Economies as an Antitrust Defense Revisited: The Welfare Trade-offs and Safe Harbors

This paper incorporates a Cournot model of oligopoly pricing into Williamson’s (1968a) model to assess the welfare effect of a merger that yields economies and market power simultaneously. The results show: (i) in most cases, economies from mergers can offset price increases due to market power such that there are positive net allocative effects, and (ii) the safe harbors in the merger guidelines may fail to screen out mergers correctly. The reliability, however, can be improved by considering cost savings and price elasticities in addition to the current use of increases in HHI and post-merger HHIs.     

Unequal Pricing in the Information Economy: Implications for Consumer Welfare

This article presents an economic analysis of information good pricing and consumer welfare, and discusses the implications of price discrimination in the information economy. It argues that network externalities, coupled with information asymmetry, enable a dominant marketer to price unequally, extracting late adopters surplus to compensate for the loss from early adopters. In the short term, the minority early adopters benefit by paying less, but in the long term, the majority late adopters suffer by paying more. Considering that late adopters are likely to be at a disadvantage in resources, this discriminatory pricing amounts to the poor subsidizing the rich. Based on this analysis, implications for consumer welfare are discussed.     

Horizontal mergers under uniform resource constraints

Resource constraints have a vertical influence on a firm's competition and it is important to address the issue of horizontal mergers with scarce resources. This article highlights the effects of uniform resource constraints on horizontal mergers with game theory methods. First, the threshold values for the firms to accept the merger, increasing consumer surplus, and increasing social welfare are presented and compared. Second, the threshold value to merge for consumer surplus maximization is larger than that for profit incentive mergers without resource constraints. Thus, under unbinding resource industries, mergers reduce consumer surplus and it is necessary to implement antitrust. Third, resource constraints deter mergers. Finally, under binding capacity (or resource) constraints, the threshold value for firms to merge is larger than that for the social optimality. Therefore, industries with scare resource should avoid antitrust.     

Impact of Horizontal Mergers on Research & Development and Patenting: Evidence from Merger Challenges in the U.S.

This paper contributes further empirical evidence on the effects of mergers on innovation using company level data. Evidence on this issue has implications for the relationship between innovation and market concentration. Our departure from previous work is that we focus on a sample of horizontal mergers whose market concentration impacts were flagged by U.S. antitrust authorities as potentially posing a problem for antitrust law compliance. We employ propensity score matching and difference-in-differences estimation to compare the innovation activities of challenged and non-challenged merger firms to a control group of non-merged firms. We use R&D, patent grants, and citation-weighted patent grants to measure the innovation activities of firms before and after a merger. Our results indicate that the post-merger innovation outcomes of firms whose mergers were challenged are lower than they would have been had the firms not merged. But for non-challenged mergers, or mergers that do not raise concerns about market concentration, post-merger innovation outcomes are not significantly different from what they would have been without a merger.     

The Effects of Market Concentration and Horizontal Mergers on Hospital Costs and Prices

Antitrust advocates believe that horizontal consolidation in hospital markets can reduce competition and increase prices while merger advocates believe it can benefit consumers by reducing service duplication. This study analyzed the market conditions, operating characteristics, and costs and prices of approximately 3500 short-term general hospitals (including 112 within-market-area mergers) from 1986 to 1994 to investigate the effects of market concentration, hospital mergers, and managed care penetration. The results show: a shift away from non-price competition toward price competition in health care markets; that this shift was fueled by increased market penetration by price-sensitive buyers; that horizontal hospital mergers produced average cost savings of approximately 5%, which were generally passed on to consumers as lower prices; that cost savings were generally greater for mergers of similar-size hospitals, with a higher degree of duplicative services, and with lower pre-merger occupancy rates; and some evidence that post-merger price reductions were smaller in less-competitive markets.     

