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E] Parallel trade of prescription medicines: the Glaxo Dual Pricing case Patrick Rey and James S. Venit' A %, Background The prices of prescription medicines in the European Union are for the most part determined by measures adopted by the national health authorities of the various Member States and tend to differ substantially from country to country as a resull of the different budgetary policies and priorities of the Member States concerned? These pri : differences inevitably give rise to significant arbitrage opportunities and have been the source of a flourishing parallel trade in prescription pharmaceuticals from low- to high-priced countries? The Glaxo Dual Pricing case relates to a practice under which Glaxo sold ts medicines to Spanish wholesalers at prices differentiated according to where the medicine would be consumed. ''hus, the price for a medicine to be sold in Spain was set at the level mandated by the relevant Spanish pricing legislation. Products for export were sold at a price freely determined by Glaxo as permitted under Spanish law. In this way, Glaxo was able Lo sell in Spain al the government-required low price for domestic consumption but at a higher price if the product was to be re-exported to countries willing to pay more, Y We advised GlaxoSmithKline in the case under review. The views expressed are however those 0 te authors and de not necessarily rellect Me views of GlaxoSmithKliac, * National price measures vass in the Iwenty-five member European Union aud include measures that set the maximum sales price that can be charged or the rebmbursement price, mbich in effect normally delermines the mosienun price charged, Although some Membor States such as the United Kingdom do box regulate prices (the United Kingora regulates profits instead), price regulation, ofíen extending to intermediate levels oPtrado, is tho rule in the majotity aftlc Member States. Morcover, although nativnal fiscal and other nicasures infiuence prices in other industrics such as automobile, Uy: pharmacentical sector ds unique ju that the pager is the party effectively detecmiring ue price, and price determination takes place prior to the marketing ol the product, Varallel trado ariscs when a product is re-exported ftom le low price comas lo one with a higher price. With other products, this acbitvage tends lo exualise prices, but this need not happen when pri are regulaled as in prescription pharmaceutical Sec Darzon (1998), Jerny (2002) and Narzin: (2003). po A 11. Parallel trade of prescription medicins : Mo Glaxo Dual Pricing case notably the UK. Chus, while not explicily prohibiting parallel trade, the practice had the efect of reducing the incentives for wholesalers to re-export. The EU goal of market integration as an overriding policy consideration has led the European Commission to treat the prevention or limitation of parallel trade as a hard-core restriction which has frequently attracted heavy fines, irrespective of the products and the regulatory environment in question. Until recently, (his approach has been generally supported by the Community Courts* Moreover, until recently, neither the Commission nor ihe Community Courts appear to have been willing to consider the specific economic issues saised by parallel trade in industries such as the pharmacen- tical sector. As a result parallel trade in prescription medicines has been protected and, indeed, encouraged under the Commission's administrative practice and the European Courts' jurisprudence relating to both the free movement of goods” and the competition rules.S Prior to the Glaxo Dual Pricing case” some cracks had already begun to appear — in the form of dicta in the Bayer Adalat case, which questioned both the efficacy and the legitimacy of the Commissior's use of parallel trade to achieve a single market for pharmaceutical products and more pronuuncedly ? “Uhe goal of market integration has uniquely high profle 1 ES: competition policy. The EC Treaty, ln ts Hirst substantive clauso (Article 2), sets vut lhe goal of a “common marke' and Article 3 sets out the activities nccessary to attaia this, including the (fue movement of goods, persons, services and capital. Article 4 incorporates the principle ofan open market economy with free competition”. The Community Cousis normally intorprot all other articles in the Treaty, including Article 81 and Article 82, ía a teleological way. which is to say in the context of the overall goals of the Treaty * See, most recenly, (: 267-268/95 Merck y Primecronn 11996] F.C.R, 1-6285; [1997] 1 C.M.LR. 83. la Primecrawa the Court did acknowledge that the imposicion of price controls was a factor hat may in certala conditions distort trado between Member States but then went on Lo observe that it is well serted that distortions cuused by differcnl price legislations iu u Member State must be remedied by measures Luken by the Community anthorities und nat the adoption by another Member Slate of measures incompasble with the rules on free movement”. See para, 47. * See, for examplo, NVIAZ Internotional Belgium y Conmníssion, Joined Casos 96-102, 104-105, 108, 110/ 82 [1983] ECR 3369, at paras. 