Patterns of abnormal returns and the competitive effects of horizontal mergers

This paper examines the abnormal stock returns of rivals of firms undertaking horizontal mergers that were challenged by the FTC over the period 1981–1987. At the time of merger announcements, the rivals earn positive abnormal return on average; at the time of the antitrust complaints, the rivals earn normal returns. Past studies have argued that this specific pattern of abnormal returns necessarily indicates that mergers could not have reduced competition. This paper finds that this pattern of abnormal returns is a result of the different effects of antitrust complaints on smaller and larger rivals. The evidence suggests that the mergers may have created efficiencies, but the pattern of abnormal returns is not inconsistent with mergers that may also have resulted in higher product prices.     

Analytical Screens for Electricity Mergers

Electricity mergers pose distinct challenges for competition policy. Electricity demand is highly inelastic in the short run, storage is limited, and transmission constraints limit the ability to substitute generation at other locations. As a result, a merger can affect prices in many different markets and even generators with small market shares may be able to exercise market power. The U.S. Federal Energy Regulatory Commission’s approach for screening horizontal mergers, based on the concentration thresholds in the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines, can fail to identify mergers that lessen competition, and mergers that fail the FERC screen may have no significant anticompetitive effect. We propose competitive residual demand (CRD) analysis, which examines the supply curves of the markets affected by a merger and considers the ability and incentive of firms to raise prices before and after a proposed merger. CRD analysis is a relatively easy way to address the incentives for generators to exercise market power and relies on data that are often available. Vertical (convergent) mergers between electricity and gas raise additional concerns, and we propose a methodology to screen vertical mergers.     

Does competition increase quality? Evidence from the US airline industry

This paper studies the impact of competition on quality provision in the US airline industry exploiting a novel source of exogenous variation in competition. While mergers among market incumbents may stifle competition, a merger may increase the probability of entry if the merging airlines were not operating prior to merger in the market but each of them had presence at different route endpoints. We find non-merging incumbent airlines increase their flight frequency upon entry threat and accommodate entry of the newly merged airline by lowering flight frequency upon entry. While non-merging incumbents reduced arrival delays only upon entry of the newly merged airline, we find that incumbents decrease their cancelation rates and departure delays both upon merger announcement and entry of the newly merged airline. Our evidence suggests an increase in competition may increase consumer surplus, because non-merging incumbents increase quality and convenience, while keeping their prices unchanged.     

Measuring market shares for the analysis of a consummated merger

This paper asks how market shares should be computed for analysis of a consummated merger. It is argued that pre-merger market shares adjusted for the direct effects of the merger should be used. The actual post merger market shares (which are available only for consummated mergers) should not form the basis of an analysis of the competitive effects of the merger because they may reflect confounding factors, such as entry, exit, or a change in capacity of third-party rivals, unrelated to the merger.     

Merger efficiency gains: Evidence from a large transport merger in france

Many industries are seeing an increase in concentration, leading to a discussion on the effectiveness of horizontal merger enforcement. The policy debate shows that one of the key arguments put forward when supporting potential mergers is the possibility of realization of merger efficiency gains, specifically in the transport industry. Yet, there exists little empirical evidence on the actual effects of realized mergers on cost efficiencies. We exploit a large and highly debated merger that took place in the French transport industry to evaluate whether a merger between two major transport groups may give rise to merger efficiency gains. We exploit the industry setting to employ a difference-in-differences methodology evaluating the effect of the merger on operating costs of merging transport groups. Our results show that, no matter the specification considered, we cannot conclude that the merger resulted in any merger specific efficiency gains for the merging parties. Our study relies on the use of several control groups and is robust to a great number of robustness checks as well as to the introduction of heterogeneous treatment effects, depending on the identity of the merging party, as well as the closeness of competition of local operators. Overall, our study contributes to a growing number of case studies undertaken by economists that can help determine whether horizontal merger policy is being properly enforced.     

