Transcript Theories of Harm in Horizontal Mergers

Horizontal Mergers and
Coordinated Effects
Eric Emch, OECD
[email protected]
1
Why Have a Merger Policy?
• We care about price-fixing, for one obvious and
one not-so-obvious reason.
• Prohibiting price-fixing without restrictions on
horizontal mergers creates a loophole.
– In fact, this logic may have contributed to US merger
wave of 1887-1904; diff. between European (cartel)
and US (merger) experience?
– Merger wave stopped in part due to greater law
enforcement attention to mergers
2
Why do we care?
• Obviously, we don’t only care about mergers to
monopoly
• More generally, reducing competition in a
market can lead to harmful effects on:
– price dimensions (most straightforward)
– quality dimensions (less straightforward)
– innovation dimensions (even less straightforward)
(we will focus on price, but discuss other dimensions too)
3
P
Consumer Surplus in a
Competitive Market
Consumer
Surplus
Pc
Demand Curve
Qc
Q
4
P
Effects of Price Rise After
Acquisition of Market Power
A. Consumer
Surplus
Pm
C. Deadweight Loss
B. Profits
Pc
Demand Curve
Q
Qm
Qc
5
Why are high prices bad?
• Money transferred from consumers to
firms
– EU explicitly, US implicitly consider this a bad thing
– Canada closer to ignoring this
• Creates deadweight loss
– Smaller in size, but more universal concern
6
Non-Price Effects
• Quality
– Similar effects to pure price rise, but there are
measurement issues
• Innovation
– A complication: cooperation in R&D can often be a
good thing -- can bring critical economies of scale and
reduce duplicative effort
– Research joint ventures given much more leeway than
pricing cartels
7
Competitive Effects of Horizontal Mergers
LEGAL HISTORY IN THE
UNITED STATES
8
United States v. Brown Shoe
370 U.S. 294 (1962)
• Prohibited merger between 3rd and 8th largest shoe
sellers: In specific markets, combined shares exceeded
5% (and in some cities ranged from 20% to 57%)
• Court showed great concern with market shares,
concentration, and number/type of competing firms:
– “If a merger achieving 5% control were now approved, we might
be required to approve future merger efforts by Brown’s
competitors seeking similar market shares.”
– Stressed that a “large national chain” held this share in an
industry that is characterized by fragmentation and small
competitors
9
Brown Shoe, cont.
• Was the Court protecting competitors at the expense of
efficiency?
• “But we cannot fail to recognize Congress’ desire to
promote competition through the protection of viable,
small, locally owned business. Congress appreciated that
occasional higher costs and prices might result from the
maintenance of fragmented industries and markets. It
resolved these competing considerations in favor of
decentralization.” 370 U.S. at 344.
• No analysis of actual or likely effects; no consideration of
efficiencies; collusion was basically impossible (at least
20 competing firms)
10
United States v. Von’s Grocery
384 U.S. 270 (1966)
• Blocked merger of 3rd largest grocery retail
chain (4.7% share) and 6th largest (2.8%)
• Combined market share (7.5%) less than the
market leader (Safeway); Top 8 firms controlled
41%
• Court focused on “trend” toward concentration
and not the effects of this particular merger:
Concern over smaller, independent competitors
• Unilateral or coordinated effects? Very unlikely
11
Von’s, cont.
• Justice Stewart’s famous dissent:
– “[T]he Court pronounces its work consistent
with the line of our decisions under Section 7
since the passage of the 1950 amendment.
The sole consistency that I can find is that in
litigation under Section 7, the Government
always wins.”
12
Criticism of the 1960s Cases
• Judge Posner said that these cases “seemed, taken as a
group, to establish the illegality of any nontrivial
acquisition of a competitor, whether or not the
acquisition was likely either to bring about or shore up
collusive or oligopoly pricing. The elimination of a
significant rival was thought by itself to infringe the
complex of social and economic values conceived by a
majority of the Court to inform the statutory words ‘may
. . . substantially . . . lessen competition.’” Hosp. Corp.,
807 F.2d at 1385.
13
Current Analysis:
Scrutiny of Effects
• Lower courts undertake sophisticated, intensive
analysis of market structure and firm behavior to
determine when firms could successfully
coordinate their behavior or unilaterally raise
prices post-merger
• Statistical evidence is credited, and qualitative
factors are still given great weight
14
Competitive Effects from Horizontal Mergers
ECONOMIC THEORIES OF
HARM
15
Coordinated Effects Theory (1)
• Firms would generally like to have higher
industry prices if they can manage it
– Explicit price fixing is outlawed and can
increasingly lead to criminal prosecution
– There are many ways to effectively collude
without a formal agreement on fixing prices
• Tacit collusion: “A meeting of the minds without
the meeting”
• Can be more or less difficult depending on market
circumstances
16
Coordinated Effects Theory (2)
• Though firms generally have a collective
incentive to collude, they also have an individual
incentive to cheat on any agreement (classic
Prisoner’s Dilemma: Nash equilibrium is suboptimal)
• Repeated games allow for successful collusion,
which requires:
1. Some way of reaching terms of coordination
2. Some way of monitoring compliance
3. Some way of punishing deviations
17
Firm 2
Collude
Collude
Defect
(2,2)
(0,3)
(3,0)
(1,1)
Firm 1
Defect
18
Coordinated Effects Theory (3)
• Ways that firms can collude:
– Price-based rules
• Explicit or implicit coordination or bid-rigging
– Quantity-based rules
• Fixing sales volumes, market shares, or capacities
– Assignment rules
• Geographic/product market division
– Facilitating practices
• MFN, MCC clauses or common sales agents
19
Coordinated Effects Theory (4)
• Market conditions that facilitate collusion:
– High concentration (few players) on seller side, low
concentration on buyer side
• But criminal record has shown cartels with large #
of firms
– Transparency (of prices, quality attributes)
– Homogeneity (of goods, firms, customers)
• Absence of mavericks
(many other factors have been mentioned that do not strictly fall into
these categories)
20
Coordinated Effects Theory (5)
• Merger may increase likelihood of collusive
activity, either explicit or implicit
– Increases concentration
– May eliminate maverick firm
– May narrow asymmetries among firms
• Key question: Why weren’t they colluding prior
to merger? What difference does the merger
make?
