Incentives to MergeMerger to attain monopoly

Merger for Improved efficiency

Takeovers

D

AC1

AC2

Q2 Q1

P2

P1 A

B

$/Q

Q

The Economic effects of MergersTheoretical Considerations

Dominant Firm-Competitive FringeCournotBertrand

Empirical AnalysesEvent analyses (Eckbo; Prager) Merger Specific Analyses (Northwest-

Republic)

Implications of DF-CF Model for MergersIf 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 increaseEfficiency gains may offset market power

effects

1985 1986 1987

Markup Relative to industry average prices (%)

NW +Rep + Other

NW or Republic + Other

NW + REPNW or Rep

10

20

30

40

Merger Policy in PracticeLegal foundation of merger policy

Clayton Act, Section 7Hart Scott Rodino

Antitrust enforcementJudicial Treatment of mergers

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 anyline of commerce in any section of the country, the effectof such acquisition may be substantially to lessencompetition or to tend to create a monopoly.

* in any line of commerce in any section of the country*the effect…may be to lessen competition or tend to create

Language matters….

Hart Scott RodinoRequires 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

2010 Merger Guidelines “The unifying theme of the Guidelines is that

mergers should not be permitted to create, enhance or entrench market power or to facilitate its exercise.”

The DOJ/FTC Merger GuidelinesMarket DefinitionMarket concentrationEntry ConditionsOther Competitive IndicatorsMerger-induced efficiencies

Market DefinitionBegin with a small geographic and product

definition.Could a hypothetical monopolist raise prices

by a small but significant and non-transitory amount?YesNo

(dd-side product, dd-side geographic, ss-side product, ss-side geographic substitutability)

Market ConcentrationHerfindahl-Hirschmann Index

HHI = Σ S2i

0<HHI<10,000(Post merger) HHI < 1500 - unconcentrated 1500 <HHI< 2500 -- moderately concentrated

if ΔHHI <100 if ΔHHI >100

2500 <HHI -- highly concentrated If 100< ΔHHI <200 “potentially raise significant competitive

concerns” if ΔHHI >200 “presumed to be likely to enhance market power”

Entry conditionsPrior taxonomy:

Uncommited EntryCommitted entry

Entry requiring significant sunk costs

“The Agencies will consider the actual history of entry into the relevant market and give substantial weight to this evidence.”

Timely (“former language” w/i two years; now “rapid enough…”)

Likely (profitable at pre-merger prices), and Sufficient (enough to discipline prices)

Other Competitive IndicatorsWould merger facilitate collusion?

Facilitate monitoring of cheatingPromote ability to punish cheatersFactors: e.g., product homogeneity; are

transactions prices “visible”; are demand and cost changing rapidly; maverick firm

Merger-Induced EfficienciesConsistent with Williamson Trade-offOnly considered if merger is only means of

achieving efficienciesConsider the case of efficiencies to gain

economies of scale...

Brown Shoe Company v. U.S.Merger of Brown and Kinney shoes (retail)market:

product markets: mens, womens, childrens’ geographic : any city over 10,000

“We cannot avoid the mandate of Congress that tendencies toward concentration in industry are to be curbed in their incipiency”

FTC v. Coca-ColaCoca-Cola - Dr. Pepper, Pepsi - 7-Up

announce merger plansFTC issues preliminary injunctionCoca-Cola-Dr. Pepper challenge in courtCritical 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 networklimited buttons on “Coke Machines”

Anticipated anticompetitive effectsThird party bottler problem

Court’s finding “the acquisition totally lacks any apparent redeeming feature.”