24, 25 und 27, and Sondoz y Commission Case 277/87 [1990 ECR 1-48, where the Court of First Instance upheld the Commission's decision (Decision 87/409/15C in Case IV? 31,741 [1987] 0.J.1.222 10,8, p. 28) prohibiting a company's practice (hu displayed the words "export prohibited' on its salos invoices, More recently, in Volkswagen y Commission, Caso 1-62/98 (2000] ECK 1-2707 (see paras, 89 and 178), be Court of First Instance uplcld the Commission”: disision which had «lassificd various measures maling parallel imports more difficult (vithvut excluding them altogether) as restrictions 'by object” Caso IV/36:9574T3 Gluxo Wellcome (notification), 1VJ 36.997/E3 Aseprajar and Pedijar (complaint), EN7 37.121/3 Span Phorma (complaint), IV/37.138:F3 BA! (complaint), EY137.380/F3 EARLC (complaiat) 2001] 04. £302:1 Case TAL/%6 Bayer y Comníscion [2000] ECR 11-3383 and €: 2-3/01 P Bundesverbanil der Arcncimitel» Inporteure eV y Commission [2004] O.]. €: 59/02, “Dicta! refers to parts ot a judicial opinion that either extend beyond the facts of the case in hand or arc rt necessary to resulve the legal issue before The court and therefore carry less authority in terms of preceden. ao Cases in European Competition Policy: The Economic Analysis in the Advocate General's opinion in the Sifait case, which went further in arguing both that pharmaceutical companies had a legilimate interest in impeding parallel trade and that parallel trade might not be welfare enhancing? Section 2 sets out the essential details ofthe cas . Section 3 provides a legal ses and section 4 concludes. and economic analysis of the issues il ra ono 2. The Glaxo Dual Pricing case 2.1 Glaxo-Wellcome's Spanish pricing agreement On 6 March 1998, prior to the Adalat judgment, GlaxoSmithKline Beecham's (GSK) predecesor, Glaxo Wellcome plc (GW), notified its general sales conditions for Spain to the European Commission, in a request for a negative clearance declaring Arlicle 81(1) inaplicable and, in the alternative, an exemplion under Article 81(3).*” These conditions, which applied to eighty- two medicines intended for sale to Spanish wholesalers, established two different price lists: Clause 4a prices applicd to medicines to be resold for consumption in Spain pursuant lo (he Spanish reimbursement scheme and at the prices set by the Spanish government under Spanish law!! in Spain, whereas Clause 4b prices were to apply for products that were sold outside of Spain and which, therefore, were not covered by the relevant Spanish price legislation. The Clause 4b products were priced at the prices that GW had requested in its original application for marketing authorisation in Spain (but which the Spanish authorities had determined should be reduced). The GW notification was conceived of and brought as a test case designed to contest the economic analysis (or lack thereof) underlying the Commission's long-standing commitment to protecting parallel trade in pre- scription medicines as a means of furthering the single market. GW argued * Case 053/03 SIEAIT y GlaxoSmithKline AEBE and GlaxoSmitiKline ple 12003; O.). € 101/18, An Adtocale Greneral's reporl provids an inftuential independent opinion for EC) judges but is uct binding 00 mem. * Negative cleararce would be o siatementby the Commission (al, having examined the facts, it found no gruunds lv take uction:; andl esemption would be finding Uat the practice was good for consumers, for example because it results in more rapid techutical progress and such beneñts are expected to outwelgh any negative effect of higher price Ylic mento vsholesale price ol medicines reimburscd by the Spanish siekness insurance scheme is determined Ds the Spanish Ministry af Health and Consamplion and the Comisión Juterministeria! de Precios de los Medicamentos (Interministerial Commission an the Prices of Medicine). See Spanistt 25;1990 and Royal Decree 271/1990. aa 11, Parallel trade of prescription medicines: the Glaxo Dual Pricing case in its notification that Article 81(1) did not apply because, inter alía, the pricing system was intended only to eliminate a distortion caused by incon- sistent Member Stale price regulation. In ils request for cxemption under Article 81(3), GW furthermore argued that the Commission's policy of encouraging parallel trade in prescription medicines harmed rather than protected consumer welfare, thus challenging on economic grounds the foundations of the Commission's approach to parallel trade and market inlegration, In support of its arguments, GW introduced two economic studies, one on the need for a new approach to parallel imports and the other on the adverse efíects of parallel imports on consumer welfare. An additional study relining these two initial studies was introduced during the course ofthe Commissior's proceeding.? 