Claude Trichet, Reinhilde Veugelers, Nicolas Véron, Ida Wolden Bache, Liviu Voinea, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre Date: September 7, 2017
Read article Download PDF More by this author

Blueprint

Remaking Europe: the new manufacturing as an engine for growth

Europe needs to know how it can realise the potential for industrial rejuvenation. How well are European firms responding to the new opportunities for growth, and in which global value chains are they developing these new activities? The policy discussion on the future of manufacturing requires an understanding of the changing role of manufacturing in Europe’s growth agenda.

By: Reinhilde Veugelers Topic: Innovation & Competition Policy Date: September 7, 2017
Read article More on this topic More by this author

Opinion

China is the world's new science and technology powerhouse

Chinese R&D investment has grown remarkably over the past two decades. It is now the second-largest performer in terms of R&D spending, on a country basis, and accounts for 20 percent of total world R&D expenditure, with the rate of R&D investment growth greatly exceeding that of the U.S. and the EU.

By: Reinhilde Veugelers Topic: Innovation & Competition Policy Date: August 30, 2017
Read article More on this topic

Blog Post

Low carbon technology exports: the race is still open

A country’s relative strength in exporting a certain product is likely to persist. But it is easier to gain a comparative advantage in exporting low carbon products. When it comes to R+D, strength in a certain technological field is much less linked to past specialisation. This also holds for low carbon technologies. Finally, our preliminary findings are consistent with the view that R+D can help a country specialise in clean technology exports. However, we are not yet able to show that policy action supporting R+D in clean technologies is a sensible way to develop a comparative export advantage in these sectors.

By: Georg Zachmann and Enrico Nano Topic: Innovation & Competition Policy Date: August 24, 2017
Load more posts