The industry environment in the United States has grown highly competitive and companies are entering into complex agreements and partnerships in order to survive the competition. Whether it is for foreign expansion or funding of innovation efforts, or about bringing operating expenses low, companies are forming complex collaborations to achieve create growth momentum. Mostly such collaborations are procompetitive and do not hurt competition in the market.
They can be profitable for the collaborating companies as well as the customers and the economy of the United States. The number of civil cases against competitive agreements brought by the antitrust agencies has been relatively low during the last two decades. However, sometimes such competitive agreements or mergers may harm the existing competition in the market if the intention of the collaborators is to gain market share or establish a monopoly.
There are certain types of competitive agreements that are highly likely to harm competition and do not yield any procompetitive benefits. In such a case, there is no reason that an investigating agency would waste its time and resources carrying out particularized inquiries into such agreements. Once an agency identifies such an agreement, it challenges the agreement as per se illegal. The remaining types of agreements are evaluated under the rule of reason.
Evaluation on the basis of the rule of reason entails a factual inquiry into the overall competitive effect of the competitive agreement or merger. The Supreme court has explained in this regard that the inquiry carried out under the rule of reason is flexible and the focus and detail of inquiry generally vary depending on the nature of the agreement as well as market circumstances.
Agreements Challenged as Per Se Illegal:
The agreements that have once been identified as Per Se Illegal do not undergo specific inquiry. These are the types of agreements that almost always tend to increase prices and reduce output. Price fixing, bid-rigging, and customer allocation are types of agreements held as per illegal. Competitors can enter into agreements for price-fixing, rigging bids, or for sharing or dividing markets through customer allocation or by allocating suppliers, territories, or lines of business. Such agreements do not have any procompetitive benefits and are considered outright illegal. The courts will not even bother about getting a detailed inquiry carried out into the nature of such agreements. There is no need to get a detailed analysis of the business purpose of such agreements, their procompetitive benefits, anticompetitive benefits, or the overall competitive impact of the agreement. The parties involved in hardcore-cartel agreements are criminally prosecuted by the Department of Justice.
Agreements under the rule of reason:
The agreements that are not challenged as per se illegal are analyzed under the rule of reason for determining their overall competitive impact. These agreements would otherwise be considered per se illegal. However, there is a solid reason to believe that they are agreements targeted at improving the efficiency of the collaborating parties and could yield procompetitive benefits. The main focus of the rule of reason analysis is to compare the state of competition with the agreement as well as without the agreement. It compares the anticipated situation with the relevant agreement with another situation where no such agreement exists.
The main question that the rule of reason addresses is that if the relevant agreement can in any way harm competition or allow the involved parties to leverage their capabilities to increase prices, reduce the quality of output, or affect the pace of innovation negatively compared to the state of competition without the agreement. Depending on the type of agreement as well as the market circumstances, the focus of the rule of reason analysis differs. However, the agencies focus mainly on the factors that are necessary to determine whether the competitive impact of the relevant agreement when conducting their analysis. Generally, any single factor cannot help conclusively determine the competitive impact of an agreement.
To begin with, the investigating agency conducts analysis into the nature of the relevant agreement. For this purpose, the agency asks questions about the purpose of the business agreement. It also examines whether the agreement has caused any anticompetitive harm if it is already in operation. In some cases, the nature of the agreement as well as the lack of market power of dominance may prove that there will be no competitive harm due to the agreement. In the other cases, where the nature of the agreement may show anticompetitive harm or similar harm due to the agreement already being in operation, and there are no overriding procompetitive benefits that could offset the anticompetitive harm, the agency will challenge such an agreement without going for detailed market analysis.
Apart from that, the agencies also examine whether the involved parties and the collaboration have the incentive to compete independently. They also evaluate other market circumstances like an entry that may cause or prevent anti-competitive harms. If after analyzing these factors the agencies reach the conclusion that there will be no anticompetitive harm resulting from the collaboration, the agencies will end their investigation without considering the procompetitive benefits of the agreement. If the agencies discover the potential for any kind of anticompetitive harm in the agreement, they will also examine if the agreement is reasonably necessary to achieve the procompetitive benefits that would likely offset the anticompetitive harms.