2.2 The Commissiors decision Not surprisingly, the Commission did not evidence any willingness to aban- don its traditional approach condemning interference with parallel trade as inconsistent with the single market. Thus in its Decision issued dated 8 May 2001, the Commission found that Article 81 applicd to the notified sales conditions and held that they did not merit exemption. The Commission's analy s under Article 81(1) was largely based on its determination, supported by its prior administrative practice and Court case law, that the notified sales conditions constitutcd a prohibited restriction hy object.** Because Clause 4 had much the same effect as an export ban ora prohibited dual pricing system, the Commission stated that there was no necd to examine its anticompetitive eflects nor, in principle, could it qualify lor exemption.!* The Decision did, however, summary conclude in an analysis limited to a single paragraph that the Clause 4b prices also had the effect of restricting competition because they made parallel trade “economically uninter sting' for a significant number of products covered by the notified agreement. In refusing the esemption under Article 81(3), the Commission applied a rather summary analysis based ín part on its doubts that a system that was Y "Pharmaceutical Pricing da Me EU - Á Note in Response to the Furopean Commissior's Statement bl Objections conceraing Gilaxo Wellcame's Spanish Pricing Agrecmunts' hy Frontier Fconomios; “The Yfeces of Parallel Imports un Social Welfare 1: Critique by Frontier Economics; "Lhe Réfecis of Parallel Imports on Social Welfare UL Critiquo' dy P. Res Y Tn other words its Uhe direct intencion oh trade should bo impaized. 2% pecision at paras, 118, 119, 124 and 125. xcnt (and not just incidental efize) that parallet al Cases in European Competition Policy: The Economic Analysis Consequently, while it is accepted thal an agreemenl intended to limit parallel trade must in principle he considered to have as its object (he restriction of competition, thal applics onby in so far as the agreement may be presumed to deprive final consumers of those advantages. The Court therefore rejected the Commission's traditional, doctrinal stance that any measures restricting parallel trade must be automatically condemned as inímical to the single market. In effect, the Court replaced this per se approach with a rule of reason designed to examine the actual effects of parallel trade on consumer welfare in the relevant economic context?” Applying this rule of reason thus requires taking into consideration (he environment ín which the markct operates; in the case of prescription med- icines, this calls in particular for an analysis of the regulatory framework that contributes to shape the industry and determine the roles of the various actors. Article 81(1) In its notification and during the administrativo procedure before the Commission, GSK stressed the importance of the fact that pharmaceutical prices were regulated by the state and that the state was ultimately the “payer'2? The Court agreed with the relevance of the regulatory framework and noted: “At no poínt does the Commission examine the specific and essential characteristic of the sector which relates lo the fact that (he prices of the products in question, which are subject to control by the Member States, which fix them directly or indirectly at what they deem to be the appropriate level, are determined at structurally different levels in the Coramunity and, unlike the prices of other consumer goods, are in any event to a significant degree shielded from the free play of supply and demand.”* According Lo the Court, the existence of the regulatory framework means that “t cannot be presumed that a parallel trade has an impact on the prices charged to the final consumers of medicines reimbursed by the national sickness insurance scheme and this confers on them an appreciable advantage analogous to that which it would conter if those prices were determined by the play of supply and demand”. ** The Court again expressly referted to a consumer welfare standard when it further noted at para, 122 aut, given the legal and economic context ia which the notified agreement operated, itweas possible tal vweholesalers “may keep the aulvantage in tercas ul price which paralll trade may entail, in which case the advantage will no! be passed on to final consumers * la the sense that il is the taspayer,ralhicr han the patient, that pays for most of the price of prescription medicines. 