Anticompetitive Mergers Research Articles

The Role of Efficiency under the EU Merger Regulation

Since the introduction of the EU merger control mechanism in 1990, the European Commission has always denied merging parties the option of using a defence based on efficiency considerations to show why an otherwise anticompetitive merger should be cleared. At the end of 2002, however, the Commission made an apparent U-turn in this regard. In fact, the reform package it is currently proposing includes a draft of the horizontal merger guidelines in which a whole section is dedicated to the treatment of efficiencies.

Merger Laws, Globalization, and Corporate Value

This paper is the first attempt to isolate the direct effect of competition laws on a country's merger activity and indirectly on corporate value. We find that, although the direct relationship between merger laws and Tobin's Q is positive and significant, once we control for the net cross-border merger flows in a country, the relationship vanishes. We conclude that the positive effect of merger laws on corporate value is driven by their deterring effect on horizontal, cross-border, anti-competitive mergers. To the extent that the trend towards globalization in the world has dramatically increased merger flows from some countries to others, we argue that there is a need for competition laws that make up for the pervasive effects of the global market on some countries. We also show that the European Merger Directive has had a negative impact on corporations value.

Antitrust, Innovation, Entrepreneurship and Small Business

The purpose of this article is to discuss a few aspects of antitrust enforcement that are directly related to small businesses. The first point concerns how the antitrust laws work as an economic "charter of freedom" by protecting our economy from the misuse of market power by dominant firms, or from anticompetitive collusion by groups of firms, or from anticompetitive mergers, all of which can blunt the mainspring of our economic success – competitive markets. Second is an expansion on the first theme which focuses on how antitrust enforcement helps preserve two freedoms that I think small businesses care about very much: the freedom to engage in entrepreneurship, and the freedom to innovate. A final discussion involves a few recent cases recently seen at the Antitrust Division that illustrate the many ways in which antitrust enforcement has helped the small business marketplace.

Why Mergers Reduce Profits, and Raise Share Prices: A Theory of Preemptive Mergers

We explain the empirical puzzle why mergers reduce profits, and raise share prices. If being an insider is better than being an outsider, firms may merge to preempt their partner merging with a rival. The stock-value is increased, since the risk of becoming an outsider is eliminated. We also show that mergers increasing consumers' prices, while increasing competitors' profits, may reduce their share-prices. Thus, event-studies may not detect anti-competitive mergers. These results are derived in an endogenous-merger model, predicting the conditions under which mergers occur, the time of merger, and the split of surplus.

Mergers, Cartels, Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions

From bidding data, we estimate the underlying value distribution for Forest Service timber. We find that bidder values decrease $2/mbf (thousand board feet) with each mile from the tract and that small firms (fewer than 500 employees) have values that are $72/mbf lower than large firms. The empirical value distribution is used to simulate various hypothetical scenarios designed to inform public policy. The most anticompetitive mergers raise price by less than 3%, and a 4% decline in marginal costs through greater merger efficiencies is enough to offset a 1% anticompetitive price increase. Eliminating the SBA set-aside program would raise timber revenues by 15%. A policy of granting bidding preferences to small and more-distant bidders would raise revenue by approximately one-tenth of one percent.

The Entry‐Inducing Effects of Horizontal Mergers: An Exploratory Analysis

Antitrust law presumes that entry normally prevents or reverses anticompetitive effects from horizontal mergers. But when sunk costs associated with entry are at levels suggested by prevailing market structure, the opportunity for entry created by an anticompetitive merger plausibly is too small to induce entry, even absent Stiglerian ‘barriers to entry.’ This is illustrated for Cournot and Bertrand models. Significant entry also makes otherwise profitable Bertrand mergers unprofitable, assuming no efficiency gains. Consequently, the entry issue can be collapsed into the efficiency issue: if a presumably profitable merger does not generate significant efficiencies, it cannot be expected to induce entry.

Night Landings on an Aircraft Carrier: Hospital Mergers and Antitrust Law

Justice Stewart’s 1966 dictum about the inevitability of government success in challenging mergers under Section 7 of the Clayton Act held true for another fifteen years or so. In the early 1980s, however, federal enforcement agencies, the Department of Justice (DOJ) and the Federal Trade Commission (FTC), began to find the federal courts less hospitable to antitrust merger cases as more sophisticated economic inquiries and changing proof burdens complicated the task of identifying anticompetitive mergers. Indeed, since the early 1980s, the government has lost more litigated merger cases than it has won and has come under criticism from some quarters for becoming gun shy and not adequately policing the wave of consolidations that have occurred over the past decade.Hospital mergers, however, are a different story. Until two years ago, the government rode a streak of important victories in federal courts and FTC administrative proceedings, and had obtained consent decrees from scores of hospitals that had announced plans to merge.