The Difference between Mergers and Competitive Agreements:
The impact of competitive agreements may differ vastly from the mergers due to a large number of factors. In most cases, mergers completely eliminate the chances of competition between the merging parties. However, the situation is different in the case of competitor collaborations. In the case of competitor collaboration, the chances of competition between the involved parties are not completely eliminated. Some chances of competition between the collaborating parties always remain in case of a competitive agreement. So, while the remaining competition may reduce concerns for the agencies, some questions still remain. There are chances that the collaborating parties may have agreed about restraints on competition in the remaining areas as well.
Another important difference between mergers and competitive collaboration is related to the duration of the deal. While mergers are generally permanent, competitive collaborations are made for a limited duration. So, let’s say Honda and Toyota have partnered with each other for an R&D project. While the two companies will be able to pool their resources in a manner that helps them grow their business efficiency, they would still remain potential competitors in the real market. Therefore, the type of antitrust investigation that occurs in the case of mergers is different from that which takes place in the case of competitive collaborations.
In some cases of competitive collaboration, the overall competitive effect can still be similar to mergers (complete or partial). So, the investigating agencies treat the collaborative agreement as a Horizontal merger in a relevant market and analyze it according to the Horizontal Merger Guidelines. This is the case generally when
(a.) collaborating parties are competitors in the relevant markets.
(b.) to undertake the collaboration, involved parties bring together resources and capabilities that help improve economic efficiency.
(c.) due to the integration, competition between the participants is eliminated in all forms in the relevant markets.
(d.) the duration of the collaboration is not definite or that it does not terminate within a sufficiently limited time period by its own specific and express terms.
The investigating agency uses these guidelines to identify the competitive impact of the collaboration in the other markets.
On what criteria does the investigating agency evaluate the competitive agreements?
The agencies use the following four main criteria to evaluate the agreements among competitors:
1. Potential Pro-competitive Benefits:
To determine whether a competitive agreement should be treated as a merger, agencies use the term of ten years. Generally, this term is sufficient to treat collaboration as permanent. The length of the term can however vary depending on the circumstances in specific industries like the technology life cycles. However, this definition does not determine the obligations arising under the Hart Scott Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a.
The agencies also recognize that there are a variety of benefits for consumers that may arise from competitive collaborations between competitors. For example, such collaborations can help the collaborating agencies bring cheaper products and services to the market that will actually benefit the consumers as well as grow the pace of innovation or bring products and services to the customers at a faster rate than usual.
Collaboration can also allow involved parties to use their existing assets better or create incentives that will encourage the involved parties to make investments for improving output which would not be possible without collaboration. There are several types of contractual agreements that the involved parties can utilize to achieve the benefits of competitive collaboration including joint ventures, trade or professional associations, trade or professional associations, licensing arrangements, or strategic alliances.
Competitor collaborations often help the involved parties gain performance efficiency by bringing various resources and capabilities together.
For example, Toyota and Honda are getting involved in a competitive agreement. Toyota brings expertise and Honda combines it with its own manufacturing and marketing processes to achieve higher efficiency as well as better quality. In another case, the two players are unable to achieve economies of scale or scope by pooling resources and capabilities which might not be otherwise possible for any single player. Apart from that, two players can also combine their resources and capabilities ( for example, R&D and marketing) in a manner that helps them lower the costs of production and sales or achieve lower lead times. This type of collaboration allows the involved players to reduce costs of the final products for the consumers, improve the quality of their existing products as well as bring new products to the market faster.
2. Potential Anticompetitive harms:
In several instances, competitive collaborations can prove harmful to consumers and society. They may increase the ability of the involved players to raise the prices higher, reduce the level of output or product/services quality, as well as the rate of innovation below the normal (absent the collaboration). There are a large variety of mechanisms that can give rise to such effects. Such agreements can have a limiting effect on decision making. They can combine the control of or financial interests in production, or decisions related to pricing, output, or any other significant factor having an effect on competition. Apart from that, these agreements may otherwise reduce the involved players’ ability to compete freely and effectively.
The involved parties may collude for their benefit in other ways too. For example, a competitive agreement may allow the involved players to exchange or disclose competitively sensitive information or through growth in market concentration. Such collusion may be limited to the relevant market or may also involve another market where the involved parties compete directly or indirectly.
