Antitrust Agencies Research Articles

Revising the US vertical merger guidelines: policy issues and an interim guide for practitioners

While the Horizontal Merger Guidelines issued by US antitrust enforcement agencies have been periodically revised since their first publication in 1968, the Vertical Merger Guidelines were last the subject of modification in 1984. Moreover, there appears to be little appetite within the agencies for revision; so interested parties are for the moment left with guidance which does not reflect contemporary economic theory, agency practice or the 2010 Horizontal Merger Guidelines. The aim of this article is to partially fill the gap left by this divergence, by providing both a modern analytical framework for the assessment of vertical mergers and illustrative examples of recent antitrust agency enforcement actions upon which practitioners and agency staff alike may rely. The article also identifies a number of legal and policy issues which would need to be considered were the Vertical Merger Guidelines to be revised. We hope that this article will facilitate a more rapid revision.

Assessment of Antitrust Agencies' Impact and Performance: A Proposal for an Analytical Framework

The assessment of antitrust agencies' impact and performance serves three goals: first, to assess how well competition agencies have done their job; second, to help to correct their future strategy and to improve the allocation of limited resources and, finally, to respond to the need for accountability of public agencies. In this paper, we propose a methodology to evaluate the impact of the interventions of antitrust agencies (e.g. infringement decisions, merger control decisions, advocacy work, etc.). The methodology proposed combines comprehensiveness (including all activities by agencies) and simplicity (through a number of synthetic indicators). The methodology classifies interventions according to their nature and impact measurability and proposes activity, relevance and impact indicators to assess agencies' performance.

Evaluating Mergers in the Presence of Dynamic Competition Using Impacts on Rivals

AbstractWe present evidence that event studies can help antitrust agencies forecast impacts of mergers on innovation. In large pharmaceutical mergers, cumulative abnormal returns on portfolios of rivals predict postmerger changes in the combined firm’s research and development (R&D) intensity. More favorable impacts on rivals are associated with lower intensities, which is consistent with softening competition. Matching merging firms to similar nonmerging firms suggests that we can attribute the changes in R&D intensity to the mergers. We highlight the importance of deducting expenses associated with in-process R&D and provide guidance on how to define rivals, construct portfolios, and use event studies in merger evaluations.

Two-Sided Markets and the Challenge of Turning Economic Theory into Antitrust Policy

The award of the Nobel Prize in Economics to Professor Jean Tirole in 2014 has generated intense interest about his brainchild theory of two-sided markets. Against this background, this article explores whether there is such a thing as a unified theory of two-sided markets and whether the two-sided markets literature can readily be applied by antitrust agencies, regulatory authorities, and courts. This article vindicates caution. The buzz surrounding two-sided markets could mask the fact that, in many cases, the policy implications of the theory are not yet clear, and divergences among its proponents are often underplayed. In that regard, the article notably stresses that one of the key conditions of market two-sidedness identified by Rochet and Tirole in their seminal paper of 2003—the unavailability of Coasian bargaining between both sides of a platform—has often disappeared from subsequent scholarship. This omission threatens the coherent implementation of the theory of two-sided markets. Without this qualification, markets are often mischaracterized as two-sided, as soon as they display prima facie signs of indirect network externalities.

Reviewing Wireless Mergers

The Federal Communications Commission can improve the transparency of its decision process by establishing a set of guidelines for its review of mergers. Its current process is opaque, and parties cannot discern the weights that it places on “public interest” goals in some areas and how those balance against harms in other areas. The antitrust agencies’ Merger Guidelines provide an example of how the Commission could signal more clearly its analytical process and push for more efficient remedies and lessen political pressure to undertake inefficient trade-offs such as requiring build out to areas unaffected by changes in competition due to a merger.