Retail Mergers and Food Prices: Evidence from France

This paper analyzes the impact of a merger in the French supermarket industry on food prices. Using consumer panel data, we compare the changes in prices for merging and rival firms in affected and comparison markets. We use a novel definition of affected markets when some firms have a local pricing strategy and others a more centralized pricing strategy. We find that prices increase significantly following the merger, and that the merging firms lose market shares. For the rivals, the price increases are larger in local markets, in which concentration increased and differentiation changed after the merger.     

The impact of firm cost and market size asymmetries on national mergers in a three-country model

This paper studies the impact of firm cost and market size asymmetries on merger decisions. I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones.     

The determinants of merger waves: An international perspective

One of the most conspicuous features of mergers is that they come in waves that are correlated with increases in share prices and price/earnings ratios. We use a natural way to discriminate between pure stock market influences on firm decisions and other influences by examining merger patterns for both listed and unlisted firms. If “real” changes in the economy drive merger waves, as some neoclassical theories of mergers predict, both listed and unlisted firms should experience waves. We find significant differences between listed and unlisted firms as predicted by behavioral theories of merger waves.     

Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence From The Banking Industry

This study examines the price effects of recent US bank mergers that substantially increased local market concentration. Using the deposit interest rates that banks offer their customers as our price measure, we find that, over the 1991–94 time period, deposit rates offered by participants in substantial horizontal mergers and their local market rivals declined by a greater percentage than did deposit rates offered by banks not operating in markets in which such mergers took place. We interpret our results as evidence that these mergers led to increased market power.     

Decoupling market incumbency from organizational prehistory: Locating the real sources of competitive advantage in R&D for radical innovation

The creative destruction literature has argued that differences in R&D performance of incumbent vs. entrant firms can be explained through organizational change theories about established vs. de novo firms. A disconnect exists between these theories and the available empirical evidence because often the best performing firms are established firms as well. I propose to resolve this disconnect by distinguishing between market incumbency (presence in a market prior to a discontinuity) and organizational prehistory (organizational experience prior to a transition, whether between technologies or between markets). Doing so allows me to contrast incumbent vs. entrant and de alio vs. de novo studies, and to suggest more robust future research designs. I illustrate my proposition using qualitative data from the anticancer and AIDS‐treatment drug markets. Copyright © 2012 John Wiley & Sons, Ltd.     

Estimating Differential Dynamic Merger Effects on Market Structure and Entry in Related Markets

The U.S. and EU merger guidelines emphasize “ease of entry” arguments but little is known about the dynamic impact of realized mergers on market structure. This study provides insights on this topic with the use of detailed firm-level data on the memory chip market. Our estimation results provide evidence for differential merger effects on market structure. These effects depend on whether the mergers are dominated by market-power or efficiency gains. While efficiency-dominated mergers cause exit, market-power-dominated mergers attract entrants, and these effects are increasing over time. We also find that market-power mergers have a larger effect on entry than efficiency mergers have on exit. Our results show that mergers can reduce the number of potential entrants into related product markets and serve as an instrument to “reduce the likelihood of entry”.

     

YOU ARE ONE OF US NOW! HOW DO SHARE PRICES OF RIVALS REACT TO PRIVATIZATION?*

By using a unique data set from the Turkish cement industry, we analyze the impact of privatization on the market value of rival firms. Privatization increases efficiency, which is bad news for rivals. But if an incumbent buys a state owned firm, this leads to a higher market concentration which is good news for rivals. We show that privatization leads to overall positive abnormal returns for rivals because the concentration effect outweighs the efficiency effect. Consistent with our theory, this effect is reinforced when the initial market concentration is high.     

The use of stock market returns in antitrust analysis of mergers

One of the most promising recent innovations in merger analysis has been the attempt to predict the effects of horizontal mergers by examining the share prices of the rivals to the merging firms. In this paper we describe the standard procedure, discuss some of the major criticisms of that procedure, and propose a modification, apply it to a sample of recent mergers, contrast the results with those from the standard procedure, and discuss the appropriate uses and remaining limitations of the model for antitrust analysis.The views expressed in this paper reflect those of the authors and do not necessarily reflect those of their employer. We wish to thank the referees and Mary Streitwieser for helpful comments, and Becky Carr for excellent typing services.     