3. Analysis of the overall collaboration and the included agreements:
Generally, competitor agreements include a set of one or more agreements ( other than merger agreements) involving two or more competitors, for engaging in economic activity or the resulting economic activity.
Agencies mainly evaluate the competitive effects of the overall collaboration and any individual agreement or set of agreements included in the collaborative agreement that may harm competition. The agency assesses two or more competitive agreements when their pro-competitive benefits or anticompetitive harms are so intertwined that the two cannot be considered in isolation for their overall competitive impact.
4. Relevance of time in terms of possible effects on competition:
The competitive effects of an agreement do not remain the same over time. Due to changing market circumstances or changing organizational dynamics, the addition of new terms to the same agreement, entry or departure of involved parties as well as new market conditions of changing market share, the competitive effect of the same agreement may change. So, the agencies also assess the competitive effects of a relevant agreement in terms of the time when it could cause possible anticompetitive harm (whether it is the time when the agreement is formed or at a later time).
However, if an agency investigates an agreement of anticompetitive effects post-collaboration, it will have to keep in mind the investments that the involved parties have made in the relevant collaboration.
Nature of the relevant agreement: Business Purpose, Operation in the marketplace and possible competitive operations.
The nature of the agreement is an important determining factor that affects the investigating agency’s decision of whether any anti-competitive harm will result from the agreement.
The investigating agency draws inferences related to the purpose of the agreement on the basis of objective facts while examining the nature of the relevant agreement. Another important factor is the evidence of the subjective intent of the participants that helps agencies decide the nature of the relevant agreement. Agencies consider the competitive effects of the agreement in light of the evidence of the subjective intent of the participants. Unless there are chances of anti-competitive harms occurring due to the agreement, the agencies will not carry out a detailed analysis of the benefits of the agreement. An agency can determine anti-competitive harm resulting from the agreement if:
- a collaboration between two or more competing parties successfully mandates new anti-competitive conduct or,
- it successfully eliminates pro-competitive pre collaboration conduct (practices like withholding services that were desired by the consumers)
If an agency finds anticompetitive harm in its investigation, it will not carry out a detailed examination of market power. In some cases, it is essential for the investigating agency to analyze market power in order to determine or effectively conclude that there is anti-competitive harm happening due to the agreement.
Types of competitor collaborations that may give rise to anti-competitive concerns:
Competing businesses may enter into agreements to make products/services that they may sell jointly. For example, HP and Dell together develop a CPU model that delivers higher performance. Or, the two companies may enter into a joint agreement to develop a product that they use as a raw material or input. For example, HP and Dell create a high-performance microchip that they use for making powerful laptops and computers. Generally, such agreements are procompetitive. Despite entering into a short term partnership for producing microchips, the two companies remain competitors in the PC and laptop markets. The collaboration between the two players improves their ability to compete in the PC market. As a part of such collaborations, competing players may bring their complementary technologies, assets, know-how, and other assets together to gain higher production efficiency or to achieve higher cost-efficiency in terms of production that was not possible for any of the individual players alone.
However, there are many cases where such agreements may yield anticompetitive harms. For example, there are collaborations involving agreements at the output level or those involving the use of key assets, or regarding prices and other significant variables like quality, service, or promotional strategies. Such collaborations can help the involved layers grow their market power or exercise market power. These collaborations can also combine the control of the involved parties on production or key assets or decisions regarding key competitive variables that individual players would otherwise control.
Such agreements may hurt independent competition. They may affect the individual players’ ability to compete independently by reducing their control over the assets necessary to compete. They can also combine financial interests in ways that will have a negative impact on the ability of the involved parties to compete independently.
Competitor collaborations may also be related to marketing, sales and distribution of goods and services produced individually or jointly by the involved parties. In most cases, these agreements are procompetitive. For example,, by combining their distribution capabilities, HP and Dell bring products to the market faster. Such agreements allow the involved businesses to achieve higher efficiency in terms of sales, marketing and distribution.
However, while such agreements are mostly procompetitive, they can also result in anti-competitive harms in some cases. It happens when collaborations related to marketing and distribution involve agreements on price, output, or any other variable that may significantly impact output. In other cases, marketing and distribution collaborations may involve the agreements in the use of assets that may have a significant impact on competition like an extensive distribution network or online distribution capabilities that cover large geographical regions. Suppose, HP and Dell have entered into a competitive agreement that combines their distribution networks and allows them to grow their sales in various regions of the world. This agreement leaves the competing players in the PC industry at a significant disadvantage.
