The European Union’s draft Merger Guidelines assign multiple meanings to several key terms, making competition enforcement less predictable. Anouk van der Veer, Max van Iersel, and Giorgio Monti explore the Guideline’s inconsistent use of three of these terms: competitiveness, dynamic, and capabilities.
This article is part of a symposium on the European Commission’s draft Guidelines on the assessment of mergers under Council Regulation. The new merger guidelines mark their first systemic update since their first release in two parts in 2004 and 2008. You can read the rest of the contributions to the symposium as we publish them here. We encourage responses to our symposium, which can be submitted to promarket@chicagobooth.edu.
Merger guidelines should make the European Commission’s enforcement of the European Merger Regulation (EUMR) more certain and predictable for businesses. However, the new but inconsistent vocabulary of the draft Merger Guidelines might run counter to this purpose. Too often, terms like “competitiveness,” “dynamic,” and “capabilities” carry multiple overlapping but conflicting meanings. We develop the beginning of a glossary to accompany the new Guidelines, showing the multiple meanings assigned to these three terms, though they are not the only ones. To reduce uncertainty over what the Guidelines intend, we propose more consistent definitions.
Competitiveness inception
The Commission has always welcomed mergers that are “capable of increasing the competitiveness of European industry” (EUMR, Recital 4). The draft Guidelines inherit the vague reference and compound it: competitiveness appears in three seemingly distinct meanings. The differences concern whose competitiveness is at stake.
i. The first meaning regards the European Union’s ability to compete globally, appearing in references to “the competitiveness of the EU industry” (section 13) and “European competitiveness” (section 15);
ii. The second meaning regards a firm’s ability to compete. The Guidelines state that “[m]ergers may enhance competitiveness and growth” and list the benefits mergers can deliver to strengthen firms’ ability to compete (section 2, 18, 91);
iii. The third meaning refers to the level of competition within the EU. By protecting competition, EU merger control supports “the competitiveness […] of the internal market” (section 9).
The first two meanings are related but distinct. Both concern an ability to compete: the EU’s and the firm’s. They also cannot be separated entirely, as strengthening a firm’s ability to compete globally may also advance the competitiveness of the EU. Nevertheless, they refer to different concepts, because a firm’s competitive position can be strengthened (for example, by acquiring key innovation inputs) without necessarily strengthening the competitiveness of the EU. The Commission acknowledges this distinction in section 11 by treating firm-level “growth and scaling-up […] to compete in global markets” as distinct from its effect “on the EU economy and its competitiveness.”
By contrast, the third meaning appears to be nested within the first. Protecting competition—by preventing further consolidation of leading players and keeping markets open—is phrased in section 9 as a mechanism to strengthen the competitiveness of the EU. Mergers that weaken intra-EU competition can thus undermine the EU’s competitiveness and give rise to a “significant impediment to effective competition” (SIEC).
When competitiveness is invoked, it is unclear what the merger is being assessed against. There is also a policy tension: the first two concepts speak in favor of a permissive merger policy in the name of strengthening the EU or the firm, while the latter reflects the more conventional EU approach that competitiveness is achieved through open markets with free competition.
The ambiguity is best resolved through precision: competitiveness should be reserved for the capacity of the EU economy to compete globally; the ability to compete for individual firm contexts; and competition for market structure within the internal market.
Dynamic is everything, everywhere, all at once
The term “dynamic” appears prominently throughout the draft Guidelines—in the assessment of market power, anticompetitive effects, and merger benefits—reflecting the Commission’s response to calls for a more dynamic merger control. However, no clear meaning is attached to it.
To get a taste of what dynamic appears not to be, consider how the Commission pairs it with other terms. For instance, the Commission highlights that the merger assessment “should consider dynamic aspects and long-term impact,” implying that dynamic aspects differ from longer-term impact (section 10). Elsewhere, the Commission commits to taking “a forward-looking and dynamic view of competition,” suggesting that dynamic differs from forward-looking (section 53). Conversely, dynamic seems to have three meanings.
i. The first is change and is used to describe markets in which a merger occurs, for example, in “dynamic settings” (section 58), or in “highly dynamic or volatile markets” (section 64(c)). These competitive environments are undergoing change—in market shares, or more broadly, due to nascency, fast growth, or short innovation cycles—significant enough to warrant a different analytical approach to identify competition risks.