The Changing Nature of Efficiencies in Mergers and in Merger Analysis

Efficiencies have long been an important aspect of the antitrust analysis of mergers, but in recent years there have been certain noteworthy changes in the nature and analysis of efficiencies. One change appears to be the greater ability of the antitrust agencies to evaluate conventional efficiencies carefully and critically. This is demonstrated by the analysis of efficiencies associated with a number of recent proposed mergers before the antitrust and regulatory agencies. The second important change concerns the types of efficiencies typically claimed by merging firms. Whereas in earlier years these largely involved scale economies, they now more often focus on dynamic efficiencies, quality benefits, and vertical economies. This article discusses each of these in turn and argues that these newer types of efficiencies pose new and greater challenges for analysis.

The Accuracy of Hospital Merger Screening Methods

This paper analyzes the accuracy of various prospective hospital merger screening methods used by antitrust agencies and the courts. The qualitative and quantitative predictions of the screening methods calculated with pre-merger data are compared with the actual post-merger price changes of 26 hospital mergers measured relative to controls. The evaluated screening methods include traditional structural measures (e.g., Herfindahl-Hirschman Index associated with various market definitions), measures derived from hospital competition models (e.g., diversion ratios, Willingness-to-Pay, and the Logit Competition Index), and hospital merger simulation. Diversion ratios, Willingness-to-Pay, and the Logit Competition Index are found to be more accurate at predicting post-merger price effects than traditional methods.

Predicting Merger Outcomes: The Accuracy of Stock Market Event Studies, Market Structure Characteristics, and Agency Decisions

Merger analysis is an exercise in prediction. This paper analyzes the accuracy of two leading methods of predicting merger outcomes—stock market event studies and an approach using market structure criteria—as well as the accuracy of antitrust agencies’ decisions about challenging mergers. The basis for these evaluations is a database of price effects of 41 mergers compiled from published retrospective studies of mergers. This paper finds that event studies systematically underpredict the incidence of anticompetitive outcomes, while market structure criteria overpredict competitive problems. Agency decisions correct much of that overprediction, however, which suggests that structural criteria may serve as an appropriate first screen.

Mergers, merger control, and remedies: a retrospective analysis of U.S. policy

In recent decades, antitrust investigations and cases targeting mergers -- including those involving Google, Ticketmaster, and much of the domestic airline industry -- have reshaped industries and changed business practices profoundly. And yet there has been a relative dearth of detailed evaluations of the effects of mergers and the effectiveness of merger policy. In this book, John Kwoka, a noted authority on industrial organization, examines all reliable empirical studies of the effect of specific mergers and develops entirely new information about the policies and remedies of antitrust agencies regarding these mergers. Combined with data on outcomes, this policy information enables analysis of, and creates new insights into, mergers, merger policies, and the effectiveness of remedies in preventing anticompetitive outcomes. After an overview of mergers, merger policy, and a common approach to merger analysis, Kwoka offers a detailed analysis of the studied mergers, relevant policies, and chosen remedies. Kwoka finds, first and foremost, that most of the studied mergers resulted in competitive harm, usually in the form of higher product prices but also with respect to various non-price outcomes. Other important findings include the fact that joint ventures and code sharing arrangements do not result in such harm and that policies intended to remedy mergers -- especially conduct remedies -- are not generally effective in restraining price increases. The book's uniquely comprehensive analysis advances our understanding of merger decisions and policies, suggests policy improvements for competition agencies and remedies, and points the way to future research.

Merger Remedies in Oligopoly under a Consumer Welfare Standard

We analyze the welfare effects of structural remedies on merger activity in a Cournot oligopoly if the antitrust agency applies a consumer surplus standard. We derive conditions such that otherwise price-increasing mergers become externality-free by the use of remedial divestitures. In this case, the consumer surplus standard ensures that mergers are only implemented if they increase social welfare. If the merging parties can extract the entire surplus from the asset sale, then the socially optimal buyer will be selected under a consumer standard. (JEL L13, L41, K21)

The Effects of Remedies on Merger Activity in Oligopoly

We analyze the welfare effects of structural remedies on merger activity in a Cournot oligopoly when the antitrust agency applies a consumer surplus standard. We derive conditions such that otherwise price-increasing mergers become externality free by the use of remedial divestitures. In this case, the consumer surplus standard ensures that mergers are only implemented if they raise social welfare. If the merging parties can extract the entire surplus from the asset sale, then the socially optimal buyer will be selected under a consumer standard.

