Economics at the FTC: Retrospective Merger Analysis with a Focus on Hospitals

Economists at the Federal Trade Commission (FTC) support the agency’s competition and consumer protection missions. In this year’s essay we discuss efforts at the FTC and elsewhere to examine empirically the competitive effects of mergers. This work has ranged from subjective interview-based reports on post-merger behavior to more objective analyses of post-merger performance based on rigorous empirical analysis of prices. In this essay we discuss the merger retrospective literature generally, and focus on the FTC staff’s recent empirical analyses of consummated hospital mergers.     

An interindustry analysis of merger activity 1960 – 1983

This paper highlights several trends in merger activity in mining and manufacturing, and commercial banking in the United States for the period 1960 to 1983. The specific data examined included commercial bank mergers by types (horizontal, market extension), by corporate structure of the acquiring organization, and by regulatory authority providing final approval of these mergers. Over the time period analyzed, significant differences appear to exist between the magnitude and the timing of mining and manufacturing as compared to commercial bank mergers. These differences may result largely from changes in long-existing legislation in the banking sector, particularly those in recent decades.     

Airport Concentration and Market Power: An Events Study Approach

This paper presents independent confirmation of the results obtained in recent studies that suggest mergers and acquisitions creating airline dominance at the airport level lead to market power. Using a different methodology – an events study for the 1986 merger of Northwest Orient Airlines and Republic Airlines – this paper confirms those results, indicating that concentration in the context of the sunk costs associated with the operation at a particular airport facility allows market power in the airline industry.     

Are legacy airline mergers pro- or anti-competitive? Evidence from recent U.S. airline mergers

Due to a series of recent mergers, the number of legacy airlines in the United States has decreased from six to three. We conduct a comprehensive investigation of the effect on fares and output of these legacy airline mergers to determine whether the mergers have had an overall pro-competitive or anti-competitive effect on consumers. Our difference-in-differences regression analysis shows that these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity. Taken together, the results indicate that the recent legacy mergers were pro-competitive.     

Horizontal merger analysis

Economic analysis of competition regulation is most developed in the domain of horizontal mergers, and modern agency guidelines reflect a substantial consensus on the appropriate template for merger assessment. Nevertheless, official protocols are understood to rest on a problematic market definition exercise, to use HHIs and ΔHHIs in ways that conflict with standard models, and more broadly to diverge with how economic analysis of proposed mergers should be and often is conducted. These gaps, unfortunately, are more consequential than is generally appreciated. Moreover, additional unrecognized errors and omissions are at least as important: analysis of efficiencies, which are thought to justify a permissive approach, fails to draw on the most relevant fields of economics; entry is often a misanalyzed afterthought; official information collection and decision protocols violate basic tenets of decision analysis; and single-sector, partial equilibrium analysis is employed despite the presence of substantial distortions (many due to imperfect competition) in many sectors of the economy. This article elaborates these deficiencies, offers preliminary analysis of how they can best be addressed, and identifies priorities for further research.     

Mergers and product quality: Evidence from the airline industry

Retrospective studies of horizontal mergers have focused on their price effects, leaving the important question of how mergers affect product quality largely unanswered. This paper empirically investigates this issue for two recent airline mergers. Consistent with the theory that mergers facilitate coordination but diminish competitive pressure for quality improvement, we find that each merger is associated with a quality decrease (increase) in markets where the merging firms had (had no) pre-merger competition with each other, and the quality change can have a U-shaped relationship with pre-merger competition intensity. Consumer gains/losses associated with quality changes, which we monetize, are substantial.     

横向合并控制中的资产剥离问题——基于古诺竞争的分析

本文基于古诺竞争构建了一个"三阶段"的博弈模型,分析了外资企业合并控制中的资产剥离问题,探讨了资产剥离的有效性及福利效应。研究发现:在一定条件下,资产剥离能够削弱合并带来的单边效应,改善社会福利,增加合并被批准的可能性。在此基础上,本文探讨了消费者福利标准与社会总福利标准之间的差别,认为提高社会总福利的资产剥离很有可能会降低消费者福利。同时,本文还详细模拟了外资企业与国内企业竞拍剥离资产的过程,认为竞拍结果的不同取决于市场规模的大小以及资产剥离的数量。最后,得出结论并为中国资产剥离的实施提出建议。     

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.     

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.     

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.     

Should competition authorities care about conglomerate mergers?

Mergers and acquisitions may change competition even when they do not affect market structure, a case known as conglomerate mergers. In this paper, we explore a wave of acquisitions of higher education institutions by educational groups in Brazil, which allows us to disentangle the effects of conglomerate mergers and of horizontal mergers on price, quantity, and quality indicators. Our findings show that multiunit organizations are able to increase some quality indicators. As for the effect on price and quantity, results are different. For conglomerate mergers, we estimated an increase in the number of freshmen and tuition fees, whereas for acquisitions that lead to horizontal concentration there is no increase in quantity, just in prices. Also these effects are larger the smaller the market share of the acquired HEI. On the whole, our findings are consistent with the hypothesis that multiunit operations increase efficiency, but only conglomerate mergers tend to pass those gains on to consumers. Results also indicate that greater caution should be taken in market extension mergers when the acquired firm has a clear dominant position.     