Petroleum Mergers and Competition in the Northeast United States

Sunoco’s 2004 acquisition of El Paso’s, New Jersey refinery and Valero’s 2005 acquisition of Premcor’s Delaware refinery significantly consolidated refinery control in the US Northeast. The Federal Trade Commission investigated both transactions but challenged neither. We examine the FTC’s enforcement rationale and test whether these mergers were associated with post-merger price increases in either gasoline or diesel at retail and wholesale. Our findings indicate that the transactions were largely competitively neutral. There was some indication that some unbranded rack prices may have increased after the mergers, but this result was not robust across controls or assumptions. In some other instances, prices in merger-affected areas may have fallen relative to prices elsewhere.     

Category management,product assortment,and consumer welfare

In this article, we endogenize product assortment decisions under a category management (CM) framework in a channel setup. We find that (1) product assortment is polarized more under CM than under a non-CM regime; (2) the price of a high-end (low-end) product in an assortment increases (decreases) under CM than under a non-CM regime; and (3) a high-quality manufacturer makes more profit than a low-quality manufacturer. In our model, the manufacturer’s choice of quality and its polarization is driven by the existence and the decisions of the retailer (CM or non-CM). Finally, we have an interesting result on consumer welfare. We find that the total consumer welfare, as measured by consumer surplus, worsens under CM only when there is sufficient heterogeneity in consumers’ tastes.     

Third-Degree Price Discrimination, Consumption Externalities, and Market Opening

This study investigates the effects of monopolistic third-degree price discrimination on market opening in the presence of consumption externalities between separate markets. Assuming symmetric interdependent linear demands and constant marginal cost, we indicate the possibility that with negative externalities a monopolist can do better by closing the relatively small market from the social welfare viewpoint, while it prefers opening that market if price discrimination is feasible. This result contradicts the previous literature on third-degree price discrimination and market opening which asserts that, in the case of non-increasing marginal cost, price discrimination improves social welfare if it opens new markets that are closed under uniform pricing.     

Mergers Among German Cooperative Banks: A Panel-based Stochastic Frontier Analysis

Based on an unbalanced panel of all Bavarian cooperative banks for the years of 1989--97, which includes information on 283 mergers, we analyze motives and cost effects of small-scale mergers in German banking. Estimating a frontier cost function with a time-variable stochastic efficiency term, we show that positive scale and scope effects from a merger arise only if the merged unit closes part of the former branch network. When we compare actual mergers to a simulation of hypothetical mergers, size effects of observed mergers turn out to be slightly more favorable than for all possible mergers. Banks taken over by others are less efficient than the average bank in the same size class, but exhibit, on average, the same efficiency as the acquiring firms. For the post-merger phase, our empirical results provide no evidence for efficiency gains from merging, but point instead to a leveling off of differences among the merging units.     

Preferences,Welfare and Desirable Subsidies under Monopolistic Competition

A simple model of monopolistic competition with consumer preferences for diversity reconciles an empirical‐theoretical disconnect of the welfare properties of industrial subsidies. The optimal policy rules indicate that subsidies can be Pareto improving, but subject to society's preference for diversity. More counter‐intuitively, the welfare‐maximizing subsidy is always found to be strictly non‐negative, and the general qualitative nature of the results seem to contradict the optimum taxation literature. The subsidy incidence is also examined and we find that there exists a potential for an over‐shifting of the subsidy.     

Effects of distribution channel structure in markets with vertically differentiated products

This study examines how the structure of distribution channels may influence firms’ quality and price strategies and how they may in turn affect consumer welfare. It treats product quality as a decision variable so that the degree of product substitution becomes endogenous rather than exogenous as in previous studies. We find that, with vertically differentiated firms, the changes in channel structure have asymmetric effects depending on whether they occur in the high-quality channel or in the low-quality channel. The product quality of the high-quality channel decreases when it decentralizes unilaterally. However, product quality of the low-quality channel would increase when it decentralizes. The high-quality manufacturer and its channel suffer more from decentralization in comparison with their low-quality counterparts, and the low-quality manufacturer actually receives greater profits when both channels are decentralized. An important driver behind these asymmetries is the interaction between firms’ pricing incentives in integrated versus decentralized channels and what consumer segments they serve. Our analysis indicates that decentralization may reduce consumer welfare, but decentralization in the high-quality channel hurts consumers more than that in the low-quality channel. Therefore in a competitive environment where firms make both quality and price decisions, channel integration would have significant welfare enhancement effects through the elimination of double marginalization, especially if it happens in the high-quality channel. Moreover, we demonstrate that once quality is endogenized, integration is the only equilibrium of channel structure choices. This suggests that the private incentives of firms may actually benefit consumers but do not have to be in line with the general preference of industry regulation for decentralization.     