3 Judgment at para. 133, al 11. Parallel trade ol prescription medicines: the Glaxu Dual Pricing case The Courts insistence on the need to take the regulatory framework into account does not introduce any new principle into Community law, which has long recognised that the application of competition rules must take into account the specilics of the sector concerned. However, this insistence had here significant novel consequences for assessing whetler a notified agree- ment conslitutes a restriction by object. While the Commission's finding that Clause 4b restricted competition by object was consistent with the approach adopted by both (he Commission and the Court in cases involving such products as automobiles and tennis balls, in this case the Court found that the Commissior's analyses could not be upheld since, prices being regulatod anyway, it could not be presumed that parallel trade necessarily translates into lower prices." Thus, the Court rejected an automatic per se, black-list approach for determining whether Clause 4 constituted a restriction by object and asked instead to assess the effects of the provision, given the specific regulatory environment shaping the market for prescription medicine. When assessing these effects, the Court however agreed with the Commission that the notified pricing measures did have the effect of restrict- ing competition and of reducing “the welfare of final consumers by preventing them from taking advantage, in the form of a reduction in prices and costs, of the participation by Spanish wholesalers in intrabrand competition on the markets of destination of the parallel trade originating in Spaiw'.P Incidentally, the Court departed from the Commissior's analysis in two dimensions. First, it considered that the relevant market might possibly be broader than argued by the Commission. Notíng that parallel traders are primarily driven by the arbitrage possibilities arising out of the difference between prices in countries of origin and destination, rather than by the therapeutic indication of the medicines, the Court concluded that it was not manifestly incorrect to accept lhat all the medicines reimbursed by the Spanish: sickness insurance scheme which are capable of being sold at a profit owing to the price differential between Spain and the Member State of * See Judgment at para. 147; "As the prices of the medicinos concerned are to a large extent shielded [roma ne frce play of supply and demand owing Lo the applicable regulations and are controlled by the public authoritics, it cano! be taken for granted at the oulsetthat paralle trade Lends to reduce those prices and thus to increase the welfare of final consumers, An anal; af the terms of Clause 4 of the General Sales Conditions does not permi the presumption thar that provision. which secks to limil parallel trade, thus tends to diminish the welfure of final consumers. ln this largoly unprecedented situation, ¡L cannot be inferred merely from a ressoning of the terms of Uat agreement, da ls context, that the agreement is restrictive of competition, and its therefore necessary tv consider the effects of the agreement if only to ascertain what the regulalory authority was able to apprehend on the basis of such reading" % Judganen al para. 182, Cases in European Competition Policy: The Economic Analysis destination constitute a product market?* Second, the Court determined that whilst il was incontestable that GSK imposed “uncqual conditions” on Spanish wholesalers depending on where they resold the products in question, tt had not been established that sales in Spain and sales outside of Spaín constituled “equivalent transactions' as would be required for the prohibition on discri- mination set forth in Article 81(1)(d) to apply % Article 81(3) In ¿ls request for exemption GSK had in essence argued that parallel trade harmed consumers by (1) interfering with efficient distribution by causing product shortages in source countries, in addition to delaying the initial introduction of innovative products in such countries, and (ii) interfering with governmental policy decisions as to the appropriate degree to which R£wD should be encouraged, thereby ultimately reducing prices and the level oERED in high-priced countries to the detriment of consumers in both high- and low-priced countries. This last a gument was supported by an empirical submission on how and why pharmaceutical RED is financed out ol the revenues and profits of pharmaceutical companies and a more theoretical analysis explaining why the dynamic pricing elfects of parallel trade would reduce overall consumer welfare (sec below). 