Such an agreement can also increase the market power of the involved parties or allow them to exercise stronger market power. For example, two or three large players (like HP, Lenovo, and Dell) in the PC industry form a collaborative agreement that involves the joint promotion of their products. They promote their products and services together but this practice reduces or eliminates comparative advertising. This has a negative impact on competition since it restricts the information customers had related to pricing or other significant competitive variables.
Competing players may also form collaborative agreements that allow them to source raw materials at lower costs and with higher efficiency. These agreements can also generate or increase market power (also called monopsony power) or help the involved parties to exercise market power by allowing them to control the prices of raw materials and depress output below the level that would likely prevail if the relevant agreement was not formed. Buying collaborations may also facilitate collusion among the participating players. They can standardize participants’ costs or improve the ability of the involved parties to project or monitor a player’s output level through the knowledge of its input purchases.
Research and Development collaborations:
Competing parties can also form collaborations to carry out research and development projects jointly. In most cases, such agreements are procompetitive. Investigating agencies analyze such collaborations under the rule of the reason. As a part of such collaborative agreements, companies can combine their assets, technologies or knowhow to develop new and improved goods and services or faster production processes. However, several times anticompetitive harms can also result from these agreements. They too can generate or increase market power or enable collusion between the involved parties in ways similar to those discussed above.
Relevant Agreements that may facilitate collusion
Each of the types of collaborations we have discussed above can facilitate collusion (marketing, buying, research and development, and other collaborations). Competitor collaborations offer the involved parties opportunities to discuss and agree on anti-competitive terms. It will also let that have a greater chance to find and punish deviations that might undermine collusion. For example, all the above forms of collaborations allow the involved players to secretly and illegally cooperate on competitively sensitive variables like prices, output, customers, geographical markets, and other factors. Of all the types of collaborations discussed above, the R&D agreements are the least likely to result in collusion. These collaborations are conducted in secret and it makes it difficult to monitor an agreement to coordinate research and development projects. However, the other types of collaborations may grow concentration in a relevant market and thus grow the likelihood of collusion among all the involved firms.
Sometimes agreements that facilitate collusion also involve a lot of exchange and disclosure of information. Mostly such information sharing is pro-competitive and the agencies recognize this fact. Often information sharing among competitors is essential for the success of the collaboration. For example, in order to achieve the procompetitive benefits of a research and development collaboration, the involved firms may need to share certain technologies, know-how, and other intellectual property. Despite that in a number of cases, the information sharing between participants related to the market in which collaboration operates or in which the participants may be actual or potential competitors can grow the chances of collusion on competitively sensitive variables including price, output, and others. The type of competitive concern that may arise in such a situation depends on the nature of the information shared among the participants. There are some variables that are more competitively sensitive compared to others like price, output, costs, or strategic planning. The chances of a competitive concern arising are higher when the participants share information on the more competitively sensitive variables. Moreover, the chances of a competitive concern arising are lower when the information shared is historical as compared to current and future business plans. When companies share aggregated data and identifying individual firm data is not possible for recipients then the chances of a competitive concern arising in such a situation are lower as compared to the sharing of individual firm data.
Relevant markets that competitor collaborations may affect and how agencies assess the impact :
Generally, agencies identify and assess the competitive effects of a competitor collaboration in all the relevant product and geographic markets. In some cases, they can also analyze the competitive effects without even defining the relevant markets. The markets that competitor collaboration affects include all the markets where the collaboration operates or will operate. It can also include any additional markets where a participant is an actual or potential competitor. These markets can be classified into the following main categories:
When determining the relevant market, the agencies generally consider the likely reaction of the buyers in case of price increases. Apart from the other things, agencies ask how buyers would respond if prices increase over the current price levels. However, when circumstances suggest that the prices are higher than would have been without the relevant collaboration agreement, then agencies use a price reflecting the prices without the agreement. Once they have defined the relevant markets, they assign market shares to both the firms that are currently operating in the relevant market as well as the ones that are able to make uncommitted supply responses.
