Horizontal Mergers Research Articles

Ten Years of the 2010 HMG: A Perspective from the Department of Justice

Ten years after their release, the 2010 Horizontal Merger Guidelines continue to reflect accurately current legal and economic principles of antitrust. Despite fears to the contrary, the Antitrust Division still relies on market shares and concentration—along with a wide range of other evidence—to determine whether a merger is likely to harm competition substantially. Similarly, market definition remains an essential ingredient to merger analysis, combining the quantitative rigor of the hypothetical monopolist test with the kinds of qualitative evidence that date back to Brown Shoe. The 2010 Horizontal Merger Guidelines have also contributed to courts’ increasing acceptance of the standard economic tools that are used to quantify the potential impact of horizontal mergers, including merger simulation and upward pricing pressure.

Do Horizontal Mergers Affect Rivals’ Cash Holdings?

This paper examines how firms adjust cash holdings following horizontal mergers in the industry. Using a sample of 16,597 horizontal mergers between US firms from 1984 to 2016, we find that in the three-year period following horizontal mergers, the marginal value of cash decreases for the rivals with lower investment opportunities. Rivals with low Tobin’s Q reduce cash while the rivals with high Tobin’s Q hold more cash. These results suggest that rival firms adjust cash holdings in a way that is more consistent with their investment opportunities. Using a control group of firms exposed to withdrawn horizontal mergers, we argue that the relations between horizontal mergers and the cash adjustments are likely to be causal. Overall, these results imply that horizontal mergers are likely to increase the non-merging rivals’ competitive pressure.

EU Merger Control between Law and Discretion: When Is An Impediment to Effective Competition Significant?

This paper considers the interpretation of the substantive test laid down in Article 2 of Regulation 139/2004. It focuses on horizontal mergers in the so-called ‘gap’ cases, which would not result in the creation or the strengthening of a (single or collective) dominant position. In its practice and soft law instruments, the Commission has construed Article 2 in such a way that virtually any transaction involving actual or potential competitors could lead to a finding of a significant impediment to effective competition. Under this approach, the substantive test would be fulfilled, in principle, in every horizontal merger. In CK Telecoms, the General Court crafted an alternative framework that is capable of meaningfully constraining administrative action and ensures that judicial review in EU merger control remains effective.

Horizontal Mergers, Investments and Industry Evolution

Do horizontal mergers shape the way an industry evolves? I answer this question by investigating the non-merging rivals’ investments. Based on the stylized fact that the rivals’ performance on average declines in the three years following horizontal mergers, I find the rivals become more cost efficient. Specifically, their R&D, PP&E, and labor investments increase in the segments close to the merger’s industry. These segments appear to have higher Tobin’s Q. Firms with greater R&D increases experience more reductions in the cost of goods sold, SG&A, and higher asset turnovers. The investment allocations are more pronounced among the innovative rivals, the neck-and-neck rivals, and the unconstrained rivals. Overall, this paper helps us better understand how firms deal with competitive pressure through internal capital markets.

A Characterization of the Herfindahl Hirschman Index and its use in the Horizontal Merger Guidelines

This article characterizes the Herfindahl Hirshman Index and its use by the Department of Justice and the Federal Trade Commission of the United States, in their Horizontal Merger Guidelines. The characterization maps ranges of the index with the level of market concentration and its changes due to horizontal mergers and acquisitions, in terms of the number of firms operating in the market and the market share of the largest active firm. The article aims to provide alternative and graphic approaches that may contribute to analyze horizontal mergers and acquisitions in an easier and expedited way, from a market concentration perspective and before there are any changes in strategic interactions or market equilibria.

Horizontal Mergers - Impact on Competitive Pricing and Quality Provisioning

Horizontal Mergers - Impact on Competitive Pricing and Quality Provisioning

Horizontal mergers and supplier power

Supplier power, such as the ability of branded goods suppliers to dictate terms to retailers, is an important feature of many markets. We show that supplier power can counteract the effects of downstream mergers on consumer prices where there are two-part contracts. This is because greater market power allows suppliers to set contracts that internalise partially the impact of the merger on downstream prices. Post-merger, the supplier reduces the per-unit price at which it supplies the merged downstream firms, with the aim of maintaining total industry profitability. We modify the standard upward pricing pressure (UPP) formula to account for the supplier's response to a horizontal merger in the downstream market while preserving much of the simplicity of the standard approach.

Competitive Effects of Horizontal Mergers With Asymmetric Firms

This paper aims at investigating the impacts of introducing cost asymmetry in horizontal merger analysis. In the absence of efficiency gains, previous literature states the negative competitive effects of a merger between symmetric firms. We go beyond the literature and show that the result is only likely to hold for a low level of asymmetry. In particular, we build a tractable model with three firms in which one of them has a different cost structure. After merging two symmetrical firms, the outsider always reduces (increases) price (investments), while the insiders choose the opposite strategies. In particular, if the outsider's cost is sufficiently low, the increase in its investment could outweigh the decreases in those of the merged entity, leading to higher total investments post-merger. Similarly, consumer surplus could be improved thanks to the decrease in the outsider's price.