The Suitability of the European Merger Control System: An Analysis of Five Years of Application / Die Eignung des europäischen Fusionskontrollsystems zur Erfassung wettbewerbswidriger Zusammenschlüsse: Eine Analyse von fünf Jahren Anwendungspraxis

Summary On September 21, 1990 the European Merger Control System became effective. The author discusses three problems that have arisen in the European debate on establishing a supra-national merger control, namely, the question of: - turnover thresholds to institute control proceedings, - purely competitive or a mixed competitive-industrial policy criterion a la France to take action against anti-competitive mergers, and - residual national jurisdiction should a national market dominant position be created rather than a Community-wide restraint of trade. Finally, the author tries to evaluate the decisions taken by the European Commission up to the end of 1995 and proposes institutional changes in the merger control system, as the workability of the existing system can only be improved by making use of institutional economics.

Merger policy guidelines for the electric power industry

With the emergence of competition as a major public policy goal, the clear trend toward anticompetitive mergers should be ended. At the root of current policy failure is FERC's exclusive focus on transmission access and its mistaken presumption that concentration in generation and distribution are of little importance. The merger guidelines proposed here are intended to stem the merger wave and permit a competitive process to flourish.

Price Discrimination and Mergers

The authors demonstrate how purely anticompetitive horizontal mergers can produce larger gains for merging firms than for nonmerging firms. Moreover, these anticompetitive mergers do not promote entry. These findings, which eliminate a long-standing free-rider problem from the previous merger literature, stem from the ability of firms to price discriminate under asymmetric competition. To illustrate, the authors use a spatial model of consumer preferences. Their results suggest that merger may significantly reduce consumer surplus in markets with certain characteristics, such as those where bidding occurs. The authors' model also shows that price discrimination facilitates entry deterrence in spatial markets.

The Horizontal Merger Guidelines of 1992

The 1992 Horizontal Merger Guidelines of the Department of Justice and the Federal Trade Commission outline an enforcement policy which makes a long overdue break with its predecessors in awarding no decisive or predominant role to market concentration as a criterion of anticompetitive effect. However, the new policy does not provide an adequate substitute criterion: the tests that it prescribes for screening merger proposals are so specified that a potentially large proportion of anticompetitive mergers can escape challenge without showing any promise of improving efficiency. The time is ripe for a comprehensive inquiry aimed at formulating a more satisfactory policy.

Electric utility mergers: principles of antitrust analysis

Preface Market Power and Antitrust Analysis Competition and Regulation in the Electric Power Industry Recent Developments in Wholesale Power Markets Market Definition in the Electric Power Industry Competitive Effects of Horizontal Mergers Competitive Effects of Vertical Mergers Utility Mergers and Retail Competition Remedies for Anticompetitive Mergers Efficiency Analysis of Electric Utility Mergers Bibliography Index

Entry, exit, and performance in airline markets

Data from the airline industry indicate that: (1) entry generally is not induced by price levels substantially above the norm; (2) entry reduces fares and increases output, and exit increases fares and reduces output; and (3) incumbents cut price and maintain output in response to entry, and survivors increase both price and output in response to exit. These findings cast doubt on the ability of entry to prevent or reverse price increases from anticompetitive mergers.

Competition policy and the liberalisation of European aviation

The European aviation industry is undergoing a process of liberalisation. One of the important lessons of American deregulation was that the industry is not perfectly contestable. One implication of this is that actual competition on a route is important in order to be able to secure the benefits of deregulation or liberalisation. Another is that effective competition policy is important in order to prevent anti-competitive mergers or predatory behaviour. This paper reviews the merger investigations in European aviation which have accompanied the search by carriers to secure the benefits of market power, and considers the extent of route competition within the European Community and its relationship to the different route licensing policies of different national governments. The paper considers the extent of present competition on the busiest routes, and stresses the importance of cabotage rights in opening up the European market to effective competition.

The evaluation of public benefit and detriment under the commerce act 1986

Under the Commerce Act 1986, whose stated objective is “to promote competition in markets within New Zealand”, an anticompetitive merger or restrictive trade practice may be authorised by the Commerce Commission on public benefit grounds. The purpose of this paper is twofold. Firstly, certain broad categories of frequently claimed benefits and detriments, and their evaluations by the Commission and Courts are assessed in the context of the Williamson merger tradeoff model. Secondly, the approach adopted by the Commission and Courts in balancing benefits and detriments is considered. About 1990 the “income weighting” approach favoured by the Commission was, under the influence of early decisions by the Courts and other factors, supplanted by an “efficiency” approach This new approach was endorsed in the recent review of the Commerce Act. Amendments to the Act to entrench that approach are expected.

