Comment on “Merger Policy in the United States”

This paper comments briefly on a merger policy article by Dennis Mueller. It concurs with Mueller's judgment that X-efficiency consequences are of crucial relevance in developing a sound antitrust policy toward mergers. It agrees also that firms proposing mergers overstepping structural guidelines should be permitted an efficiencies defense, but it stresses the difficulties of making ex ante efficiency predictions.     

A New Perspective on Entry in Horizontal Merger Analysis

I analyze horizontal mergers in procurement settings in which sellers incur costs to participate. Considering existing sellers’ contest-level entry differs from antitrust authorities’ typical emphasis on new sellers’ market-level entry to counteract a merger’s anticompetitive harm. I show that profitable mergers can increase consumer and total surplus by inducing more and stronger contest-level entry by the merged seller, which echoes common claims from merging parties that their merger is beneficial because it creates a stronger competitor. This finding suggests caution by antitrust authorities: when contest-level entry costs matter, standard models that ignore those costs prescribe blocking procompetitive mergers.

     

Commitment to Competition: An Assessment of Antitrust Agency Budgets since 1970

In these remarks to the Industrial Organization Society, I discuss the adequacy of antitrust enforcement resources in the U.S. Relevant resources are measured by the competition budgets of the Justice Department and the Federal Trade Commission. Since 1970 these have been influenced by the overall economy, its changing structure, and politics, but they have not kept up with the pace of mergers or other measures of the need for antitrust. Thus at present, the resources devoted to antitrust fall well short of what is required for continued vigilance over our growing and changing economy.     

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.     

Policy Implications of the Effects of Concentration and Multimarket Contact in China’s Airline Market

Unlike many other mergers in developed countries, which might have been assessed and their effects estimated by antitrust authorities before being granted antitrust immunity, the airline mergers that swept China’s airline industry in 2002 occurred with no antitrust challenge. These mergers provide the opportunity to study important market power issues in China’s airline markets. Given that increased concentration and multimarket contact are the main legacies of an airline merger, the effects of mergers on these variables can raise the potential for the exercise of market power. However, an examination of the period 2002–2004 during which the Chinese airline mergers occurred shows that the resulting increased concentration and enhanced multimarket contact did not have important consequences for airfares in Chinese city-pair markets. The presence of Hainan Airlines appears to have played an important role in suppressing the airfares charged by China Eastern and China Southern.     

Antitrust Versus Regulatory Merger Review: The Case of Electricity

This paper focuses on the implications of multi-agency review of electricity mergers. It highlights fundamental differences between regulatory and antitrust merger enforcement procedures–ranging from standards of review to data collection, economic analysis, and remedies. Such disparities potentially introduce costly and potentially conflicting redundancy into the merger review process. Illustrative examples are drawn from a number of cases, including apparent inconsistencies across applicant-filed analyses in FERC merger cases. Absent the delegation of competition analysis to the antitrust agencies, the paper makes the case for harmonizing review across regulators and antitrust enforcers.     

Mergers with future rivals can boost prices,bar entry,and intensify market concentration

It is theoretically shown that mergers between incumbents and future rivals can boost prices and harm consumers. But in the absence of empirical evidence, no merger has been litigated on this basis. To offer empirical insights, I study the acquisition case of a promising future rival by a large incumbent pharmaceutical firm. First, there is strong and causal evidence that the merger has enabled higher prices for the incumbent. Mergers with future rivals are practically unregulated and, if wisely exploited, they can circumvent antitrust enforcement and serve as entry barriers. Second, in contrast to the mainstream prediction that mergers with future rivals do not alter market concentration, I report a large post-merger increase in the market concentration. I introduce advertisement expenditure as a possible channel of effect between the merger and market concentration. Third, I document spillover effect of the merger on the incumbent's immediate rivals without affecting its distant rivals.     

Modeling the effects of mergers in procurement

In procurement settings, mergers among suppliers reduce buyers' choice sets and can harm buyers by eliminating their preferred supplier or reducing their negotiating leverage. I develop a stochastic economic model that predicts the effects of mergers based on information that commonly is available to antitrust authorities. I derive general expressions for the ex ante expected changes in price, buyer utility, and supplier profit. Each becomes tractable under certain distributional assumptions. The model predicts that average prices will increase by more than 40% due to the recently litigated acquisition of Power Reviews by Bazaarvoice, in the absence of an effective remedy.     

The Supreme Court and Beer Mergers: From <Emphasis Type="Italic">Pabst/Blatz</Emphasis> to the DOJ–FTC Merger Guidelines

The beer industry in the U.S. has undergone significant structural change in the post-WWII period. The industry also was the object of prominent antitrust challenges to horizontal mergers proposed during this time frame. This paper documents the trend of increasing seller concentration in the brewing industry and assesses the role that mergers played in this structural transformation. We also analyze the change in merger policy that has taken place since the Supreme Court originally addressed mergers in the beer industry as compared to current antitrust enforcement under the DOJ–FTC Merger Guidelines and recent judicial decisions.     

The Australian merger guidelines: A comparison with the U.S. merger guidelines

Modern Australian antitrust had not begun when the first U.S. merger guidelines appeared in 1968. Even now, twenty five years later, no similarly detailed, formal administrative guidelines have been developed in Australia. This paper reviews the way in which the AustralianTrade Practices Act 1974 handles mergers and market definition, and considers how the Courts and the Trade Practices Commission, Australia's sole antitrust enforcement agency, have handled market definition and evaluated mergers. The key role played by the Trade Practices Tribunal, a quasi-judicial body, in influencing the Australian approach to mergers and market definition is highlighted. Contrasts are made with the 1992 American guidelines, and reasons for the different approaches are suggested.     