A Note on Quality Choice,Monopoly, and Network Externality

Introducing network externalities into a model of vertically differentiated products, Lambertini and Orsini (2001, 2003) analyze the implications of a monopolist’s quality choice for social optimum. Moreover, they examine how the network externality affects quality, quantity, price, and social surplus. In this note, by looking at the nature of cost functions and the degree of network externalities, we reconsider their results, at least some of which depend upon the specificity of the cost functions.      

Setting Upper Limits on Merger Related Efficiencies

The purpose of this paper is to show that a complementary entry analysis could be performed by the authorities when assessing the welfare impacts of a merger. In addition to analyzing the likelihood and impact of post-merger entry by other firms, the authorities could also study pre-merger alternatives for the insiders, that is, to study wether other concentration operations were available but not chosen by the merging or acquiring firms. This may be particularly useful when the authorities are faced with a concentration operation that raises anti-competitive concerns. Insiders will argue that cost reductions are likely to compensate these negative effects. However, if the cost reductions are not firm specific it is possible, in some circumstances, to establish an upper limit on the extent of cost reductions when there are other mergers available. If these mergers were admissible but were dominated by the present one, information is revealed about the extent of cost reductions. This information may lead to the authorities updating their beliefs on efficiencies. Such updates may lead to the modification of the decision to approve or reject the merger.     

What Do We Know about Success and Failure of Mergers?

Collecting the most important results of about 80 empirical merger studies, this study condenses the bewildering spectrum of results to 18 stylized facts. Most important, no more than a quarter of the mergers increase consumer welfare; another quarter increase profits at the cost of consumers; half of the mergers reduce the value of the firm. Targets' shareholders win, while bidders' shareholders break even upon the announcement of a merger, but lose significantly in the long run. Seen relatively, horizontal mergers fare best, especially if they are focus-increasing. Cash-financed mergers fare better than stock-financed and strategic mergers fare better than financial ones. Confronting the stylized facts with existing merger theory reveals some major paradoxes; confronting them with existing competition policy reveals the need for a modification and intensification, as mergers increase concentration, and corporate policy strives towards still higher concentration. As a summary ten lessons are extracted on what we may have learnt, and on what is still open.     

Who should practice price discrimination using rebates in an asymmetric duopoly?

Price discrimination is generally thought to improve firm profits by allowing firms to extract more consumer surplus. In competition, however, price discrimination may also be costly to the firm because restrictive incentive compatibility conditions may allow the competing firm to gain market share at the discriminating firm’s expense. Therefore, with asymmetric competition, it may be the case that one firm would let the other firm assume the burden of price discrimination. We investigate optimal segmentation in a market with two asymmetric firms and two heterogeneous consumer segments that differ in the importance of price and product attributes. In particular, we investigate second-degree price discrimination under competition with explicit incentive compatibility constraints thus extending prior work in marketing and economics. Focusing on the managerial implications, we explore whether it would be profitable for either or both firms to pursue a segmentation strategy using rebates as a mechanism. We identify conditions under which one or both firms would want to pursue such segmentation. We find that segmentation lessens competition for the less price-sensitive consumer segment and that this results in higher profits to both firms. A key to understanding this result is that segmentation leads to consumer remixing. We establish the key result that if firms are asymmetric in their attractiveness to consumers, the disadvantaged firm in our model is more likely to pursue a segmentation strategy than its rival in equilibrium. We then ask whether this result prevails in practice. To this end, we explore competitive segmentation empirically and are able to verify that disadvantaged firms indeed pursue segmentation through rebates with greater likelihood.     