2* In annulling the Commissior's refusal to grant an exemption, the Court noted that it was applying lhe appropriate standard of judicial review in cases involvinga complex economic assessment. Consistent with this approach, the Court stated that it would not substilute its own economic assessment for that of the Commission but, rather, would limit its analysis to assessing whether the facts have been accurately stated, whether there has been any manifest error of appraisal and whether the legal consequences deduced from those facts were accurate.” Applying this test the Court neverthelcss came to the view that the factual arguments and evidence submitted by GSK in support of its claim for an Judgment al para. 159, See Judgment al paras. 176 17%, In particular, the Court recalled tal Commnaniry law docs not prevent +ven a dominant fiin (tom charging different prices ia different Member States when this is justified by variationsin conditions of marketingund the intensity of hc competition in the different Member States andconchuded thaLit could nor rule out that “GSK applies difieren prices because ditlcrent markets exist ind mot so that different markets will exis See P. Roy, "Addendum to the note on “The Adverse EiTecis of Parallel Unports vu Consumer Wellare”, vwhrich builds on (he previous nole and on a more formal analysis, “The Impact of Parallel Imports on Prescription Medicines'. múmeo (2403), University of Toulousa, 7 Judgment at para. 241. a 11. Parallel trade ol prescription medicines; the Glaxo Dial Pricing case exemption appeared 'to be relevant and credible, having regard to their content ... which is itself corroborated on a number of significant aspects by documents originating with the Commission'.** In particular, the Court cites the Commission in its own Communication on parallel trade in the pharma- ceutical industry"? and notes that in this Communication the Commission had itself concluded inter alía that: e the pharmaceutical industry is characterised by intense competition in RS; * the pharmaceutical industry mainly relies on its own profits to finance its investments in R£D: the European pharmaceutical industry has been declining in competitive- ness as a result of higher profitability in (he US; Member States differ significantly as to per capita income and wealth and health care systems, with a positive link between healthcare expenditure and income; important differences in Member State prices are traceable to governmental price controls; itwould be extremely difficult to establish a single price for the Community as low prices which might benefit immediate healthcare budgetary objec- tives would provoke a steady diminution of R8—D investment, whereas high prices would reduce access to consumers and payers in those countries where high prices could not be afforded; and pharmaceutical companies charge different prices to take account of the different ability to pay. Given the credibility of these arguments and evidence that in the pharma- ceutical sector the transfer of wealth from producers to intermediaries as a result of parallel trade “does not bring any significant added value to the final consumer”, the Court concluded that the Commission's decision rejecting the request for exemption was vitiated by a failure to carry out a proper examination ... because ... it did not validly take into account all the factual arguments and the evidence pertinently submitted by GSK, did not refute certain of those arguments even though they were sufficiently relevant and substantiated to require a response, and did not substantiate to the requisito legal standard its conclusions ... that GSK had failed to prove that ... parallel %% fudgment at para. 263. —** Sec COM (1998) 588 final. 1% See Judgmentar para, 26d, To be sure, the Court wamed thacit did not mean that GSICs factual arguments were therefore “necessarily well founded” or provided a complete and definitivo picture ol tho Coramissiax's position, but it did note that the Communication corroborated part of GSKs arguments aul the economic analyses ithad subraited, thus arrest Lo theñr reliability and credibilty (ce para. 265) BALI] cases in zuropean Competition Poficy: The Economic Analysis of numerous markets and show thai under price uniformity the firm has indeed an incentive to withdraw from many markets when demand varies substantially across them, Even when some customers benefit from the imposition of uniform Prices, assessing the value of price uniformity for consumers is nota straightforward exercise and requires the assessment of trade-offs between the loss customers and the benefits to othe, ss for some “Two difficulties arisc here. First, one has to define the principles used to achieve this trade-ofí. Second, one has to evaluate the trade-off in each particular instance, since otherwise ambiguity prevails: for example, focusing on total consumer surplus, there is no general prediction as to whether this aggregate