Accountable Care Organizations and Antitrust Enforcement: Promoting Competition and Innovation.

The antitrust laws stand to protect consumers of health care services from conduct that would raise prices, lower quality, and decrease innovation by lessening competition. Importantly, though, vigorous antitrust enforcement does not impede accountable care organizations (ACOs) and similar collaborations that advance these same goals of better and more efficient care; in fact, by fostering competitive markets, the antitrust laws encourage such initiatives. This article summarizes the legal framework that the federal antitrust agencies - the Federal Trade Commission and the Antitrust Division of the US Department of Justice - use to analyze ACOs and other collaborations among health care providers. It outlines the guidance provided by the federal antitrust agencies concerning when ACOs and other provider collaborations likely would harm competition and consumers. In addition, it reviews common antitrust issues that can arise with ACOs and provides examples of enforcement actions that have prevented health care providers from taking or continuing anticompetitive actions.

Chinese antitrust—a snapshot

China’s Anti-Monopoly Law (AML) has been in force for over six and half years. This article argues that there has been a gradual yet perceptible change in the quality and intensity of AML enforcement over the years, with the fifth anniversary of the AML’s effectiveness as the somewhat arbitrary ‘turning point’. Indeed, over the past few years, the normative work—in terms of drafting AML implementing rules and guidance—of the three antitrust authorities has decreased, while the handling of actual enforcement cases has increased. Moreover, the cases investigated have become more high profile: the investigation by the National Development and Reform Commission against Qualcomm, the action by the State Administration for Industry and Commerce against Microsoft, and the prohibition by the Ministry of Commerce of the P3 transaction symbolize this trend. I . INTRODUCTION China’s Anti-Monopoly Law (AML) has been in force for over six and half years. In August 2013, the AML’s five-year anniversary since its foundation was celebrated. In a way, the AML’s fifth anniversary marked a qualitative change in the implementation and enforcement of the AML—the initial phase of laying the groundwork for antitrust enforcement had come to an end. If we were to use merger control jargon, we would say that AML enforcement entered into ‘phase 2’. In this article, we will summarily examine the AML’s history during its first five years of operation, briefly go through the most recent developments, and describe existing achievements and challenges. We will do so by looking at each of the three antitrust agencies with AML enforcement powers, as well as the courts, separately. When the AML was enacted in August 2007, the law provided for an unidentified ‘anti-monopoly enforcement authority’ (or authorities) under the State Council to be in charge of the enforcement work. Shortly after the law came into force a year * Xiaoye Wang, Distinguished Professor of Law at Hunan University and the Chinese Academy of Social Sciences, and Member of the Consultative Expert Panel of the Anti-Monopoly Commission under the State Council of the People’s Republic of China. Email: wangxiaoye88@live.cn † Adrian Emch, Partner at Hogan Lovells in Beijing, and lecturer at Peking University. Email: adrian.emch@hoganlovells.com. The author would like to thank LYU Qing and CONG Shan for their help in preparing this article. 1 Anti-Monopoly Law of the People’s Republic of China [2007] Presidential Order No 68, 30 August 2007. 2 Maureen K Ohlhausen, ‘Illuminating the Story of China’s Anti-monopoly Law’ [2013] Antitrust Source 12.

Two-Sided Markets and the Challenge of Turning Economic Theory into Competition Policy

The award of the Nobel Prize in Economics to Professor Jean Tirole in 2014 has generated intense interest about his brainchild theory of two-sided markets. Against this background, this paper explores whether there is such a thing as a unified theory of two-sided markets and whether the two-sided markets literature can readily be applied by antitrust agencies, regulatory authorities and courts. This paper vindicates caution. The buzz surrounding two-sided markets could mask the fact that, in many cases, the policy implications of the theory are not yet clear, and that divergences among its proponents are often underplayed. In that regard, the paper notably stresses that one of the key conditions of market two-sidedness identified by Rochet and Tirole in their seminal paper of 2003 – the unavailability of Coasian bargaining between both sides of a platform – has often disappeared from subsequent scholarship. This omission threatens the coherent implementation of the theory of two-sided markets. Without this qualification, markets are often mischaracterized as two-sided, as soon as they display prima facie signs of indirect network externalities.

