Transcript Assessing the efficacy of structural merger remedies

Assessing the efficacy of structural
merger remedies: choosing between
theories of harm?
Steve Davies and Matt Olczak,
ACLE EC Competition Enforcement Data
Workshop, Amsterdam, April 2008
www.ccp.uea.ac.uk
Motivation
Motta et al (2002) important trade-off inherent in
structural merger remedies:
1) Ensure create a viable competitor to prevent the
merged entity establishing a dominant position.
However;
2) Creating a viable competitor may enhance symmetry
and make collective dominance more likely.
Previous literature on the efficacy of merger
remedies has focused on 1). In particular ex-post
evaluations conducted by CA’s e.g. FTC (1999) and EC
(2005).
EC (2005) find that the effectiveness of a remedy is
more likely to be in doubt the less of the overlap
created by the merger is divested.
Our approach
• Motta (2004) ideally a merger should be cleared subject
to remedies ONLY if neither single dominance (SD) or
collective dominance (CD) are expected to result post
remedy.
• Our approach:
- Assemble a database of structural remedied mergers
and identify the structures resulting from the remedies.
- Assess the ‘competitiveness’ of the outcome resulting
from the remedy.
Remedy sample
• Davies et al (2008) identified a sample of 62 mergers
from 1990-mid 2004 in which the EC seriously
considered CD.
• 25/62 mergers involved a intervention in 1 or more
market (4 mergers prohibited).
• These 25 mergers covered 222 markets where
interventions occurred in 118 (30 CD and 88 SD)
• Of these 118 we can identify the pre merger and post
structural remedy market structure in 66 (23 CD and 43
SD).
We examine the impact of the structural remedies in
these 66 markets (17 mergers)
The scale of divested assets
Relative to Prohibition
ME2
Less
Equal
30
More
TOTAL
30
Remedy
Total
9
9
23
53
4
4
36
66
Return to the status quo
• FINDING 1: the ‘typical’ divestment remedy returns
the market share of the merged entity to the premerger share of the larger of the merging parties.
Who purchases the divested assets? Typically an
entrant (In only one merger was the purchaser already
present in the market concerned).
• FINDING 2: the most common outcome following a
structural remedy is return to the pre merger market
structure.
How ‘competitive’ is the pre merger market structure?
Structural Model
estimated using POST merger market shares
SUM=S1+S2 & RATIO=S2/S1
N=222 markets:
PCD  14.524**  0.0985( SUM )**  8.508( RATIO)**
(2.162)
(0.0191)
(2.171)
PSD  1.521**  0.0608( SUM )**  5.650( RATIO)**
(0.540)
(0.0101)
** indicates significance at 99% level
(1.175)
Pseudo R2 = 0.445
Correct Predictions:
%
All
SD
CD
NI
79
77
80
80
Graphical implications of estimated
structural model
100
80
SD
S1
60
CD
40
NI
20
0
0
20
40
60
S2
80
100
Assessing competitiveness of market
structures
‘Competitiveness’
PRE
POST
REM
NI
40
17
35
SD
15
33
15
CD
11
16
16
FINDING 3: Almost 40% of markets present pre-merger
structures which would have been identified by the
Commission as displaying dominance (23% SD and 16%
CD) – had they been the result of a merger.
Type 1 errors
•
FINDING 4: in 47% (=31/66) of cases in this sample,
divestment remedies have resulted in market
structures which the EC would have sought to
remedy had they been the result of a merger, rather
than a remedy. (We refer to these as type 1 errors).
Possible interpretations of type 1 errors:
1) EC applies inconsistent criteria between assessing a
merger and designing a remedy.
2)
‘Sympathetic’ possibility: when framing a remedy
constrained by pre merger status quo. If status quo is
characterised by CD or SD so too will be any structure
attainable by a remedy.
Decomposing Type 1 errors
REM:
Freq
NI
DOM
PRE=NI, POST=Dom
Scope for successful
remedy
23
19
4
PRE=Dom, POST=Dom
Remedy likely to be
ineffective
26
1
25
PRE=NI, POST=NI
No need for remedy
17
15
2
Total
66
35
31
Remedy error rates
• Remedies are fairly ‘successful’ if the market was
‘competitive’ pre merger (error rate 4/23=17%)
• Remedies achieve almost no success if the market was
already ‘uncompetitive’ pre merger (error rate
25/26=96%
• In 17 cases the remedies were unnecessary & in 2 of
these 17 actually counterproductive (error rate 2/17
=12%)
Overall support for the ‘sympathetic’ interpretation.
