The Law and Economics of Horizontal Mergers
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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.”