– One way to look at it: collusion may be a continuous,
not a discrete variable
21
Competitive Effects of Horizontal Mergers
RECENT U.S. CASE STUDIES
22
Coordinated Effects:
FTC v. Arch Coal (2004)
• Five major producers of coal in the relevant
market: Peabody, Kennecott, Arch, RAG &
Triton. Arch buying Triton
• Post-merger, still five in that Arch would sell a
mine to Kiewit (“fix-it-first”)
• Although market was highly concentrated (HHI
of around 2000-2200), merger resulted in HHI
change of only between 49 and 224 points
23
Court’s Analysis
• Prima Facie burden met, but this was a
weak “presumption” case (cf. Heinz where
HHI increase of 510 on a 4775 base), so
D’s burden is not as high
• Court also indirectly questions “check-list”
approach; prefers in-depth analysis of
exactly how coordinated activity is likely to
occur
24
Focus on Facts
• Court finds that although collusion may
occur, it is not likely to occur:
– Current market is competitive
– No evidence of actual collusion (yet amazing
examples of interest)
– Market structure inhibits coordination: Powerful
customers, incomplete information, no effective
punishment mechanism
– Fringe would step-in
25
DOJ v. Mactac/Raflatac (2003)
• Merger between producers of paper labelstock
• Pre-merger: Nine producers, but only three “firsttier” producers, Avery (49%), MACtac (12%), Raflatac
(11%)
• Merger between MACtac and Raflatac: relatively
small change in HHI, though market “highly
concentrated” by guidelines
• Elements of both coordinated effects and unilateral
effects in harm story
–
–
–
–
UPM (Raflatac) now sells paper to all first-tier firms
Only two first-tier firms remain
Fringe can’t discipline potential price increase
MACtac, Raflatac each other’s closest competitors
26
Coordinated Effects Factors
• Coordinated effects checklist:
– High concentration on seller side, low on buyer
side?
• Yes: 3 “first tier” sellers, buyers unconcentrated
– Transparency?
• Producers know lots about competitors
– Firms in many cases know competitors’ sales to each
customer. In individual competitions, often know
both competitor & price
• Raflatac sells label paper to Avery (cost side info)
– Homogeneity?
• Little product differentiation between big three; MFN
clause means cost similarity for big two
27
Coordinated Effects Factors
• Terms of coordination:
– Possible coordination on prices
– Raflatac upstream parent UPM sells label paper to Avery;
avenue for transfers and information exchange
– Evidence of attempts to collude pre-merger (signaling,
retaliatory price cuts, noncompete agreements), though
market seen as reasonably competitive
• What difference does merger make?
– Elimination of maverick (Raflatac changes behavior)
– One fewer top-tier competitor
– Greater homogeneity
28
Final Thoughts
• Market definition and market shares are
necessary, but only a first step.
• Current guidelines by most competition
authorities provide a way to structure your
thinking, not a simple formula
• Logic must be clear and backed up by
quantitative and qualitative evidence to be
convincing to outside arbiters, like courts
29
Some References
•
•
•
•
•
•
European Commission, Guidelines on the assessment of horizontal mergers under the Council
Regulation on the control of concentrations between undertakings (2004/C 31/03) , available at
http://ec.europa.eu/comm/competition/mergers/legislation/notices_on_substance.html#hor_g
uidlines
Japanese Fair Trade Commission, Guidelines to Application of the Antimonopoly Act Concerning
Review of Business Combination, May 31, 2004, (amended on May 1, 2006, March 28, 2007).
(English translation available at: http://www.jftc.go.jp/epage/legislation/ama/RevisedMergerGuidelines.pdf)
Korean Fair Trade Commission, Notification on M&A Review Guidelines, Notification 1999-2
(English Translation available at http://www.ftc.go.kr/eng/)
U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines,
March 2006 (available at: http://www.usdoj.gov/atr/public/guidelines/215247.htm)
U.S. Department of Justice and Federal Trade Commission, Commentary on the Horizontal
Merger Guidelines, March 2006 (available at:
http://www.usdoj.gov/atr/public/guidelines/215247.htm)
Motta, Massimo, Competition Policy: Theory and Practice, Cambridge University Press, 2004,
Chapter 5: “Horizontal Mergers.”
30