GE/Alstom, Economic Patriotism and State-Created Barriers to Exit

This paper seeks to understand the competitive impact of State restrictions to M&A transactions which target domestic corporations. In the economic literature, a rich body of papers has examined the impact of State restrictions in terms of market access, international trade and FDI. In contrast, the consequences of State restrictions in terms of economic competition remain poorly understood. To discuss the competitive effects of State restrictions to M&A transactions that target domestic firms, the present paper offers a case study of the takeover of the French company Alstom by the US conglomerate General Electric (“GE”) in 2014, and of the measures adopted by the French Government to undermine it. This case is interesting. Unlike in the conventional scenario where Government intervention leads to prohibit the transaction, the Government interference did not kill the GE/Alstom transaction. Rather, in GE/Alstom, the French Government re-engineered the initial transaction. In lieu of an “absorption” of Alstom by GE as initially envisioned, the parties were forced to seal an “alliance”. Our case-study shows that State interference may influence the competitive conditions in the market. In particular, we advance a counterintuitive idea. Whilst the traditional market access literature would lead to envision State interference as a form of measure that protects the domestic firm, we show that State interference can also harm the domestic firm. In particular, in the case in point, the French Government measures may have locked Alstom behind exit barriers, by preventing it to leave the energy markets it purported to quit. We review empirical data to test our hypothesis. In practical terms, we believe our findings are important, because the literature on failed industrial projects suggests that Governments are often bad at making exit choices. This should be kept in mind, at a time where proponents of strong industrial policy agendas are increasingly vocal. Moreover, our analysis may have implications for antitrust policy. As much as entry barriers, barriers to exit prevent the emergence of competitive markets and are thus a concern for antitrust agencies. Moreover, State interference with M&A risk undermining the efficacy of merger control systems, in depriving the antitrust agencies’ of the ability to negotiate remedies that remove competition concerns.

Quality Enhancing Merger Efficiencies

The appropriate role of merger efficiencies remains unresolved in US antitrust law and policy. The Patient Protection and Affordable Care Act (ACA) has led to a significant shift in health care delivery. The ACA promises that increased integration and a shift from quantity of performance through increased competition will create a system in which quality will go up and prices will go down. Increasingly, due to the economic trends that respond to the ACA, including considerable consolidation both horizontally and vertically, it is imperative that the antitrust agencies provide an economically sound and administrable legal approach to efficiency enhancing mergers. In this regard, horizontal hospital mergers present particularly challenges for antitrust. Most hospital merger cases focus on cost based efficiencies, as does most of the academic empirical literature. Yet, government policy seems out of synch with quality analysis. This essay proceeds as follows. First, it provides a discussion of the welfare effects on quality and its implications for antitrust analysis. In the next part, the article explores quality analysis both in the 2010 Horizontal Merger Guidelines and in antitrust case law. In doing so, the essay identifies areas both of clarity and ambiguity regarding quality enhancing efficiencies policy. In the subsequent part, the essay draws parallels to an efficiency analysis of quality under rule of reason analysis, in which the essay offers examples of resale price maintenance and tying of franchising contracts. Thereafter, in the next part, the essay addresses how agencies and courts should treat quality efficiencies in mergers. In doing so, the essay draws upon the existing academic literature in empirical industrial organization economics and public health on measurements of what is hospital quality in a consolidating healthcare marketplace. In its concluding section, the essay advocates a more robust use of quality measurements as a guiding principle of merger law and policy that is flexible enough for case by case analysis and that will provide for ease of adminstrability and outcomes more in line with sound economic analysis than the current system.

