Transcript Standard Setting in High

Class 15
Antitrust, Fall, 2015
Horizontal Mergers
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2000-15 Randal C. Picker. All Rights Reserved.
P
The Key Merger Tradeoff
P1
P0
Demand Curve
DWL
AC0
Savings
AC1
Q1
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Q
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1976 as a Dividing Line

Pre-1976
Many
cases are litigated under Sec. 7 of the
Clayton Act
Over an extended period, the Supreme Court
averages almost one case per year
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1976 as a Dividing Line

After-1976
Cases
vanish
Passage of Hart-Scott-Rodino in 1976 changes
antitrust practice from court-driven to agency
driven
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Merger Policy as Regulatory
Policy



Mergers are controlled through regulation.
Mergers of any real size will trigger HSR
notification duties.
This results in a negotiation with the FTC or
DOJ over how the transaction might be
structured to eliminate competitive concerns.
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Merger Policy as Regulatory
Policy


Absent a consent decree, most parties
abandon proposed mergers.
Litigation over the statute is rare.
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DOJ Press Releases

Link
http://www.justice.gov/atr/public/press_releases/2
015/index.html
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Clayton Act Section 7

Key Text
No
person engaged in commerce or in any activity
affecting commerce shall acquire, directly or
indirectly, the whole or any part of the stock or
other share capital and no person subject to the
jurisdiction of the Federal Trade Commission shall
acquire the whole or any part of the assets of
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Clayton Act Section 7
another
person engaged also in commerce or in
any activity affecting commerce, where in any line
of commerce or in any activity affecting commerce
in any section of the country, the effect of such
acquisition may be substantially to lessen
competition, or to tend to create a monopoly.
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HSR Thresholds
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HSR Annual Report 2013
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HSR Annual Report 2013
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HSR Annual Report 2013
Judging Concentration

Concentration Ratios
Just
add the market shares for a given number of
firms
So speak of four-firm concentration ratio or 8-firm
concentration ratio
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Judging Concentration

Examples
A:
(25,25,25,25): 4-firm ratio is 100%
B: (100,0,0,0): 4-firm ratio is 100%
C: (40,20,10,10,5,5,5,2,2,1): 4 firm ratio is 80%
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The Herfindahl-Hirschman Index

Comparing A and B
In
the prior example, Industries A and B had the
same four-firm ratio, but competition is almost
certainly quite different.
Try an alternative measure: square the market
shares and add
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Calculating HHIs

Examples
A:
25*25 + 25*25 * 25*25 + 25*25 = 2,500
B: 100 * 100 + 0*0 + 0*0 + 0*0 = 10,000
C: 40*40 + 20*20 + 10*10 + 10*10 + 5*5 + 5*5 +
5*5 + 2*2 + 2*2 + 1*1 = 2,284
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Mergers and HHIs

A merger of two firms increases the HHI by 2 *
S1 * S2
When
the firms merge, their combined market
share will be S1 + S2.
(S1 + S2) * (S1 + S2) = S1*S1 + 2*S1*S2 + S2*S2
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Mergers and HHIs

Prior Examples
When
the top two firms in Industry C merge, the
HHI goes up by 2 * 40 * 20, or 1600, from 2284 to
3884.
When the first firm merges with the fifth firm, the
HHI rises by 2 * 40 * 5, or 400, from 2284 to 2684.
This is a 1200 difference.
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Pre-2010 DOJ-FTC Grid
Increase in Post-Merger Concentration
< 50
Unconcentrated:
Post< 1000
Merger Moderately Conc:
HHI
1000 to 1800
Highly Conc.:
> 1800
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50 to 100
> 100
No challenge No challenge No challenge
No challenge No challenge High scrutiny
Presumed
No challenge High scrutiny
unlawful
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Revised DOJ-FTC Grid
Increase in Post-Merger Concentration
< 100
Unconcentrated:
Post< 1500
Merger Moderately Conc:
HHI
1500 to 2500
Highly Conc.:
> 2500
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100 to 200
> 200
No challenge No challenge No challenge
No challenge Scrutiny
Scrutiny
No challenge Scrutiny
Presumed
unlawful
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Implementing the Grid