The effects of mergers in markets for differentiated products

Several authors have studied conditions in which price-increasing forces associated with mergers in ahomogenous oligopoly might be offset by price-decreasing forces associated with rationalization of production. Analogously, in the case of mergers between producers ofdifferentiated products, economies of scope are a possible price-decreasing force. The interrelationship of demands can be another one. Edgeworth showed the possible strength of this latter force in demonstrating that the imposition of taxes on substitute products can cause the prices of all of them to fall. That paradoxical result is directly relevant since effects of mergers are shown to be equivalent to those of properly chosen taxes. Nevertheless, it is shown that the Edgeworth phenomenon does not carry over to mergers i.e., demand forces on their own are not sufficient for mergers to lead to reductions in all prices — although some price reductions are possible. The paper also develops conditions for all prices to rise after a merger. General conjectural variation models in both price and quantity are considered. Finally, it is shown that mergers cannot increase welfare in linear models with Bertrand or Cournot competition. The implications of the results for merger policy are briefly discussed.     

Who's acquiring whom? — Experimental evidence of firm size effect on B2B mergers and marketing/sales tasks

A recent study has revealed a marked growth in global mergers and acquisitions between firms from developed and developing countries. Unlike previous merger waves, however, companies in emerging markets are playing an increasingly important role. This highlights the need for greater scrutiny of more, and diverse, aspects of mergers. In particular, the size difference between firms involved in mergers and its impact on merger outcomes are of interest. This paper examines whether the involvement of differing numbers of employees (either from the acquiring firm or from the acquired firm) may influence merger success. Drawing on previous work in understanding organizational culture and merger dynamics, we conduct a laboratory experiment that not only confirms the presence of learning and conflict in organizational cultures in mergers but also presents new findings in relation to the relative size of the firms involved.     

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.     

Mergers and coordinated effects

A merger is said to have coordinated effects if it results in more collusive outcomes. I review the theory of collusion, and the role played by communication in coordination. Mergers can affect the enforcement and participation constraints for a collusive agreement, and the selection from the equilibrium set of outcomes. I describe some recent empirical studies of the effects of mergers on collusion, and the underlying measurement issues associated with identifying the degree of coordination. I also discuss some recent cases in which coordinated effects were a concern, including both merger reviews and ex post investigations.     

Harm to Competition Under the 2010 Horizontal Merger Guidelines

In August, 2010, the Antitrust Division and the Federal Trade Commission issued new Guidelines for assessing horizontal mergers under the antitrust laws. These Guidelines were long awaited not merely because of the lengthy interval between them and previous Guidelines but also because enforcement policy had drifted far from the standards articulated in the previous Guidelines. The 2010 Guidelines are distinctive manly for two things. One is briefer and less detailed treatment of market delineation. The other is an expanded set of theories of harm that justify preventing mergers or reversing mergers that have already occurred. The 2010 Guidelines reflect a growing belief that in markets where product differentiation is minimal competition tends to be robust and the structural presumptions stated in previous Guidelines were too harsh. By contrast, where product differentiation is substantial the Guidelines?? approach tended to define markets too broadly, overlooking significantly anticompetitive possibilities. Under the 2010 Guidelines unilateral effects analysis relevant markets can be very small, often limited to three or four firms, and excluding some obvious substitutes. Markets in merger analysis are not defined for their own sake, however, but rather to ascertain whether a particular alteration in market structure covered by the merger provisions will be likely to facilitate a price increase. The 2010 Guidelines address four substantive merger concerns: exclusion, restraints on innovation, unilateral effects, and coordinated effects. The Guidelines have a separate section on mergers limiting ??innovation and product variety,?? treated mainly in the category of unilateral effects. The 2010 Guidelines are more flexible than previous Guidelines and also more catholic about the types of harms that mergers might cause and the techniques that can be used to assess them. Older Guidelines were excessively wed to methodologies that were at the forefront of applied merger analysis when they were drafted, but that tended to make the Guidelines obsolete as new methodologies became available. Not only do methodologies change, they are also specific to the situation. Further, they tend to be well developed in the literature and accessible to experts consulted by those defending a merger as well as to the government economists who employ them. To be sure, there is a tradeoff between flexibility and guidance. Often we can have more of one only by giving up some of the other, and that tradeoff is clearly present in the 2010 Guidelines.     

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.

     

Research notes and communications management objectives in mergers and acquisitions

A taxonomy of managerial goals in mergers and acquisitions is developed through a cluster analysis of data from interviews with merger and acquisition practitioners. These clusters of objectives overlap with some objectives cited for mergers and acquisitions in the academic literature, but the correspondence is not complete. Further analysis shows that different types of mergers and acquisitions are characterized by different managerial objectives. The implications of this research for the development of a contingency model of the relationship between managerial objectives and mergers and acquisitions are discussed.     

The 2010 Revised Merger Guidelines and Modern Industrial Economics

The new Horizontal Merger Guidelines provide greater transparency into how the Department of Justice and the Federal Trade Commission staffs review horizontal mergers than did the guidelines they replaced. While they reflect some advances in economic techniques for predicting the competitive consequences of mergers (most notabley the Upward Pricing Pressure test), greater attention to costs and efficiencies could further improve merger review.     

Economic Analyses of Mergers at the FTC: The Cruise Ships Mergers Investigation

This paper provides an overview of how economists atthe Federal Trade Commission assess the potentialcompetitive effects of mergers, with a focus on thetypes of quantitative analyses frequently employed.The paper first outlines the general approach employedat the Federal Trade Commission to review mergers.The paper then describes analyses done in theinvestigation of proposed mergers in the cruiseline industry as a specific example. Of particularinterest in this example are the analyses used toassess the potential for coordinated interaction asa result of the merger.