Localized Competition,Heterogeneous Firms and Vertical Relations

This paper investigates the link between firms' geographic configuration and market power in imperfect markets. We consider two related setups. The first illustrates the relevant characteristics of the pricing equilibrium. A main implication is that the equilibrium price vector changes in accordance with the firms' spatial configuration. The second, where firms operate as downstream retailers affiliated to rival upstream wholesalers, shows that upstream market power is strongly affected by an index of geographic concentration which reflects the spatial configuration of retailers. Finally, our analysis provides several insights for market delineation as well as merger evaluation and remedies.     

Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis

The historic precedents in telecommunications antitrust findings have tended towards finding harm to competition when network operators integrate downstream and bundle the provision of applications and services. The reason for this is that market power in network provision is thought to be extended into the applications market(s). More recently however, proposed mergers have been between telecommunications and media distribution firms, both of whom have some degree of market power, already sell their own services in bundles, and who may or may not have been offering combined bundles already via contractual agreements. Examples include Sky/Vodafone in New Zealand, and Time Warner/AT&T in the United States as well as Vodafone/Unitymedia in Germany and Media Capital/Altice in Portugal. These complex proposed arrangements pose challenges to competition authorities, whose legal and procedural rules and precedents, especially those defining the relevant markets affected by the merger or vertical integration activity, have been developed from the analysis of simpler cases. These precedents may not be sufficient to analyse current cases, characterized by multiple products catering to heterogeneous consumer preferences, and consumers are not constrained to buying only one variant of the products in each of the upstream and downstream markets.We illustrate the challenges by way of a case study of the proposed merger between Sky and Vodafone, declined by the New Zealand Commerce Commission in February 2017. Limitations in existing market definition processes and the evaluation of market power where bundling already occurs risk overlooking complex demand-side interactions that influence the profitability and efficiency of various structural and contractual strategic choices. We propose that classic merger and antitrust analysis based on econometric cost-benefit analysis can be augmented by using simulation and numerical analysis of a range of bundle offers expected to be relevant in decision-making. We develop a simple model and use it to illustrate how it may be used to inform broadband and content mergers, and other complex antitrust cases, such the assessment of the effects of two-sided markets and firm pricing decisions.     

The Gradual Response of Market Power to Mergers in the U.S. Steel Industry

Studies of the impact of horizontal mergers on market power typically impose an immediate adjustment of market power following a merger. This paper adopts an alternative procedure to estimate the effect of four mergers on market power in the U.S. steel industry. Namely, by estimating a switching regression model that incorporates profit-maximizing behavior, the results show that mergers generally increased market power in the steel industry. However, it did take some time for market power to fully adjust after each merger.     

MERGER, EASE OF ENTRY AND ENTRY DETERRENCE IN A DYNAMIC MODEL

We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.     

The 1984 justice department guidelines toward horizontal mergers

This paper examines the treatment of economic efficiency in the 1984 revision of the Department of Justice's antitrust Merger Guidelines. An overview of the evolution of the guidelines toward horizontal mergers is presented emphasizing three key areas where changes have occurred. A model is developed following O. Williamson framework is extended to link changes in market concentration (as measured by the Herfindahl-Hirschman Index) that result from a horizontal merger to changes in market power (as measured by price-cost margins). Finally, the cost reductions (economies) required to offset increases in market power are developed in a simulation model. The paper concludes with an application of the model to the LTV-Republic Steel merger.     

The Competitive Effects of Not-for-Profit Hospital Mergers: A Case Study

Applying conventional horizontal merger enforcement rules to nonprofit hospitals is controversial. Critics contend that the different objective function of not-for-profits entities should mitigate competitive concerns about mergers involving nonprofit hospitals. We analyze a merger that reduced the number of competitors (both nonprofit) in the alleged relevant market from three to two. We find that the transaction was followed by significant price increases; we reject the hypothesis that these price increases reflect higher post-merger quality. This study should help policymakers assess the validity of current merger enforcement rules, especially as they apply to not-for-profit enterprises.     

Network effects and merger analysis: instant messaging and the AOL–Time Warner case

The AOL–Time Warner merger, announced in January 2000, was and still is the largest merger ever consummated. The merger plan was submitted to the FTC for antitrust review and to the FCC for license transfer review. The FTC approved the merger with conditions relating to open access. The FCC approved the merger subject to a condition (among others) that mandated interoperability for future (but not present) generations of AOL's popular instant messaging (IM) service, based on the potential leveraging of merger assets together with current IM network effects into market power in next-generation IM services. This condition was controversial and represents a new departure in antitrust analysis for industries imbued with network effects. This paper analyzes AOL's IM service and the ability to leverage merger assets into future market power in the context of the FCC condition; counter-arguments are considered and larger lessons for “new economy” antitrust are drawn from this experience and analysis.     

25 years of European merger control

We study the determinants of common European merger policy over its first 25 years, from 1990 to 2014. Using a novel dataset at the level of the relevant antitrust markets and containing all relevant merger cases notified to the European Commission, we evaluate how consistently arguments related to structural market parameters – dominance, rising concentration, barriers to entry, and foreclosure – were applied over time and across different geographic market definitions. On average, linear probability models overestimate the effects of structural indicators. Using non-parametric machine learning techniques, we find that dominance is positively correlated with competitive concerns, especially in markets with a substantial increase in post-merger concentration and in complex mergers. Yet, its importance decreased following the 2004 merger policy reform. Competitive concerns are also correlated with rising concentration, especially if entry barriers and foreclosure are of concern. The impact of these structural indicators in explaining competitive concerns is independent of the geographic market definition and does not change over time.     

