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An Unsuccessful Merger

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On August 99’, Volvo tried an agreement with Invest AB with the purpose of acquiring Scania.

After a first stage was developed by the Commission in order to assess the outcomes of such merger, authorities decided to follow up with a second phase, since there were numerous concerns related to the compatibility with the rules of the Merger Regulation.

In the end, the Commission Decision did not allow such an acquisition. It is important to understand that the determination of the relevant product and geographic market placed a crucial role on this decision.

Volvo and Scania enjoyed at that time the two largest market shares of trucks and buses in the Nordic market. Hence, a possible merger between these two companies would create the largest truck company in Europe. While this merger’s share was about 30% in the Western European market, in the Nordic ones it would be about 66%. Particularly, in Sweden, 90% of market share would likely occur.

Volvo basically relied on a series of non-price factor to support the argument that the relevant geographic markets were the EEA countries. Nonetheless, the Commission objected this position by stating the following: demand price-elasticity and technical configurations differ among countries considerably; the selective and exclusive distribution system links ales with after-sales services. This point may be crucial since the Commission assumes that dealers may be induced to charge higher prices to foreign customers because of the importance of after-sales service’s profits. Yet, there are significant differences of market shares among countries.  

In essence, the Commission will prohibit a merger if it creates or strengthens a dominant position in a common market. Factors like market shares, barriers of entry and customer purchasing power were analyzed as well through this Competition Authority. The undertaken investigation was made in countries where effects would be more noticed by the public if the acquisition was to occur. The commission gave a very weight to market shares in assessing dominance. As a final point, it also assessed the likely market share of both the joint venture and the largest remaining competitor in all those countries. What’s more, the Commission found out indicators of relevant brand loyalty and of a dispersed customer structure. In summary, it was concluded that there was not enough public buying power to offset the increased market power of the merge. Moreover, the Controlling Commission argued that it would increase entry barriers in the market. After all, the Commission understood that the Volvo-Scania merger would most likely lead to an insufficient effective competition in these Nordic countries.

As we see, this case illustrates quite well the important of relevant market definitions in competition cases. Most people would be worse off with such a merger, meaning a decline of welfare for the society in this case.

 

Diogo Ribeiro

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Author: studentnovasbe

Master student in Nova Sbe

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