Rules of Origin and Strategic Choice of Compliance

This paper examines how an input supplier’s monopoly power affects exporters’ choice between compliance and noncompliance with rules of origin (ROO) in a free trade area (FTA). When the regional input supplier has monopoly power, the number of compliers largely affects the input price. This is because to meet ROO, exporters must use a certain ratio of the input originated within the area. In such a case, each exporter has an incentive to choose noncompliance with ROO if the rival exporter complies. Because this incentive yields strategic substitution between symmetric exporters, the coexistence of the complier and the non-complier appears in equilibrium. Our model consists of three final-good producers (one in an importing country and two in an exporting country) and one input supplier, which is in the importing country and has monopoly power. We show that within the range of parameter values for which some exporters comply with ROO, the content rate affects the output of the final-good producer in the importing country and the country’s welfare in a U-shaped fashion. The content rate levels that allow the coexistence of the complier and the non-complier minimize welfare.     

东道国税收激励政策的福利效应分析

应用税收激励来吸引外商直接投资是目前世界上大多数国家常用的政策手段。然而,税收激励政策在促进东道国经济增长的同时对东道国福利的影响是不确定的,需要对税收激励政策的成本和收益进行综合评估。本文对经典的Macdougall一般福利效应模型做进一步拓展,引入税收激励来分析外商直接投资对福利效应的影响,结果表明:税收激励政策能否增进一国福利水平主要取决于外资企业的技术外溢。从这个结论出发,本文对我国当前税收优惠政策的福利效应进行评述,进而对我国外商投资税收优惠提出政策建议。     

生产商-零售商双边垄断中的所有权配置效应研究

文章在生产-流通-消费框架下,在供零双边垄断这一纵向关系中考虑了所有权配置效应问题。发现所有权配置会对市场绩效或配置效率产生重大影响。均衡分析表明,无论所处哪一个环节,国有企业的存在具有内部化垄断外部性、减轻或消除双重加价、稳定市场均衡价格和销售量的作用。这一模型可为我国在改革开放初期,在流通领域保留部分国有企业,采用渐进式改革提供了一定的理论解释。当市场处于严重的不完全竞争,或生产-流通环节的某一端处于垄断状态时,适当地保留国有企业或对有关企业进行严格监管,有利于整体社会效益的提升和保障消费者的权益。文章从纵向生产和流通关系的角度,在一定程度上证实了我国经济转型过程中部分流通经济学家们曾经提出的“国有商业具有稳定市场作用”的观点。     

Third-Degree Price Discrimination in the Presence of Asymmetric Consumption Externalities

In this paper, we consider third-degree price discrimination in two markets in the presence of asymmetric consumption externalities; we establish that under plausible conditions, a firm reduces its price in the market with low price elasticity of demand. The firm can increase its profits by reducing the price for these consumers and enlarging the demand for other consumers, provided that positive consumption externalities exist. Moreover, we show that third-degree price discrimination enhances not only the firm’s profit but also total consumer surplus.

A comparative analysis of marketing promotions and implications for data analytics

Retailers use many different marketing promotions to increase sales and profits. These promotions include price reductions, coupons, cash mail-in rebates, free gift cards, and buy-one-get-one (BOGO) discounts. The type of promotion used results in different outcomes for demand, profit, average price, consumer surplus, and sales taxes collected. We perform comparative analysis of these five promotions and their outcomes. We show that for the same discount amount, price reductions result in the lowest average price. For products with weakly diminishing consumer utility and low consumer stockpiling, BOGO promotions result in the largest demand, profit, consumer surplus, and taxes collected. Cash mail-in rebates may result in large profit and taxes collected, but they perform poorly in terms of average price paid and consumer surplus. We also find that a retailer offering a delayed incentive (i.e. gift cards and mail-in rebates) offers a larger reward but provides lower consumer surplus than when offering an immediate incentive (i.e. price reduction and BOGO). In a segmented market with a price-insensitive consumer segment, immediate incentives have the disadvantage of allowing price-insensitive consumers arriving during the promotion to obtain the discount, which reduces the discount effectiveness. The addition of more retailer objectives to maximizing profit, such as demand maximization or consumer surplus, increases the effectiveness of immediate incentives. We also provide a framework for estimating the important parameters for evaluating promotion effectiveness using readily available transactional data and examine its accuracy using a simulation experiment.