Ten years of Merger Guidelines: A retrospective,critique, and prediction

The period since the 1982 Merger Guidelines is surveyed and assessed, including the 1992 Merger Guidelines. The 1982 Guidelines were an improvement in economic underpinnings and in merger policy, but the Guidelines' focus on short run market power is not a sensible basis for merger policy. The 1992 Guidelines continue this focus on short run market power, attempt to provide some clarifications of current enforcement policy, but add some questionable economics to the stew. The merger policy laid out in the 1992 Guidelines will not survive, since it does not suitably come to grips with the fundamental bases of the social costs and benefits of mergers and ignores ‘competitiveness’ issues.     

Staples and Office Depot: An Event-Probability Case Study

Investors in financial markets bet their dollars on whether amerger will raise or lower prices. Below, we apply an event-probability methodology to the proposed merger between Staples and Office Depot, which was challenged by the FTC and eventually withdrawn. In addition to a time-series regression,we also look at the effect of the merger in specific event windows. We find highlysignificant returns to the only rival firm in the relevant market. We estimate theprice effect of the merger and find it highly consistent with independent estimates.     

Merger review with intermediate buyer power

Buyer power features prominently in antitrust cases and debates, particularly as it relates to the potential for a merger among suppliers to harm a buyer. Using a Myersonian mechanism design approach, Loertscher and Marx (2019b) provide a framework for merger review for markets with buyer power, assuming that buyer power is a zero-one variable. In the present paper, we extend this analysis by treating buyer power as a continuous variable (technically, as a Ramsey weight) that ranges from zero to one. This generalization is relevant because, among other reasons, the Ramsey weight can be interpreted as a conduct parameter that can be estimated. Moreover, we establish the robustness of prior results to an alternative way of modelling merger-related cost synergies, and we show that when an acquiring firm’s choice of target is endogenous, its profit-maximizing choice depends on the buyer’s power.     

Exploring the incremental merger value from multimarket and technology arguments

We address the question through which channels mergers create incremental value to merging firms and consider various product market and technological arguments. Based on the pairwise stable allocation concept, we estimate firms’ pair-specific (incremental) merger value functions. Our results show that technological arguments contribute to the majority of added merger value. We also find that market power arguments across multiple markets contribute to explaining incremental post-merger value. In contrast, multimarket strategic effects do not add merger value. Our estimated match values are aligned with the merging firms’ post-merger stock market performance.     

The Sound of One Hand Clapping: The 2010 Merger Guidelines and the Challenge of Judicial Adoption

There is ample justification for the consensus view that the Horizontal Merger Guidelines have proven one of antitrust law??s great successes in the grounding of antitrust doctrine within economic learning. The foundation of the Guidelines?? success has been its widespread adoption by federal courts, which have embraced its rigorous underlying economic logic and analytical approach to merger analysis under the Clayton Act. While some have suggested that the Guidelines?? most recent iteration might jeopardize this record of judicial adoption by downplaying the role of market definition and updating its unilateral effects analysis, we believe that these updates are generally beneficial and include long-overdue shifts away from antiquated structural presumptions in favor of analyzing competitive effects directly where possible. However, this article explores a different reason to be concerned that the 2010 Guidelines may not enjoy widespread judicial adoption: the 2010 Guidelines asymmetrically update economic insights underlying merger analysis. While the 2010 Guidelines?? updated economic thinking on market definition and unilateral effects will likely render the prima facie burden facing plaintiffs easier to satisfy in merger analysis moving forward, and thus have significant practical impact, the Guidelines do not correspondingly update efficiencies analysis, leaving it largely as it first appeared 13 years earlier. We discuss two well-qualified candidates for ??economic updates?? of efficiencies analysis under the Guidelines: (1) out-of-market efficiencies and (2) fixed-cost savings. We conclude with some thoughts about the implications of the asymmetric updates for judicial adoption of the 2010 Guidelines.     

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.     

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.     

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.     

Can no competition policy be better than some competition policy?

This paper examines how the market structure is likely to evolve in a situation of multi-stage oligopolistic production. The decision to merge across or within stages of production is treated as endogenous. It is shown that when firms at a particular stage of production are relatively dominant, simultaneous merger decisions are conducive to competitive vertically integrated outcomes while sequential decisions are not. The persistence of non-integrated market structures may be explained by the existence of equally dominant firms which make merger decisions sequentially. The credible threat of retaliatory merger may deter both socially desirable and undesirable forms of merger. Inferences are drawn for the design of competition policy.     

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.     

Electricity Merger Analysis: Market Screens, Market Definition, and Other Lemmings

Much discussion and effort have been devoted to the use of market power screens to detect market power that might arise from existing generation asset portfolios or utility acquisition of new generation assets. The quest is to find the “Holy Grail”: a market power detection mechanism that minimizes the costs to all parties involved while finding the majority of market power exercises. This article contends that market power screens should be utilized with caution in policy and litigation applications because while they meet the criteria of minimizing enforcement costs, they are often unable to detect many types of market power exercises that an electric utility might undertake. The article begins with a discussion of the polestar for all screens—the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines—and its limitations. Next, the article examines the accidentally correct, absolutely incorrect, and other outcomes that arise from the application of screens using FERC’s merger policy statement, “contestable load” analysis, and other examples. The Article concludes by noting that many types of market power exercises are undetectable with market power screens, and that better approaches would increase the probability of detection, given the low level of penalty current imposed upon those that wield market power.     

Market Definition?

The 2010 horizontal merger guidelines issued by the antitrust agencies de-emphasize market definition, which has been a foundation of merger law for decades and was required by previous guidelines. The justification for this change is that unilateral adverse price effects caused by mergers of firms that produce differentiated products are best assessed using analyses that do not depend on market definition. Though the guidelines unquestionably serve a value in illuminating actual agency practice, any marginal benefit in dropping the exercise of market determination from the merger review process is likely to be small, and the marginal cost may be substantial.