Barriers to contestability in the deregulated European aviation market

The deregulation of aviation in the United States and intercity bus transport in the United Kingdom initially resulted in substantial fare reductions associated with new market entry. Many new market entrants subsequently left the market and fares increased. International aviation in Europe has been operated by national airlines with price collusion and capacity sharing and a ban on new entrants. The normal economy fares charged on air services within Europe are the highest in the world. Therefore, there is significant scope for fare reductions when the European Community (EC) internal market comes into operation in 1993. Deregulation of market access will, however, leave unaddressed other barriers to contestability in the deregulated European aviation market. The structural barriers to contestability include hub airport dominance by the incumbent airlines, ground handling monopolies, and computer reservation system (CRS) bias. The paper proposes measures to ensure access to major airports for new entrant airlines on equal terms with incumbent airlines and the deregulation of the market for airport ground handling. The EC code of conduct for the neutral operation of CRS for incumbent and new entrant carriers is an important precedent. The strategic obstacles to contestability in a deregulated European airline industry are anticompetitive mergers and predatory pricing. In recent years national airlines have acquired several independent airlines in important European markets. It is recommended that such takeovers be prohibited because of their anticompetitive implications in the absence of competition between national airlines. The large networks of national airlines allow them to pursue policies of geographical price discrimination with reduced fares on contested routes and higher fares on uncontested routes. Price surveillance is recommended to explain fare differences between contested and uncontested routes. It is recommended that the EC competition policy exemption for price consultations between airlines be ended. Without measures to tackle the structural and strategic obstacles to competition in European aviation, its liberalization may have no impact on the present high-cost system.

The new EEC Merger Control System

On September 21st, 1990 the EEC Merger Control System became effective. The author discusses three problems that have arisen in the European debate on establishing a supra-national merger control: - The question of the turnover thresholds to institute control proceedings. - The question of a purely competitive or a mixed competitive-industrial policy criterion a la France to take action against anti-competitive mergers. - The question of the residual national jurisdiction if there is no Community-wide restraint of trade, but a national market dominant position is created.

Can event studies detect anticompetitive mergers?

Using standard event study methodology, we examine a challenged horizontal merger known ex post to be anticompetitive. The event study shows no evidence that the merger was anticompetitive. This result casts doubt on the ability of event studies to detect anticompetitive mergers.

Mergers and the Market Concentration Doctrine: Evidence from the Capital Market

The last 3 decades of vigorous enforcement of U.S. antimerger laws is based on the market concentration doctrine, one of the oldest and most controversial propositions in industrial economics. This doctrine, which is an implication of oligopoly models in the tradition of Cournot ([1838] 1927) and Nash (1950), holds that the level of industry concentration is a reliable index of the industry's market power. The empirical implication is that a relatively high level of industry concentration, which in the presence of entry barriers is believed to facilitate intraindustry collusion or dominant-firm pricing, should be associated with relatively large industrywide monopoly rents.' Following Bain (1951), numerous The market concentration doctrine predicts that a horizontal merger is more likely to have collusive, anticompetitive effects the greater the merger-induced change in industry concentration. Since a collusive, anticompetitive merger generates an increase in the industry's quality-adjusted product price (or a decrease in factor prices), it also follows from the doctrine that the mergerinduced expected benefits to the product market rivals of the merging firms should be an increasing function of the concentration change. The empirical results of this paper, which are based on the industry wealth effect of a large sample of horizontal mergers, including cases found in violation of antimonopoly laws, fail to support this prediction. This conclusion is robust with respect to assumptions concerning the probability that a proposed merger will be prevented by the law enforcement agencies, and it continues to hold after transforming the industry wealth effect into a hypothetical, constant expected change in the industry's product price. The results imply that the levels of concentration and market shares found in the Department of Justice's merger guidelines are unlikely to identify truly anticompetitive mergers. * I wish to thank Paul Asquith, Gregg Jarrell, Rex Thompson, Walter Vandaele, the participants of the economics workshop at the Antitrust Division of the U.S. Department of Justice, and a referee of this Journal for helpful comments. Earlier drafts were presented at the 1983 meetings of the European Association for Research in Industrial Economics and at the 1984 meetings of the Western Finance Association. Financial support from the Social Sciences and Humanities Research Council of Canada (grant no. 494-83-0091) and the U.S. Federal Trade Commission is also gratefully acknowledged. 1. A closely related but somewhat less general prediction is that high levels of concentration should be associated with relatively high, supracompetitive product prices. Although

Efficiency Considerations in Merger Enforcement

This is one of the first articles to demonstrate that the primary goal of antitrust is neither exclusively to enhance economic efficiency, nor to address any social or political factor. Rather, the overriding intent behind the merger laws was to prevent prices to purchasers from rising due to mergers (a wealth transfer concern). This is the first article to show how to analyze mergers with this goal in mind. Doing so challenges the fundamental underpinnings of Williamsonian merger analysis (which assumes mergers should be evaluated only in terms of net efficiency effects).In this and three related articles we re-do the Williamsonian tradeoff, using price to consumers, instead of net efficiencies, as our focus. We show how a price focus would require substantially more efficiencies to justify an otherwise anticompetitive merger. We demonstrate this by calculating how large the necessary efficiency gains would have to be to prevent price increases under different market conditions. We also show that under efficiency analysis even a tiny cost savings would justify almost any merger, so a purely efficiency-based approach effectively would negate the anti-merger laws! Finally, we demonstrate that price analysis is much more predictable and easier to administer than efficiency analysis.