Agencies may need to define technology markets in order to assess the competitive effects of the competitor collaboration including an agreement to license intellectual property. It happens when rights to intellectual property are marketed separately from the products they are used in. Technology markets include the licensed intellectual property and its close substitutes. (Close substitutes mean the technologies or goods that are close enough substitutes and can significantly constrain the exercise of market power with respect to the intellectual property being licensed.)
Research and development: Innovation markets:
In several cases, the agencies analyze the competitive effects of an agreement as a separate competitive effect in a relevant goods market. However, in various cases, the competitive effects of a competitor collaboration on innovation cannot be addressed fully through the analysis of goods or technology markets. In such a case, the agencies may need to define and analyze an innovation market. An innovation market includes research and development for new or improved goods and processes as well as close substitutes for that research and development. The investigating agencies define an innovation market only in the cases where the capabilities to engage in the relevant research and development can be associated with specialized assets or characteristics of specific firms.
Effect of market share and market concentration:
Market share and market concentration also affect the chances of helping the involved players create or grow market power. These two factors also facilitate the exercise of market power in the case of competitor collaborations. When these factors create, grow or facilitate the exercise of market power, they offer the involved parties the ability to raise the prices higher than the prices that would normally prevail if the collaboration was not in place. Apart from that, the increased market power can allow the involved parties to reduce output, product quality, service, or innovation below the level that would likely prevail given there was no competitor collaboration in place.
Market share affects the state of the competition after the collaboration in other ways too. For example, it affects the extent to which the involved parties should reduce their output in order to have an anticompetitive effect in the relevant market. If the market share of a firm involved in the collaboration is smaller then it would be difficult for that firm to produce an anticompetitive effect in the relevant market by restricting its output. It will need to restrict its output severely to produce a price increase and apart from that, the chances of the price increase being successful will also be very low.
The case would be its reverse if the total supply that a firm controls in a relevant market is large. So, while assessing the likely anticompetitive impact of the collaboration, the investigating agencies assess the market shares of the individual players involved in the collaboration as well as the total collaboration. However, the process is not as straightforward because the agencies have to assign a range of market shares to the collaboration.
The higher end of the range includes the sum of market shares of the collaboration and the individual players whereas the lower end includes the market share of only the collaboration. (To measure the market share, agencies utilize the best possible indicators of a firm’s competitive significance in a relevant market. Apart from the type of competitive effect being considered, it also depends upon the availability of data. Generally, the agencies use annual data to calculate the market shares of individual firms. However, in various cases, individual transactions are large and infrequent. In such a case, annual data would not be representative of the firm’s market share. So, the agencies measure market share over a longer period of time to get a better estimate).
Market concentration also plays a similar role in helping companies create or grow their market power in relevant markets. It has a direct effect on the difficulties and costs of achieving collusion in a relevant market. So, in order to assess whether an agreement will increase the chances of collusion in any given market, the agencies calculate the market concentration. However, both these factors only offer a starting point in the assessment of whether the relevant agreement will increase the chances of collusion in any relevant market.
Factors that drive competition among the participants and the collaboration
In some cases, competitor collaboration does not end the competition among the participants. Instead, the involved parties will continue to compete against each other and the collaboration. They can continue to compete against each other through separate and independent business operations or through participation in other collaborations. It means the same participants can be members of several different collaborations. For example, HP and Dell enter into a collaboration agreement with Amazon and in another collaboration agreement with Microsoft or Google.
Moreover, it is not always essential that the involved players manage the collaboration between the competitors. Independent decision-makers can also manage these collaborations. Apart from that, control over key competitive variables may also remain outside the collaboration. For example, the collaborating firms may independently set prices or do the marketing for the firm’s output.
In other cases, however, there may be explicit terms and conditions or financial and other provisions that may limit the competition among the participating firms and the collaboration. The agencies do not only consider the formal terms of the agreement, but they consider the competitive effect of the entire agreement. If the nature of the agreement as well as the market share and market concentration data reveal that there are chances of anticompetitive harm, they will examine more closely to find if the involved players and the collaboration have the necessary incentive to compete against each other in the relevant markets. In such a case, the agencies will most likely focus on the following six factors:
- The extent to which the relevant agreement is nonexclusive or if the involved parties will continue to compete independently of each other in the relevant market where the collaboration operates.
- The degree to which the involved parties will retain the control of the assets necessary to compete against each other.
