Transcript The Law and Economics of Horizontal Mergers

Georgetown University
The Law and Economics of
Horizontal Mergers
Incentives to Merge
 Merger
to attain monopoly
 Merger
for Improved efficiency
 Takeovers
The Williamson Tradeoff
$/Q
P2
P1
B
AC1
A
AC2
D
Q2
Q1
Q
The Economic effects of
Mergers
 Theoretical



Considerations
Dominant Firm-Competitive Fringe
Cournot
Bertrand
 Empirical Analyses


Event analyses (Eckbo; Prager)
Merger Specific Analyses (NorthwestRepublic)
Implications of DF-CF Model for Mergers

If a dominant firm mergers with a competitive
fringe firm, market power and price will rise
(ceteris paribus)
 The magnitude of market power increases
depend on standard DF-CF Market power
factors (concentration; fringe SS elasticity,
market DD elasticity)
 Without barriers to entry, no MP increase
 Efficiency gains may offset market power
effects
Cournot
• Each firm produces an output to maximize profit,
given the output of all other firms. Nash
Equilibrium, when, given the output of others, no
firm wishes to change output
Bertrand
Each firm sets a price to maximiye ist profit,
given the price of other firms. Nash Equilibrium
when, given the price of all other firms, no firm has
an incentive to change price.
Northwest/Republic Merger
Markup Relative to industry average prices (%)
40
NW or Rep
NW + REP
30
20
NW or Republic + Other
10
NW +Rep + Other
1985
1986
1987
Merger Policy in Practice
 Legal


foundation of merger Policy
Clayton Act, Section 7
Hart Scott Rodino
 Antitrust
enforcement
 Judicial Treatment of mergers
The Clayton Act, Section 7
That no corporation engaged in commerce shall acquire,
directly or indirectly, the whole or any part…of another
corporation also engaged in commerce, where in any
line of 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.
Language matters….
* in any line of commerce in any section of the country
*the effect…may be to lessen competition or tend to create
Hart Scott Rodino
 Requires
pre-notification of intent to
merger be filed with both the Federal
Trade Commission and the Department of
Justice, Antitrust Division
 The relevant antitrust agency has 30 days
to green light or issue a “second request”
 Second requests typical involve large
detailed filing
 Once complete DOJ/FTC has 20 days
1997 Merger Guidelines

The unifying theme of the Guidelines is
that mergers should not be permitted to
create or enhance market power or to
facilitate its exercise.
The DOJ/FTC Merger Guidelines
 Market
Definition
 Market concentration
 Entry Conditions
 Other Competitive Indicators
 Merger-induced efficiencies
Market Definition
 Begin
with a small geographic and product
definition.
 Could a hypothetical monopolist raise
prices by a small but significant and nontransitory amount?


Yes
No
• (dd-side product, dd-side geographic, ss-side
product, ss-side geographic substitutability)
Market Concentration
 Herfindahl-Hirschmann




Index
HHI = Σ S2i
0<HHI<10,000
(Post merger) HHI < 1000 unconcentrated
1000 <HHI< 1800 -- moderately
concentrated
• if ΔHHI <100
• if ΔHHI >100

1800 <HHI -- highly concentrated
• if ΔHHI <50
• if ΔHHI >50
Entry conditions
 Uncommitted

Within one year and not involving significant
sunk costs
 Committed

Entry
entry
Entry requiring significant sunk costs
• Timely (w/i two years)
• Likely (profitable at pre-merger prices), and
• Sufficient (enough to discipline prices)
Other Competitive Indicators
 Would



merger facilitate collusion?
Facilitate monitoring of cheating
Promote ability to punish cheaters
Factors: e.g., product homogeneity; are
transactions prices “visible”; are demand and
cost changing rapidly; maverick firm
Merger-Induced Efficiencies
 Consistent
with Williamson Trade-off
 Only considered if merger is only means of
achieving efficiencies

Consider the case of efficiencies to gain
economies of scale...
FTC v. Coca-Cola
 Coca-Cola
- Dr. Pepper, Pepsi - 7-Up
announce merger plans
 FTC issues preliminary injunction
 Coca-Cola-Dr. Pepper challenge in court
 Critical issue: Market definition


FTC - carbonated soft drinks (pricing
decisions of executives)
Coca-Cola - all potable liquids sold in North
America (Lake Erie defense)
FTC v. Coca-Cola (cont.)
 Barriers



to entry
sunk costs of entry (brand name awareness)
requirements for distribution network
limited buttons on “Coke Machines”
 Anticipated

anticompetitive effects
Third party bottler problem
 Court’s
finding “the acquisition totally lacks
any apparent redeeming feature.”