ii. The second is future and appears as an analytical approach in merger review. A “dynamic perspective” to a “firm’s competitive strengths and weaknesses” refers to a firm’s future (dynamic) competitive potential rather than its current position (section 80). This is operationalized through an analysis of, for example, expenditure on research and development, track record, and, notably, the acquisition price of the target (sections 80-83). A comparison of section 177 with section 121 suggests that the dynamic competitive potential is even a synonym for market position. Likewise, “dynamic” in foreclosure theories of harm reverts to the future: “dynamic gains by securing future sales” (section 225), and dynamic incentives arise not from immediate gains “but to strengthen, entrench or extend its [merged entity] market power over time” (section 239). This analytical approach thus enables intervention based on projected competitive relevance and harm, even when the current market power of the merged entity is limited.
iii. The third is forms of non-price competition as the object of the merger assessment. The “dynamic competitive interaction”—an element of the theory of harm assessment—refers to present competitive constraints in investment or innovation competition (section 173, 176(b), and footnote 259). Similarly, “dynamic efficiencies” concern increases in the abilities and incentives to invest or innovate (section 296). The taxonomy of efficiencies mirrors the direct/dynamic distinction between the impact on price and on non-price competition (sections 302 and 325).
The Commission occasionally uses more than one meaning at the same time. Dynamic merger effects refer to the impact on abilities and incentives to invest and innovate, and on future product market competition (section 115). Are these effects dynamic because of their impact on non-price competition or because of their impact on future product market competition? The meaning matters because they point to different assessments: one asks whether the merger harms non-price competition today; the other asks whether it harms future product market competition. Similarly, the “dynamic competitive process” captures (or conflates) both innovation (non-price) competition(theory of harm based on discontinuation of R&D projects or existing products) and futureproduct market competition (theory of harm based on reduced future price competition) (sections 180 and 186).
Finally, there are instances where dynamic is an unnecessary adjective. Take “dynamic entry or expansion” (section A.4.1). Does it mean future, innovation-driven, or does it introduce a new meaning of potential entry? And is entry not, by definition, dynamic? What do “dynamic quality efficiencies” (section 337) and “dynamic price effects” (section 345) mean? As Joseph Schumpeter, who abandoned the term precisely because “it so easily leads us astray because of the associations which attach themselves to its various meanings,” argued: “[b]etter, then, to say simply what we mean.”
We suggest that the term “dynamic” should be limited to refer to an analytical approach that captures ongoing competitive change through a forward-looking analysis, as opposed to a static assessment based on current market conditions.
The capability, the incentive, and the assessment
The Guidelines use the term capability consistently to denote a firm’s ability to perform a given action or function effectively. Sometimes, capability concerns the ability to perform a task, such as investing, innovating, or producing a good. On other occasions, capability appears to concern the ability to influence a competitive process or outcome, though as section 327 makes clear, that question belongs to the assessment of dynamic competitive potential rather than to the capability concepts themselves. The clearest textual support for confining capability to a firm’s capabilities to mean the ability to perform a given action or function is section 327, where the Guidelines equate the ability to invest or innovate with the existence of the economic and technical resources required for those activities.
An analysis of capability operates within the assessment of a firm’s position in the competitive process and, in that context, capability serves two functions. The first is the theory of harm and market power assessments: the question is whether the target holds specific capabilities that make the acquisition competitively significant, and whether sufficiently capable rivals remain to constrain the merged entity post-merger. The second is the assessment of the innovation shield and efficiencies: capability combinations between the merging parties may generate efficiencies, and an acquisition of an innovative firm may only benefit from the innovation shield where enough capable rivals remain.
More granularly, the draft Guidelines identify four types of capabilities.
Innovation capabilities concern the inputs a firm deploys in its innovative activity. The definition encompasses what the Guidelines describe as “capabilities stricto sensu” (in the strict sense), such as know-how and intellectual property, and supporting innovation/R&D resources such as laboratory infrastructure, skilled personnel, and natural resources (footnote 265). The Guidelines use R&D capabilities interchangeably with innovation capabilities across sections 192(d), 201, 204, 329 and 332. The definition thus confines the firm’s current stock of innovation-relevant assets as a proxy for its ability to pursue innovation.
The remaining capability concepts follow the ability to perform a task reading without a formal definition, and their usage in context confirms it. Technological, production, and supply capabilitiesconcern the ability to perform an action effectively, whether by reference to access to superior technologies or to the resources and capacity to produce or supply a given good (sections 9, 81, and 133). Unqualified references to capabilities carry the same meaning: section 140 refers to capabilities held by a firm that are demanded or valued by customers, and the accompanying footnote, citing Commission decisional practice, confirms that capabilities in such contexts relate to the ability to perform a particular service or task well. The same reading governs section 302, where the complementarity of capabilities may improve a firm’s ability to produce or distribute more efficiently.