- The nature and extent of participants’ financial interest in the collaboration, or each other.
- The control of the collaboration’s decision making that may have a significant effect on competition.
- The chances of information sharing between the participating players and the collaboration that may have a significant adverse impact on competition.
- The duration of the collaboration.
The competitive concern related to the relevant agreement may grow higher or lower depending on the factors that agencies find necessary to consider. The analysis carried out by the agencies is generally flexible and will not necessarily involve all the factors at the same time. Depending upon the facts and circumstances of each individual case, the relevance and significance of each of these factors may vary. The agencies will also consider any other factor that is applicable under the given circumstances. These six factors are discussed in detail below:
While analyzing the competitive effects of the relevant agreement, the agencies analyze its exclusivity. They consider whether the relevant agreement and to what extent as well as in what manner allows the individual firms to compete against the collaboration through separate and independent business operations or through participation in other collaborations that the one under consideration. The investigating agencies will consider if the relevant agreement is just as non exclusive in fact as it claims. They will also consider if there are any significant costs of impediments to competing with the agreement. If the agreement is already in operation, then in order to assess its non exclusivity, the agencies will consider whether, to what extent, and in what manner the participants have continued to compete against each other and the collaboration. The chances of competitive concern arising from the relevant agreement are lower if the participating players have continued to compete against each other and the collaboration or if they are allowed to do so.
Control Over Assets:
Participants’ control over competitively significant assets is an important factor that affects their ability to compete independently in the relevant markets. So, the agencies investigate if the agreement requires the participants to surrender competitively significant assets to the collaboration that they previously required to compete effectively and independently in the relevant markets.
If the agreement requires such resources (specialized resources that do not have substitutes or whose substitutes are difficult to find) to be contributed to the collaboration then it means that the participating players might have lost their ability to compete independently and effectively against each other or the collaboration fully or partially., even if they have contractually retained their right to compete. Generally, the higher the need to contribute such resources to the collaboration, the more negative will be the impact on competition in the relevant markets.
Financial Interests in the collaboration or in the other players:
to find the anticompetitive effect of the agreement, the investigating agencies also assess the financial interests of individual players in the collaboration. They also assess the potential impact of that interest on the ability of individual players to compete independently and effectively. Depending on the size and nature of the financial interest, the potential impact on competition may vary. For example, the competitive impact may vary depending upon whether the financial interest is debt or equity. Generally, the participants having higher financial interest in the collaboration are less likely to compete with it.
Apart from that, the agencies assess direct equity investments between or among the participants. Such incentives generally stop the participating players from competing against each other by reducing the incentives to do so. The agency compares the level of financial interest of a player in the collaboration or in another participating player relative to the participant’s investment in its independent business operations in the markets where the collaboration operates.
Control of the collaboration’s competitively significant decision making:
While assessing the anticompetitive harms of the agreement, the agencies also assess the manner in which the collaboration is organized and governed. The agencies assess that to what extent the governance structure of the collaboration allows it to act as an independent decision maker. For example, the agencies will check if the participants of the collaboration are allowed to appoint members of a board of directors for the collaboration, if incorporate, or otherwise to exercise significant control over the collaboration. If the participating players gain significant control over the collaboration’s competitively significant decisions like price, output, and other, the result would be that the chances of independent competition would be reduced. If the collaboration’s decision making is subject to the participant’s control, the agencies would consider if that control can be exercised jointly. If the joint control of the involved players over the collaboration’s price and output level is high, that could lead to growth in market power and thus raise competitive concerns.
Based on the nature of the collaboration, joint control of the collaborating players over the other competitively significant decisions like the level and scope of R&D efforts and investment may also give rise to competitive concerns. However, if the level of joint control of the participating players over the collaboration’s competitively significant decisions is low, then the competitive concerns related to the relevant agreement would be reduced.
For example, if the participating players independently control the price and quantity of their share of the collaboration’s output, and control the other competitively significant decisions independently, the chances of competitive harm occurring from the relevant agreement would be reduced.