“High-Tech” Antitrust: Incoherent,Misguided, Obsolete,or None of the Above? Comments on Crandall-Jackson and Wright

That prominent antitrust cases have been in the “high-tech” arena is not surprising, since high-tech industries are often susceptible to the scale economies that lead to highly concentrated or monopoly markets. Crandall and Jackson’s observations on the IBM case are on point. Regarding AT&T, the salient observation is that recent changes in legal doctrine may make it impossible to bring antitrust cases in regulated industries. The problem with the Microsoft case was not that it was right or wrong, but that it was fundamentally incoherent. Wright’s critique of the Federal Trade Commission’s case against Intel is problematic because buyers in exclusion cases tend to be better off, not victims as they would be under collusion or anticompetitive mergers. As these observations apply more generally to cases in sectors that are not associated with high-tech, I offer a few thoughts on some antitrust issues that are particular to high-tech sectors, specifically how the prospect of innovation could affect market definition in merger cases and, more broadly, whether dynamic efficiencies reduce the need for antitrust enforcement.     

Considerations of Countervailing Power

The 2010 Horizontal Merger Guidelines set forth the current antitrust enforcement practices but do not address mergers that result in bilateral monopoly. We show that, given the presence of lawful, enduring market power, such mergers may improve social welfare. As a result, these mergers deserve careful scrutiny before condemning them as anticompetitive. In this paper, we address this issue and suggest an economically sound enforcement policy.     

Diagonal Merger

Diagonal merger combines the assets of an input supplier and a downstream rival of the input demander that does not use the input. Diagonal mergers are likely to be overlooked by federal antitrust authorities as they are neither vertical nor horizontal mergers. Diagonal mergers are shown to be nearly as anticompetitive as comparable horizontal mergers and, like horizontal mergers, the welfare effects of diagonal mergers are predicted in the first instance by a modified HHI calculation.     

Hold-up of anti-competitive mergers

We construct a model of endogenous mergers and study some issues of whether and how to control mergers, taking into account firms equilibrium response to policy. Anti-competitive mergers benefit competitors more than the merging firms. We show how such free-riding reduces firms incentives to merge (holdup). Firms delay merger proposals, hoping other firms will merge instead. The final result, however, is an overly concentrated market. Merger control may thus preserve competitive markets. In the presence of holdup, even reasonable policies such as requiring divestiture or using cost-benefit analysis, may be worse than not controlling mergers at all.     

A Structural Approach to Market Definition With an Application to the Hospital Industry

Market definition is common in merger analysis, and often the decisive factor in antitrust cases. This has been particularly relevant in the hospital industry, where many merger challenges have been denied due to disagreements over geographic market definition. We compare geographic markets produced using frequently employed ad hoc methodologies to structural methods that directly apply the ‘SSNIP test’ to California hospitals. Our results suggest that markets produced using previous methods overstate hospital demand elasticities by a factor of 2.4 to 3.4 and were likely a contributing factor to the permissive legal environment for hospital mergers.     

Mergers and synergy: Lessons from contemporary telecommunications history

Using contemporary historical data, the analysis reported in this article has evaluated the impact of the various mergers of the local exchange companies that took place between 1988 and 2001 on financial performance. Performance was measured using an important metric normally used to measure synergies of firms undergoing mergers. The analysis has revealed that the relative cash flow variable for firms worsened after mergers. If the synergy motive had been primary in influencing merger decisions, and also approvals, then the past mergers approved led to decreased performance levels and corresponding welfare losses for American consumers; thus, the mergers of communications common carriers were not in the interest of the public, the shareholders and customers. On the other hand, given the negative outcomes, views that the quiet life, hubris or a quest for possible market power motivated the mergers could be discarded. The lessons of such contemporary historical analysis have suggested that antitrust oppositions to contemporary telecommunications sector mergers may have basis in fact and salient evidence.     

Merger policy greatly simplified: Building on keyes

This comment urges a recognition of the fact that the main goal of antitrust, as revealed in a century of consequences, is not economic efficiency or consumer protection but the dispersion of power and decision-making in the business world. Building on Lucile S. Keyes' proposal for improving merger guidelines, it argues that the “true” aims of merger policy can be more efficiently pursued by disallowing all mergers involving very large firms that cannot be justified on efficiency grounds and ignoring mergers involving all other firms.     

Globalisation, strategic alliances, acquisitions and technology transfer. Lessons from ICL/Fujitsu and Rover/Honda and BMW

As globalisation proceeds major national companies may find themselves involved in domestic mergers and acquisitions, only to have turn later to international co-operation. International strategic alliances, though, often eventually move on to international acquisition, either involving the alliance partner (as in the case of ICL/Fujitsu) or some third party (as in the case of Rover/Honda/BMW). This article draws on research in Britain and Japan to investigate the strategic and technological implications of such co-operative trajectories. Two acid tests appear to determine whether such inter-company co-operations (whether mergers, acquisitions or strategic alliances) are likely ultimately to prove transitory, or whether they will progress towards some more stable inter-action: ?Is the arrangement ‘adding value’ technologically? Is it contributing to some process of international integration? ?Technological synergies and learning possibilities are often played down initially in domestic acquisitions, and even in international strategic alliances offering particular scope for technology transfer; but they are important in determining long term outcomes.     

The effect of horizontal mergers,when firms compete in prices and investments

Motivated by a number of high-profile antitrust cases, we study mergers when firms offer differentiated products and compete in prices and investments. Since the net effect of the merger is a priori ambiguous, we use aggregative game theory to sign it: we find that absent efficiency gains, the merger always reduces total investments and consumer surplus. We also prove that there exist classes of models for which the results obtained with cost-reducing investments are equivalent to those with quality-enhancing investments.