EC merger policy raises two important issues in institutional design. First, which level of government should have the power to regulate mergers? Second, what institutional structures and mechanisms are needed to implement policy?

The subsidiarity principle should answer the first question. The Merger Regulation, which came into force in 1990, stipulates that mergers and acquisitions between parties whose combined global worldwide turnover exceeds ECU 5bn annually should be notified to the European Commission, unless the parties conduct two-thirds or more of their business in a single member state. This rider is a correct application of subsidiarity - centralization depends upon the spillovers between member states - since it exempts from EC jurisdiction mergers whose impact is concentrated in only one member state.

Why should merger control be centralized, rather than coordinated among member states? Cooperation would not work. The implementation of merger policy is highly discretionary: a member state could not monitor well whether its eleven fellow members were implementing the agreed merger policy. In this case, centralization makes sense. In contrast, the EC and EFTA competition authorities should cooperate, not centralize: it is easier to monitor one partner than eleven.

A centralized institution may be more efficient, but it may also be prone to regulatory capture, since it tends to be less accountable to the electorates of the individual member states. Our study of the operation of the Merger Regulation examined whether centralization had favoured regulatory capture. We concluded that the procedure implemented by the Commission, though speedy and efficient administratively, is unnecessarily unsystematic and lacks transparency. In contentious cases, the investigative part of a merger inquiry may be influenced by the need to justify decisions which are reached on other grounds, perhaps political pressure. This makes regulatorycapture more likely, since it gives well-informed firms significant bargaining power in their dealings with the Commission, and there is consequently more toleration of market power than is consistent with the Regulation. Our survey of firms involved in merger cases before the Commission highlighted how companies mobilized pressure in support of their case, while other affected parties (such as consumers) had less influence. Firms communicated a high level of satisfaction with the procedure, especially the German firms, for which the alternative to an EC investigation would have been one by the German Federal Cartel Office.

Reforms now should diminish the risk of capture, increase the transparency of the system and strengthen the influence of consumers. The investigation and the decision phases of a merger inquiry should be separated, and the investigation conducted by a body independent of the rest of the European Commission. The Merger Task Force could then carry out its inquiries independently, free of pressure to justify decisions already taken; the Commission could signal more credibly its unwillingness to be influenced by those with the loudest voices and the most influential friends. And those
outside the Commission could see more clearly the process by which decisions are reached and judge whether merger policy is striking a balance among the interests of all affected parties.

Should merger policy be based only on competition-based criteria, or should it also take into account broader considerations of industrial policy? The present Merger Regulation appears to rule out efficiency arguments (such as scale economies) that may sometimes justify mergers which reduce competition; but there is an obvious danger that undesirable mergers will be rubber-stamped on the basis of spurious claims about efficiency gains. Nevertheless, our research showed that under the present Regulation some individual investigations are influenced by efficiency. In our view, these arguments should enter explicitly in the investigation, so that they can be systematically analysed. An `efficiency defence', if based on a proper audit mechanism, would be a valuable part of the Merger Regulation.

Neven is Professor of Economics at the Universit_‚" de Lausanne and co-director of the Industrial Organization programme at CEPR. He is also Assistant Editor of Economic Policy.

Seabright is Fellow and Director of Studies in Economics at Churchill College, Cambridge, a Research Fellow in CEPR's Industrial Organization programme and Assistant Editor of Economic Policy.

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