Likelihood of anti competitive information sharing:
The agencies also evaluate the extent to which competitively sensitive information related to the markets where the collaborations operate would be shared or disclosed. The chances of such information being shared by the participating players depends on several things and chiefly the nature of the collaboration, its governance and organization as well as the safeguards in place to minimize or prevent such information from being disclosed. For example, the participating players may not assign marketing personnel to an R&D collaboration. Or, they could limit access to competitively sensitive information related to their respective operations to only certain individuals or an independent third party. If there are chances of the participant’s input requirements or other competitively sensitive information to be revealed in a buying collaboration, then the collaboration could use a third party to handle the negotiations. If there are appropriate safeguards in place that prevent such information sharing then the chances of anticompetitive concerns or collusion on competitively sensitive variables are reduced.
Duration of the collaboration:
While investigating the anti-competitive concerns arising due to an agreement and if the participants will continue to compete against each other and the collaboration, the agencies also consider the duration of the collaboration. In the case of short duration collaborations, the chances of anti-competitive concerns rising are lower. However, the collaboration is of a larger duration, then the chances of collusion are higher. The likelihood of participants competing against each other and the collaboration are higher with low duration collaborations.
Identifying pro-competitive benefits of the collaboration
Companies often strive to achieve efficiency internally to beat the competition in the market. However, in a large number of cases competitor collaborations can generate various significant efficiencies that may benefit the consumers in several ways. For example, competitor collaborations can enable firms to produce goods/services that are cheaper, more valuable to customers, or delivered to the market faster than possible without the relevant agreement. In most cases, the efficiency gains from competitor collaborations stem from a combination of various resources and capabilities. The main benefit of the economy from such competitor collaborations is their ability to generate such efficiencies.
The efficiencies that a competitor collaboration helps the involved parties generate enables the collaboration and its participants to compete effectively. The result can be lower prices, better quality, as well as better products and services. For example, when competing firms collaborate, they might be able to produce raw material more efficiently than any of the firms could produce individually. Such efficiencies that are achieved through collaboration may improve competition by allowing two or more participants to grow their effectiveness at competing in the market. Even when such collaborations yield a significant advantage in terms of competition for the involved firms, they may also have other effects that may reduce the competition and in this way make the relevant agreement anti-competitive.
In case, the agencies identify that the agreement has caused or may cause anticompetitive harm they try to find if the agreement is reasonably necessary to achieve cognizable efficiencies. The cognizable efficiencies are efficiencies that the agency has verified that they do not arise from anticompetitive reductions in output or service and that cannot be achieved through practical, less restrictive means.
Cognizable efficiencies should be verifiable and potentially pro competitive.
Efficiencies can be difficult to verify and quantify. It is partly so mainly because most of the efficiencies related to the collaboration are held by the individual participants of the collaboration. The participants need to substantiate efficiency claims. It is necessary so that the agencies can verify using reasonable means, the likelihood, and magnitude of each of the asserted agencies, how and when each one would be achieved as well as the costs involved and how each of these efficiencies could enhance the collaboration or its participants’ ability and incentive to compete. Apart from these, the agency needs to judge why the relevant agreement is reasonably necessary to achieve the claimed efficiencies. The agency would not consider efficiency claims if they are vague or speculative or cannot be verified using reasonable means. Moreover, cognizable efficiencies need to be potentially pro-competitive. Some asserted efficiencies like the ones based on the premise that competition itself is unreasonable are insufficient as a matter of law. Apart from that, the agencies do not treat the cost savings that arise from the anticompetitive output or service reductions as cognizable efficiencies.
Reasonable Necessity and less restrictive alternatives:
The agencies consider only those efficiencies that the relevant agreement is reasonably necessary for. However, even without being essential, an agreement can be reasonably necessary. If the involved players can achieve the same or could have achieved the same efficiencies through practical and less restrictive means, then the agencies will conclude in that case that relevant agreement is not reasonably necessary to achieve those efficiencies. While making this assessment, the agencies will consider only the more realistic and practical in the given business situation. They will not look for a theoretically less restrictive alternative that would be unrealistic in the given business situation.