Investment capabilities, mentioned only twice in the draft Guidelines, follow the ability to perform a task meaning in the main text: the Commission evaluates the dynamic competitive potential of remaining competitors by reference to their ability to commit capital and resources at a level sufficient to constrain the merged entity, consistent with the treatment of investment capabilities in the Commission’s decisional practice (Air Liquide/BOC, section 118; Intel/Altera, section 130). The Guidelines support this reading in both substantive passages: Section 81 treats investment capabilities as an element bearing on competitive strength, and section 171 applies the same notion to the assessment of likely post-merger rivalry. However, footnote 142 departs from this by indicating that investment capabilities extend beyond the ability to invest to encompass the incentive to do so. This seems to be a drafting error. Under the Guidelines’ own framework, the incentive to invest is a feature of dynamic competitive potential, not of investment capabilities, which concern only the ability to commit capital.
The Guidelines assign dynamic capabilities two different roles, and the meaning of the term shifts accordingly. In its first role, dynamic capabilities are one factor among several that together make up a firm’s dynamic competitive potential, alongside innovation and investment capabilities. The Guidelines operationalize the concept by reference to a firm’s business model and whether it is structured to facilitate growth, treating these conditions as grounding both the ability to innovate and the incentive to do so. This is close to the use of dynamic capabilities in the strategic management literature, where the term denotes a firm’s capacity to reconfigure its assets and ordinary capabilities in response to competitive change; a capacity to adapt rather than simply a disposition to grow (sections 81-83 and footnote 146). The operationalization sits within the broader assessment of dynamic competitive potential, which lists innovation and investment-related factors that correspond to what the Guidelines elsewhere call innovation capabilities and investment capabilities, without using those terms (sections 54, 81 and 169). On this reading, dynamic competitive potential reflects a firm’s dynamic capabilities combined with its investment and innovation capabilities: its potential to grow is a function of its ability to deploy its resources to innovate or invest effectively.
In the second role, the Guidelines seem to use dynamic capabilities as a label for dynamic competitive potential itself, treating the concept as the assessment’s output rather than one of its inputs. This reading is apparent at section 64(b), where the concept refers to a firm’s capacity to shape the competitive process through investment, expansion, or innovation across existing and future product markets, assessed prospectively rather than by reference to current market shares. The same paragraph introduces static capabilities as a counterpart, concerning a firm’s ability to influence competition on the basis of its current market position. The distinction is intuitive, but it adds little: both concepts describe a firm’s ability to influence competition, differing only in whether that ability is assessed by reference to its current market position or its prospective one.
These two meanings are incompatible. On the first, dynamic capabilities are one input among several into the section 81 assessment of dynamic competitive potential; on the second, the term is a label for that assessment itself, contrasted with static capabilities as the corresponding label for assessment by reference to current market position. The Guidelines do not indicate which reading governs, nor do they acknowledge the tension. The same problem appears in respect of investment capabilities, where footnote 142 imports an incentive dimension into a concept that the Guidelines otherwise treat as concerning ability alone. In both cases, the Guidelines use capability vocabulary to do work that the ordinary meaning of capability cannot support: in the investment-capabilities case, incorporating incentive; in the dynamic-capabilities case, standing in for the broader prospective assessment.
A narrower reading is preferable: a capability is the ability to perform a given action or function effectively, assessed by reference to the resources available to perform it. Innovation capabilities, the only concept the Guidelines formally define, support this reading, characterising a firm’s capability by reference to the inputs deployed in its innovative activity rather than by reference to incentives or prospective competitive potential.
Do guidelines need a glossary?
In coming up with Draft Guidelines, the impact of economic literature is evident, and when using academic insights into policy, one necessarily translates them into legalese. The risk of this, as we have indicated here, is that words are used with less consistency than expected. A glossary as a means to tidy-up of terminology may be a useful accompaniment to the Guidelines.
Author disclosures: Giorgio Monti is a research fellow at the Center for Regulation in Europe (CERRE). He has received funding from Vodafone to research merger control. Findings are published at: Horizontal Mergers – Refining the Commission’s Assessment Standards TILEC Discussion Paper No. 2023-11. Anouk van der Veer and Max van Iersel have nothing to disclose. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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