surplus increases or decreases with uniform prices, so that a specific investigation ís required. Furthermore, merely adding up consumer surplus across countries ignores distributional concerns, For example, an equity concern might lead us to place a higher weight on the poorest countries, which are likely to be the ones where prices would be lowest in the absence of non-discriminatory rules. Thus, equity concerns would lead to a greater weight being pla ed on precisely those consumers who, being poorer, benefit most from non-uniform prices, As a result, equity concerns would make price diversity more desirable, This is particularly true when imposing uniform prices would lead firms to withdraw precisely from the poorest countries. Non-price factors including RE(D incentives The foregoing analysis focused on prices, but consumers are often interested ín other aspects such as quality, services, innovation and so forth, and different consumers may have different preferences over these other factors, For example, sorne consumers may be willing to pay more in exchange for higher quality, while other consumers may prefer a low-price, low-qualiy product. Similarly, some consumers may be willing to trade off higher prices against higher levels of RSD and the corresponding promise of better pro- ducts for the future, If irms can charge different prices for different qualities, the previous price analysis still apphes. However, if some dimensions of quality or services related to the product are difíicult to identify in practice, then an additional concern aríses, since imposing uniformity on prices may de facto impose some unilormity on other dimensions (such as quality) as well. For pharmaceutical products, for example, R£-D is a key factor and some governments appcar willing to accept higher prices in order to give higher incentives for RD, so as to improve the development of new drugs o the extent thal the governments cannot directly compensate pharmaceutical eo 11. Parallel trade of prescription medicines: the Glaxo Dual Pricing case companies for the additional RED ellorts that they may require (and indeed such compensations are subject to serious limitations), imposing uniform prices also imposes a uniformity ofincentives to R$D and may thus generate inefficiencies and adverse effects on consumer surplus. Indeed, in each country, national health authorities face a trade-off between budget concerns, which calls for setting low reimbursement prices, and the development of new treatments that will contribute to improve health condi- tíons in the future, which calls for accepting higher prices. When analysing this trade-o(f, cach government takes into consideration ihe specific economic and political environments it faces, as well as its own policy prioritics; as a result, different countries are likely to adopt different solutions to this trade-off, In this context, parallel trade amounts de facto to imposing the policy choices of the most price-oriented countries on the other countries, more prone to contribute to RED. This therefore imposes a restraint on the later countries, which tends to reduce overall (present and future) consumer welfare in these countries, but it also harms the former countries, which do not benefit as much as before from the olher countries” willingness to contribute to RED. ''herefore, the impact of parallel trade in this particular context diflers significantly from the standard analysis for traditional marketed goods and services recalled above. In standard Contfexts, some consumers or consumer groups may lose while others may gain, since parallel trade would induce firms to adopt more uniform prices al some intermedíate level in the range that would otherwise prevail, thus resulting in Tower prices in some countries but higher prices in other countries. Here in contrast, parallel trade adversely affects all countries, by restricting the policy choices of those that would be most willing to contribute to R£—D. Thus, the specificity of the regulatory environment in which the market for prescription medicines operates may call for a significant departure from the traditional altitude towards parallel trade. This argument was presented by GSK in the proceedings but did not rece much altention by the Coromission, which disputed any significant link between prices and RED efforts, The Court of First Instance was, however, more receptive and while it noted that the empirical relevance remained to be assessed, it considered that the Commission had the duty to review carcfulty the economic evidence produced to sustaín the argument, One may wonder whether these considerations are not also relevant for the application of Article 81(1) as well as Article 81(3) at least to (he extent that it can be argued that an inherenlly pro-competitive agreement should not be deemed to be restrictive in the first place. However, at the very least, the Court made clear that the Commission could not ignore, for the sake of overriding principles, A Se Cases in European Competition Policy: The Economic Analysis the economic facts and reasoning presented before it. Instead, it must assess the impact of pricing practices in the light of the economic reality of the markets concerned. 