The reasonable necessity of an agreement may dependent upon two important factors that include the market context and the duration of the agreement. different circumstances may justify the relevance of an agreement in different ways. For example, an agreement whose relevance is justified by the requirements of entry of new players may not be justified or reasonably necessary for achieving cognizable efficiencies in different circumstances. Another important factor that helps agencies determine if the relevant agreement is reasonably necessary is if the agreement deters the individual players from taking free-riding (free ride means benefits companies obtain at other’s expense or without the usually necessary cost or effort) or other similar opportunistic conduct that may significantly reduce the ability of the collaboration to achieve cognizable efficiencies. Collaborations sometimes also include agreements that discourage any individual participant from appropriating an undue share of the output or achievements of the collaboration or to align the incentives of the involved players in a manner that it encourages them to cooperate and achieve the efficiency goals of the collaboration. The agencies check if the relevant agreement is reasonably necessary so that it can prevent opportunistic conduct which would otherwise prevent the collaboration from otherwise achieving cognizable efficiencies.
How the agencies determine the overall competitive effect of the relevant agreement?
In order to determine the overall or likely competitive effect of the relevant agreement and if the agreement is reasonably necessary to achieve cognizable efficiencies the agencies will assess the chances and magnitude of cognizable efficiencies and the anticompetitive harms from the relevant agreement. So, to determine this, the agencies will assess if the cognizable efficiencies achieved from the collaboration will be sufficient to offset the potential anticompetitive harms from the agreement in the relevant markets. For example, the agencies will check if the cognizable efficiencies achieved from the agreement will be sufficient to prevent price increases in the relevant markets and in this way reduce the chances of anticompetitive harms occurring due to the relevant agreement.
The agencies do not compare the cognizable efficiencies and the anticompetitive harms in absolute terms but the comparison is only an approximate judgment. When assessing the overall competitive impact of the agreement, the chances and magnitude of both the anticompetitive harms and cognizable efficiencies from the relevant agreement. If the chances of anticompetitive harm occurring from the agreement grow, then the agencies will need evidence that can establish that a higher level of cognizable efficiencies can be expected from the collaboration that will help balance the anticompetitive harms occurring from the relevant agreement. If the anticompetitive harm of the relevant agreement is extraordinarily large, then the cognizable efficiencies to be generated from the agreement also need to be extraordinarily great in order to balance the anticompetitive impact from the relevant agreement.
Antitrust Safety Zones:
Often competitor collaborations are pro-competitive and therefore there is also a need to encourage such activities. Agencies have therefore created safety zones so that they can encourage competitor collaborations that yield pro-competitive benefits. There is a lot of uncertainty surrounding competitor collaborations and if any related activity would be considered illegal. The safety zones laid out by the agencies help minimize this uncertainty in the situations where the anticompetitive effects are so unlikely that the agencies presume these are legal arrangements without eve inquiring into particular circumstances. However, while these safety zones are designed to encourage illegal activity, they are not designed to discourage the competitor collaborations that fall outside these safety zones. The agencies also emphasize that if a competitor collaboration falls outside the safety zones then it does not mean that the competitor collaboration becomes entirely illegal. Several times such cases have come to light where competitor collaborations falling outside these safety zones are not illegal. There are basically two types of safety zones and they include the general safety zones and another one for research and development collaborations.
Safety zone for general competitor collaborations:
If the total market share of the collaboration and its participants is not higher than 20% of each of the relevant markets in which the state of competition may be affected by the collaboration and there are no other extraordinary circumstances then the agencies would not challenge a competitor collaboration. However, this safety zone does not apply to the competitor collaborations that are per se illegal or the ones that can be challenged without a detailed market analysis or the ones to which a merger analysis is applied.
Safety Zone for Research and Development Collaboration (Innovation Markets)
If there are no extraordinary circumstances, then the agencies would not challenge a competitor collaboration on the basis of effects on competition in an innovation market where apart from the research and development efforts of the collaboration, there are three or more independently controlled R&D efforts having specialized assets or characteristics as well as the necessary incentives for engaging in research and development that is a close substitute of the collaboration’s R&D. It also means that the R&D activity of the collaboration must not be without a substitute or that there must be some independent players whose R&D activity might be able to challenge that of the collaboration. Otherwise, the collaboration’s R&D activity would offer it an undue advantage.
To determine if the independently controlled R&D activities are close substitutes, apart from the other things, the agencies will also consider the nature, scope, and magnitude of the R&D efforts as well as access to financial support, intellectual property, skilled professionals, or other specialized assets and more factors like the timing and ability to successfully commercialize innovations. However, this safety zone is also not applicable to the agreements that are per se illegal or the ones that can be challenged without a detailed market analysis or in case of a competitor collaboration to which a merger analysis is applied.