Leniency Programs in Latin America: 'New' Tools for Cartel Enforcement

The fight against cartels has become a central feature for many competition agencies. In Latin America, this fight is long overdue as the prevalence of cartels has historically harmed competition in both large and small markets. The introduction of immunity and leniency programs to fight hard-core cartels is an important challenge for many authorities in the region. They have to garner the necessary expertise to administer these programs, increasingly join and even cooperate with their international counterparts, and learn the nuances in their legal systems when implementing them and enforcing their competition legislation. Nonetheless, these programs have proven to be extremely effective, low-cost tools that have uncovered a number of cartels in a relatively short period of time.We present some information on the differences among these programs in eight Latin American countries and discuss some of the advantages and challenges that each have faced in using this tool to investigate cartels. While we note that increases to monetary fines and sanctions would improve the effectiveness of these programs, we also believe that, on their own, there is room for leniency programs to grow and become more effective for antitrust agencies in Latin America.

Aplicação de novo modelo simulação de fusões ao transporte aéreo

Este artigo apresenta o Antitrust Mixed Logit Model (AMLM), uma metodologia nova que demonstra como calibrar os parâmetros de um modelo de demanda mixed-logit e simular os efeitos unilaterais decorrentes de uma fusão horizontal. A principal vantagem sobre a versão mais simples que utiliza o modelo logit (Antitrust Logit Model, ALM, desenvolvido por Werden e1994) é a flexibilidade da demanda, o que resulta em elasticidades mais plausíveis e, conseqüentemente, previsões mais plausíveis sobre o efeito de fusões. Ao contrário de abordagens econométricas, o AMLM compartilha com o ALM atributos interessantes para autoridades de defesa da concorrência: requer poucos dados e é rápido de processar. Utilizam-se dados fictícios para ilustrar a operação, principais inputs e outputs do AMLM e comparar os resultados com outros modelos como ALM e o PCAIDS (Proportionally Calibrated Almost Ideal Demand System). Adicionalmente, aplica-se o modelo AMLM às simulações entre várias empresas que compõem o mercado de transporte aéreo de passageiros, incluindo a recente fusão real entre GOL e WEBJET.

THE EVOLUTION OF US MERGER CONTROL POLICY – PART 2: 1974-2013

The aim of the study is to present the changes in US merger control policy at different stages of development of competition theories and views on pro- and anti-competitive effects of mergers (especially Harvard, Chicago, and Post-Chicago Schools of Competition). The research methods used in the study include literature review as well as the in-depth analysis of US legislation, antitrust agencies' enforcement policy and federal courts' adjudication practice with focus on changes in the economic analysis of mergers and their impact on market competition. This part of the study covers the period from the mid 1970s to the present time and comprises two stages of the development of US policy towards mergers. In the 1980s the Chicago School theories, efficiency primacy and minimum intervention principle prevailed in US antitrust policy. From the 1990s under the influence of Post-Chicago approach which no longer assumes that markets work perfectly the antitrust agencies have been more eager to intervene to block some (even vertical) mergers with potential anticompetitive effects (though the level of this intervention could be hardly compared with that of the 1960s). US merger enforcement policy has become more interdisciplinary with a more flexible approach to economic analysis as regards applied methodology which should be tailored to each transaction and supported by empirical evidence. Apart from consumer welfare its priority is protecting competitive process in the market.

THE EVOLUTION OF US MERGER CONTROL POLICY – PART 1: 1890-1973

The aim of the study is to present the changes in US merger control policy at different stages of development of competition theories and views on pro- and anti-competitive effects of mergers (especially Harvard, Chicago, and Post-Chicago Schools of Competition). The research methods used in the study include literature review as well as the in-depth analysis of US legislation, antitrust agencies' enforcement policy and federal courts' case-law with focus on changes in the economic analysis of mergers and their impact on market competition. The first part of the study covers the years 1890-1973. Apart from explaining some procedural issues it highlights the early days of merger control policy in the United States with an emphasis on the creation of antitrust legislation and institutional framework for its enforcement. In 1890-1950 the antitrust authorities' approach to mergers was generally friendly as large enterprises were supposed to play an important role contributing to the development and international expansion of the US economy. However, together with a surging increase in concentration in the US market and with the emergence of new competition theories that focused their research on market structure (Harvard School) this approach changed for the very interventionist (1950-1973). At that time the main purpose of merger control policy was to preserve competitors and small businesses rather than to improve consumer welfare, economic efficiencies or to protect competition process.