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How do Economists use Evidence?

Luke FroebVanderbilt University

luke.froeb@owen.vanderbilt.edu

10:30am, 24 April 2012

NAAG Midwestern Region MeetingWyndham Hotel 633 N St. Clair St. Chicago, IL 60611

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Acknowledgements

Michael Doane, Competition Economics

Forbes Belk, Competition Economics

Greg Werden, US Dept of Justice

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OUTLINE (15 minutes)

I. What do economists do?

II. “Natural” experiments Perch bid rigging Car Rental merger

III. Structural Models CRB merger

IV. Lessons for NAAG’s

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I. What good are economists, anyway?

Antitrust litigation poses “but-for” (counter-factual) questions Did this conspiracy raise price? Will this merger harm consumers?

Economists are trained to answer these questions? Econometric comparisons (“natural” experiments)

How good is the experiment? Is the experiment a good “metaphor” for effect?

Economic models How well does the model fit the evidence? Are the predictions of the model biased?

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II. Perch Bid-rigging Conspiracy

Price collapsed suddenly after DOJ began investigation

Use the post-conspiracy period to estimate model of frozen fish prices.

Backcast into conspiracy period to determine “but for” prices

Froeb, Luke, Robert Koyak & Gregory Werden, What is the Effect of Bid-Rigging on Prices?, Economics Letters, 42 (1993) pp. 419-423. available at SSRN

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Conspiracy raised price 23% above “but-for” prices

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Is Big Bad Again?:Staples-Office Depot Aftermath

Staples-Office Depot merger was successfully challenged by FTC using price comparisons Prices 7.5% higher in one-office superstore cities than in two-office

superstore cities With a 15% estimated pass-through rate, would imply a 50% mc reduction

to offset merger effect.

Would you block merger based on these data?

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What could go wrong?

Experiment is “polluted,” i.e., something else accounts for results Spurious correlation Example: movie tickets (Davis, 2005)

Finding: Price is $0.90 higher with competitor <.5 mile away Movie theatres are locating in areas with high demand

Experiment might be bad metaphor for merger Merger changes ownership concentration Does data mimic this effect?

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New Work on Car Rental Mergers

Doane, Michael J., Luke M. Froeb, and David Zimmer, and Gregory Werden, Pricing and Ownership Concentration: A New Estimation Strategy (April 4, 2012), available at SSRN.

Dollar-Thrifty rebuffed two suitors Avis-Budget Hertz-Advantage

Expedia Price Data from 400 airports in US

Compare prices with at airports with same number of brands, but different ownership structures Are prices higher at airports with three 1-brand firms, or one 3-brand firm? Comparison can “predict” effects of ownership change caused by merger.

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At Which Airports will the Proposed Car Rental Mergers Raise Price?

PredictedMarket Average Price Increase

Acquisition by Avis-Budget

Acquisition by Hertz-Advantage

.01–.99% 0 2

1.00–1.99% 11 77

2.00–4.99% 104 38

5.00–9.99% 3 0

10.00–19.99% 2 0

>19.99% 0 0

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III. Model Example:US v. Altivity and Graphic (2008)

US DOJ challenge Altivity (35%) + Graphic (17%) of North American capacity

Market Geographic: North America Product: Coated Recycled Board

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Theory of Harm

Nicholas Hill, “Analyzing Mergers with Capacity Closures,” DOJ Working paper, at SSRN

Model: Once built, mills produce at capacity; and merger would increase incentive to close mills

Mechanism: mill shutdown supply decrease higher price

Model tells us What matters: demand elasticity, import supply response Why it matters: increases profitability of shutdown How much it matters: divest 2 plants representing 11% of capacity

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Why Attorneys Should Care About Modeling

Models are “blueprints” for enforcement Model guides interpretation of evidence Evidence guides selection of model

Agencies do it 2011 DOJ blocked H&R Block/TaxAct proposed merger 2009 FTC blocked CCC Holdings/Aurora proposed merger

Other reasons Analysis of models provides a solid foundation for enforcement concerns Analysis of models clarifies the precise nature and determinants of mergers in

particular settings. Application of models to cases permits a fact-based, quantitative assessment

of merger effects.13

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Conclusions

Economists are uniquely trained to answer the kind of “but-for” questions that arise in litigation

The earlier you get an economist involved, the better off you will be But you have to communicate frequently

Tip for communicating: ask three questions 1. How will economist investigate the questions posed by the case? 2. What are the possible outcomes of the investigation? 3. How will the outcomes influence judge or jury?

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