4. Conciuding remarks Mergers “This case is interesting for several reasons. The Commís sion and the European Courts have a long history of protecting if not promoting parallel trade as a an tool lor market integration. his led to a per se approach, with the result at Introduction o any restriction on parallel imports was automatically blacklisted as a restric- tion by object, unlikely ever to be exempted from legal prohibition under Artide 81(3)7 The Commission stuck to that approach in (his particular instance, and its decision provides only a rather cursory review of the eco- nomic context af case, In contrast, the Court of First Instance departed from the per se approach, It placed consumers, rather than any other overriding principle, at the centre of the objectives of competition rules; thus, any application of these competition rules must be driven by the impact on consumers of the practices under review. Given the specificity of the markets for prescription medicines, where the “customers”, ¡.e. (he national govern- ments, directly or indirectly regulate the prices they are willing to pay, the Court then considered that it could not be presumed that restricting parallel imports impeded competition in a way that would harm consumers. In legal terms; it did not constitute a restriction by object, since prices were anyway regulated. And while the CH followed the Commission's decision in deciding that GSK's provisions had a restrictive effect on competition, it also criticised the Commission's lack of analysis of the economic reality of the markets, as well as the lack of attention paid to the economic facts and reasoning presented by the parties. Although the Court emphasised that its judgment was nol to be interpreted as a general openness towards restrictions on parallel trade, it did challenge the automatic approach that was prevailing until then. lt pushed instead for a consideration of the actual economic effects of the provisions on consumers. We now await the position of the Court of Justice. * Ta particalar. parallel imports restrictions is one of the two provisions (tngerher with sesale price maintenance) that rermained blacklisted in Uhc guidelines on vertical restraints that the Comunission adopted, following the revicw ol its application of Article 81 to vertical agreements Virms propose mergers for many different reasons. For horizontal mergers they may be buying technology or customers in anticipation of synergies or economies of scale. For vertical mergers they may see advantages in coordi- nating activities and reducing transaction e .. For conglomerate mergers, they may expect economies of scope, perhaps in marketing a product range. Where technologies are evolving fast and in difficult-to-anticipate directions, they may even view mergers as an insurance policy or a way to experiment with new ideas. All these can be claimed as efficiency motives, Mergers are also a way to change corporate control. The threat of takcover ís a discipline against an ineffective management team. The threat does not always work and some mergers arc proposed by managers seeking personal aggrandise- ment at the expense of shareholders. Other mergers are a way for a famity firm to capitalise on its wealth creation when there is no natural successor. Á Further motive, of course, is the pursuit of market power. Competition policy is important even if this is not the object of the merger — efficiency or corporate control motives may still result in mergers that have the effect of impeding competition.' "the EC Merger Regulation (ECMR) was first implemented in 1990. The original tesl lor a merger was that it would not be allowed if it created or strengthened a dominant position. Notice that it ts not the current level of competition that needs to be assessed, but the change in competition that This is not a concern far Empiricall, ve find that muny mergors Lurn oul to disappoint shareholder competition policy, Systematicalis poor selection ul mergers by senior managers would suggest hal corporate governance needs reform. Itis not the role oía competition authority lo actas y management consultancy, More relevant lor competition policy is that firms often have no clear idea of spe síficiencies they are hoping to uchieve und are rar achieved * See Lyuns (2008) fur an economic assessment of EG merger control. y uble Lo provide reasonable evidence lhal they will be