Increase in Post-Merger Concentration
Remember
that the increase in the HHI is 2*S1*S2.
50 points is two 5% market share firms or a 10%
firm and a 2.5% firm
100 points is roughly two 7% firms or a 10% firm
and a 5% firm.
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Mergers and Markets

Don’t necessarily need to define the market
“The
Agencies’ analysis need not start with
market definition. Some of the analytical tools
used by the Agencies to assess competitive
effects do not rely on market definition, although
evaluation of competitive alternatives available to
customers is always necessary at some point in
the analysis.”
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Mergers and Markets

Substitutes and Market Definition
“Market
definition focuses solely on demand
substitution factors, i.e., on customers’ ability and
willingness to substitute away from one product to
another in response to a price increase or a
corresponding non-price change such as a
reduction in product quality or service.”
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Defining Markets and Market
Power

Hypo
Price
of Diet Coke Rises
Volume of Diet Pepsi sold rises


What does this tell us about how to define a
market?
What can we say about “market power”?
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Market Definition and CrossElasticities of Demand

Markets and Market Power
We
must define the market appropriately to
assess a claim of monopoly power.

DuPont Approach
The
Supreme Court in DuPont looks to crosselasticities of demand to assess the extent of the
market.
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Cross-Elasticities

Key Idea
How
much does a rise in the price of one good
change the quantity consumed of a second good?
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Defining Cross Elasticity


The percentage change in quantity of good 1
divided by the percentage change in price of
qood 2.

Q
1
Formally:
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Q1
Q1 P2


P2
P2 Q1
P2
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Examples

Increase of price of McDonald’s hamburger:
How
many more hamburgers are sold by Burger
King?
How much more chicken is sold by KFC?
How many more meals are sold by Alinea?
How many more pairs of shoes are sold?
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Market Definition

The Hypothetical Monopolist Test
“The
Agencies employ the hypothetical
monopolist test to evaluate whether groups of
products in candidate markets are sufficiently
broad to constitute relevant antitrust markets. The
Agencies use the hypothetical monopolist test to
identify a set of products that are reasonably
interchangeable with a product sold by one of the
merging firms.”
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Market Definition

The Hypothetical Monopolist Test
“The
hypothetical monopolist test requires that a
product market contain enough substitute
products so that it could be subject to post-merger
exercise of market power significantly exceeding
that existing absent the merger.”
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National Cinemedia 36
Screenvision (Nov 3, 2014)
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National Cinemedia 37
Screenvision (Nov 3, 2014)
National Cinemedia –
Screenvision Case Documents

Key Docs
Complaint
Answers

Docket
http://www.lib.uchicago.edu/e/law/index.html
SDNY:
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14 CV 08732
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Market Definition and SSNIP

Defining SSNIP
“Specifically,
the test requires that a hypothetical
profit-maximizing firm, not subject to price
regulation, that was the only present and future
seller of those products (“hypothetical monopolist”)
likely would impose at least a small but significant
and non-transitory increase in price (“SSNIP”)
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Market Definition and SSNIP

Defining SSNIP
“on
at least one product in the market, including at
least one product sold by one of the merging
firms.”
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Market Definition Example

Example 5
“Products
A and B are being tested as a
candidate market. Each sells for $100, has an
incremental cost of $60, and sells 1200 units. For
every dollar increase in the price of Product A, for
any given price of Product B, Product A loses
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Market Definition Example

Example 5
“twenty
units of sales to products outside the
candidate market and ten units of sales to Product
B, and likewise for Product B.”
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Guidelines Example

Example 5
“Under
these conditions, economic analysis
shows that a hypothetical profit-maximizing
monopolist controlling Products A and B would
raise both of their prices by ten percent, to $110.
Therefore, Products A and B satisfy the
hypothetical monopolist test using a five percent
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Guidelines Example