QUANTIFYING THE SCOPE FOR EFFICIENCY DEFENSE IN MERGER CONTROL: THE WERDEN‐FROEB‐INDEX*

This paper introduces the Werden‐Froeb Index (WFI) to assist in evaluating merger‐specific efficiencies in horizontal mergers. The index measures the weighted average reduction in marginal costs required to restore pre‐merger equilibrium prices and quantities after the (full or partial) merger is consummated. The WFI is well defined, objective and robust, and it has relatively low information requirements. We propose to use the index as a natural complement to concentration measures such as the Hirschmann‐Herfindahl Index in the assessment of horizontal mergers.     

THE ECONOMIC EFFECTS OF THE MARATHON‐ASHLAND JOINT VENTURE: THE IMPORTANCE OF INDUSTRY SUPPLY SHOCKS AND VERTICAL MARKET STRUCTURE*

This study measures the effects of the Marathon/Ashland Petroleum (MAP) joint venture on rack and retail reformulated (RFG) gasoline prices in the four cities where both firms sold RFG before the joint venture. MAP was an early transaction in the recent era of petroleum mergers and resulted in large regional increases in concentration. While wholesale (rack) prices increased in the two cities experiencing the largest change in market structure in the year following the transaction, retail prices did not increase. Our results also highlight the importance of identifying the marginal source of supply in correctly identifying merger effects.     

Strategic Complementarities in Bank Branching Decisions*

I study how complementarities between rival banks’ branching decisions impacts banking deregulation. I use an instrumental variables approach to separately identify a bank’s strategic response to rivals’ branching decisions from common market factors. The results indicate that some bank types are more likely to open additional branches if their rivals do. This has important implications for expansion and merger policies. These are explored using a model of consumer demand for bank services and bank branch network choices. I find that strategic complementarities in branching decisions augment the effects of a merger or expansion, leading many banking markets to become over-branched.     

Digging Deep to Compete: Vertical Integration,Product Market Competition and Prices

This article establishes a causal effect of product market competition on vertical integration. I exploit a hitherto unexplored natural experiment in the U.S. coal mining industry and a unique mine‐level organizational data set. Following an exogenous increase in product market competition, the incidence of vertical integration fell by 33% within the treatment group relative to the counterfactual. I find novel evidence that transition to the lower degree of vertical integration is driven by competition's reducing market prices by 32% which decreased the incentive to conduct vertical mergers. I discuss several possible interpretations of these changes.     

ENTRY DETERRENCE BY NON‐HORIZONTAL MERGER*

We study when and how pure non‐horizontal mergers, whether cross‐product or vertical, can deter new entry. Organizational mergers implicitly commit firms to more aggressive price competition. Because heightened competition deters entry, mergers can occur in equilibrium even when, absent entry considerations, they do not. We show that, in order to prevent a flood of entrants, mergers arise even when a marginal merger costs incumbent firms more than does a marginal entrant.     

Efficiency and competition: The reagan administration's legacy in merger policy

The full effects of the latest merger wave will not be evident for a number of years. Further, many forces other than the Reagan administration's permissive policy contributed to the surge in asset redeployment that characterized the 1980s. Nevertheless, the rationale for this policy should be evaluated as promptly as possible, since antitrust remains the nation's primary policy instrument for dealing with untoward effects of merger. Both empirical evidence and underlying theory contradict beliefs in the efficiency-enhancing character of most mergers and of the market for control. Several emerging and potential harmful effects are noted.     

Economics at the Antitrust Division: 2017–2018

This article describes some of the work of Antitrust Division economists over the past year, with a focus on modeling. It begins by illustrating the mapping from evidence to prediction using tools for assessing the effects of mergers using Bertrand, Cournot, and auction models. It then turns to two hot topics in competition policy: the implications of claims of increasing margins for merger enforcement and the validity of claims of increasing concentration. Finally, it considers how mergers affect prices in bargaining models.