The pre merger outcome can constrain the
effectiveness of the remedy.
Collective v Single Dominance
• 25 cases where dominance PRE & POST and remedy
ineffective:
19 PRE & POST presented same type of dominance
(14 SD & 5 CD)
Remaining 6:
PRE
CD
SD
POST
SD
CD
REM
CD
SD
5
1
• WEAK FINDING 5: EC appears more disposed to CD over SD.
A second type of error
• Type 2 errors: refraining from imposing a remedy even
though the merger led to a market structure which, in
other mergers, it would have associated with dominance.
Can type 2 errors be explained by the ineffectiveness of a
potential structural remedy?
• It turns out that often Type 2 errors can be explained by an
additional issue not reflected in original structural model –
RANK of the merged entity:
SD only tool for intervention for non-coordinated behaviour
and SD necessarily implied merged entity number 1 post
merger.
Re-estimate structural model dividing sample:
• Merged-entity number 1 MN logit: SD,CD,NI
• Merged-entity number 2 binary probit: CD,NI
Revised predicted theories of harm
100
90
80
70
SD (#1)
Sme
60
CD (#1)
CD (#2)
50
40
30
NI (#1)
NI (#2)
20
10
0
0
10
20
30
40
50
So
60
70
80
90
100
Alternative depiction
(with S1 and S2 on axes)
100
90
S1
80
70
SD (#1)
60
NI (#2)
50
40
30
NI (#1)
20
NI (#2)
CD (#1)
10
NI (#2)
0
0
10
20
30
40
CD (#1)
CD (#2)
50
S2
60
70
80
90
100
Type 2 errors
Rank of
Full
merged sample
entity
Davies et al
Revised
(2008)
structural
structural
model
model
Total SD CD Total SD CD
#1
171
6
4
2
6
4
2
#2
51
15
10
5
1
0
1
Reluctance to find CD when merged
entity is not the market leader
• FINDING 7: for a given post merger market structure,
the EC is less likely to remedy on grounds of CD if, post
merger, the merged entity would be the number 2
firm.
EXAMPLE: consider a post merger market structure
with S1=40% & S2=30%. The EC is predicted to find:
- CD if the merged entity is number 1
- NI if the merged entity is number 2
Explanations for Finding 7
• When the merged entity is number 2, a structural
remedy:
- Can reduce symmetry (a thus CD concerns)
- Cannot reduce the size of the market leader
Any remedy moves the market structure closer to a
position of SD
If, (as in weak-finding 5) SD is viewed as more of a
concern than CD this explains a reluctance to find CD in
such markets
Addition Econometric results show EC significantly less
likely to find CD when preS1≥40 & merged entity
number 2 post merger.
New ECMR
• Second, complementary explanation for finding 7:
When the merged entity is number 1 a SD finding is at
least a possibility. Might this in fact increase confidence
in a CD intervention?
• Particularly relevant since May 2004 when the new
ECMR gave the EC a new tool – EC can intervene for
non-coordinated behaviour when the merged entity is
NOT number 1
• Updating the sample:
May 2004 – mid 2007 13 additional mergers (274 mkts)
identified meeting criteria used to estimate Davies et
al (2008) structural model – in particular CE/CD
considered a serious issue
Decisions under the new ECMR
predicted using structural model
Prediction
Decision
NI
NI
SD
CD
146
28
10
UE/SD
10
77
1
CE/CD
2
0
0
Evaluating decisions made under the
new ECMR
• UE/SD decisions:
- Only 3 where the merged entity NOT the number 1 firm
- Typically in markets where under the old Merger
Regulation SD would be predicted
• CE/CD decisions:
- CE finding very rare – 2 cases (both ME number 1)
- Even here where CE found to be a problem it was
coupled with a UE finding in the same market
• Maverick firms:
- Very rare pre the reform of the ECMR
- Important in both CE findings under new ECMR (& for
UE as well as CE)
Conclusions
• Assessment of the ‘competitiveness’ of the outcomes arising
from structural merger remedies:
- Type 1 errors – EC intervention results in an uncompetitive
market structure
- Pre merger status quo imposes a significant constraint
- Weak evidence EC more disposed to CD than SD
• In markets where the merged entity is number 2:
- Explanation for Type 2 errors – EC refrains from intervening in
uncompetitive markets
- Imposing a remedy for CD leaves an outsider closer to a singly
dominant position
• Evidence from decisions under the new ECMR:
- Continued reluctance to intervene when merged entity number 2
- CE findings very rare and coupled together with UE