Example 5
“SSNIP,
and indeed for any SSNIP size up to ten
percent. This is true even though two-thirds of the
sales lost by one product when it raises its price
are diverted to products outside the relevant
market.”
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Doing the Numbers in Ex 5

Pre-Merger Position
A
selling 1200 units at a price of 100 with a
marginal cost of 60
 Profits = 1200*(100-60) = 48000
Same for B
Total profits of 96000
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Doing the Numbers in Ex 5

Would A be willing to raise its price to $110 in
the pre-merger world?
For
every $1 increase in price, A loses 10 units to
B and 20 units to other sellers
A $10 price increase would lose 300 units total
A profits would be 900*(110-60) = 45000
Profits drop, so A wouldn’t raise its price
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Doing the Numbers in Ex 5

Would the merged firm be willing to raise its
price to $110 in the post-merger world?
For
every $1 increase in price, A loses 10 units to
B and 20 units to other sellers
But A and B would raise price simultaneously, so
diversion outside the merged firm drops
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Doing the Numbers in Ex 5

Would the merged firm be willing to raise its
price to $110 in the post-merger world?
(1200
- 200)*(110 - 60)
=1000*50 = 50,000 (for each product (A&B))
With A and B raising price together as part of the
merged firm, the price increase to $110 would be
profitable
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Doing the Numbers in Ex 5

Meaning: Treat A and B as being in the same
market
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Market Analysis v. Direct Harms
Analysis

But …
What
work is the idea of market doing here?
Do we need it?
Shouldn’t we just evaluate harm to consumers?

Critical loss analysis (4.1.3) gets at this idea
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Critical Loss Analysis Approach
to Example 5

Set Up
Hypothetical
monopolist raises price on A & B by
$10
What is the drop in sales such that the hypo
monop will just be indifferent between leaving
prices as is and raising prices by $10?
That number is the critical loss
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Critical Loss Analysis Approach
to Example 5

On the numbers
Pre-merger
profits for A, $48K and B, $48K for
total of $96K on 1200 units sold of each
At a new price of $110, profits would be $50 per
unit
At what X, does X*50 = 96,000? 1920
Critical loss = 2400 – 1920 = 480 units
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Critical Loss Analysis Approach
to Example 5

On the numbers
loss = 2400 – 1920 = 480 units
Predicted loss was 400 units (200 units outside
the new firm on each of A & B)
Critical

Critical loss > Predicted loss
Meaning,
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again, price increase is profitable
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Unilateral Effects and
Differentiated Products

Upward Pricing Pressure
“In
some cases, where sufficient information is
available, the Agencies assess the value of
diverted sales, which can serve as an indicator of
the upward pricing pressure on the first product
resulting from the merger.
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Unilateral Effects and
Differentiated Products

Upward Pricing Pressure
“Diagnosing
unilateral price effects based on the
value of diverted sales need not rely on market
definition or the calculation of market shares and
concentration.”
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Unilateral Effects and
Differentiated Products

Upward Pricing Pressure
“The
Agencies rely much more on the value of
diverted sales than on the level of the HHI for
diagnosing unilateral price effects in markets with
differentiated products. If the value of diverted
sales is proportionately small, significant unilateral
price effects are unlikely.”
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Coordinated Effects

Assess potential competitive problems from the
merger
Will
the merger enhance coordination in a
concentrated industry?
How many sellers must we have for cartelization
or tacit collusion to be difficult?
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Entry

Contestable Market Theory
Cannot
judge market power by number of actual
sellers
Potential entry make exert substantial control over
prices
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Efficiency Benefits

Merger-specific efficiencies
Efficiencies
that would not be achieved but for the
merger

Market by Market
Assess
each market, and challenge if anticompetitive in any market
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Efficiency Benefits
Not:
assess net gains, net costs and go forward if
gains exceed costs
But: restructure in harmed markets to solve
problem
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