Dynamic Oligopoly Pricing with Asymmetric Information: Implications for Horizontal Mergers

We model differentiated product pricing by firms that possess private information about serially-correlated state variables, such as their marginal costs, and can use prices to signal information to rivals. In a dynamic game, signaling can raise prices significantly above static complete information Nash levels even when the privately observed state variables are restricted to lie in narrow ranges. We calibrate our model using data from the beer industry, and we show that our model can explain changes in price levels and price dynamics after the 2008 MillerCoors joint venture. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

CK Telecoms and the Assessment of Horizontal Mergers in Oligopolistic Markets: Does the More Economic Approach Entail Stricter Judicial Review? (T-399/16 CK Telecoms)

Case T-399/16 CK Telecoms UK Investments Ltd v European Commission, Judgment of the General Court (First Chamber, Extended Composition) of 28 May 2020 The General Court annulled the European Commission’s decision prohibiting the acquisition of Telefónica Europe plc, operating on the UK retail telecommunications market under the brand name ‘O2’, by CK Hutchison Holdings Ltd, operating on the same market under the brand name ‘Three’. In the first judgment on the application of the Significant Impediment to Effective Competition (SIEC) test to horizontal concentrations on oligopolistic markets, the General Court held that the Commission had failed to demonstrate that the concentration would significantly impede effective competition.

Improving the Competitiveness of Enterprises Operating in the Construction Services Market

The purpose of the study is to analyze the tools that exist today to improve the competitiveness of companies in the Russian construction and repair services market, which promote their progressive development from the perspective of partnership management. The competitors’ ambition to establish, maintain, develop and utilize their own advantages and to simplify the competitive environment is realized through the establishment of interaction between the competing subjects, which can be legally identified as a competitive partnership. The authors consider the possibility of establishing a competitive partnership in the context of horizontal merger and network associations as part of the investment-and-construction complex. This research describes the proposals for expanding the practical scope of partnership at the construction services market as a factor of improving the competitiveness level of enterprises on the basis of using strategic approaches to managing production and economic activities and improving the marketing business process support.

Price Effects of Horizontal Mergers: A Retrospective on Retrospectives

In this comprehensive review of ex-post merger studies price effects of horizontal transactions are evaluated. By combining and further analyzing the results of 52 retrospective studies on 82 mergers or merger-like transactions it can be shown that the industry alone is no strong indication for the direction of price-related merger effects. However, the “size” or “importance” of a transaction as well as market concentration pre-merger and change in concentration due to the transaction seem to have an impact on post-transaction price development.

The Competitive Effects of Mergers with Cournot Competition

This paper provides a full characterization of the price effects of horizontal mergers in the Cournot model with heterogeneous firms and constant returns to scale. We show that the price change brought about by a merger only depends on the smaller merging firm's share and the number of firms, but is independent of the distribution of shares among other firms. Price effects are determined by factors that are either directly observable by competition authorities or can be bounded under relatively mild assumptions on demand curvature or pass-through. Estimates based on concentration measures can instead be seriously misleading. We also provide closed-form solutions for calibration that approximate merger effects on the basis of simple pre-merger parameters.

Assessing EU Merger Control Through Compensating Efficiencies

Worldwide, the overwhelming majority of large horizontal mergers are cleared by antitrust authorities unconditionally. The presumption seems to be that efficiencies from these mergers are sizeable. We calculate the compensating efficiencies that would prevent a merger from harming consumers for 1,014 mergers affecting 12,325 antitrust markets scrutinized by the European Commission between 1990 and 2018. Compensating efficiencies seem too large to be achievable for many mergers. Barriers to entry and the number of firms active in the market are the most important factors determining their size. We highlight concerns about the Commission’s merger enforcement being too lax.

Algorithmic Pricing in Horizontal Merger Review: An Initial Assessment

Algorithmic Pricing in Horizontal Merger Review: An Initial Assessment

Tailoring critical loss to the competitive process

In 1989, Barry Harris & Joseph Simons developed a quantitative method to implement the Horizontal Merger Guidelines’ hypothetical monopolist test with a market-level “critical loss” analysis. The appeal of Harris & Simons’ framework is that it created a simple, intuitive approach to delineating markets—with relatively parsimonious data requirements. After over a decade of use, however, economists began to propose alternative approaches to the classic critical loss analysis—using theory to impose structure on firm-level demand. This allowed researchers to reformulate the critical loss test in terms of diversion ratios. The purpose of this paper is to discuss when the classic, market-level approach to critical loss is more appropriate and when firm-level critical loss offers an important refinement. We illustrate, with a detailed example, that under certain plausible demand scenarios, a diversion-based firm-level analysis could easily reach the wrong answer on market definition. Thus, the analyst needs to carefully study the competitive environment before deciding on the appropriate analysis. As a bottom line, the choice between market-level and firm-level analysis depends on the specific factual situation.

Documenting Horizontal Integration Among Urologists Who Treat Prostate Cancer

Relatively little is known about the extent and effects of horizontal mergers among physician specialists. We developed and implemented a methodology to document changes in physician practice structure resulting from horizontal integration among urology groups. We merged cancer registry records from four large states with Medicare Part B claims to identify all urologists who treated men with prostate cancer. We added information from SK & A surveys and extensive internet searches to assign a practice structure to each urologist-year (2005-2014). Horizontal integration among small urology groups led to a sharp increase in the proportion of urologists who belong to large urology practices with ownership in intensity modulated radiation therapy and/or anatomical pathology services. By 2014, more than half of New Jersey urologists and about 43% of urologists in Florida and Texas were members of such large practices, whereas small percentages (7%-16%) were employed by a health system. In contrast, more than 27% of California urologists were employed but only 17.5% had ownership in intensity modulated radiation therapy and/or pathology services. Importantly, we found our indicators of market share of urologists associated with each practice structure type were highly concordant with indicators of market share based on number of prostate cancer episodes treated by each practice structure type.

Effects of customer horizontal merger on supplier capital structure decisions

AbstractWe study the impact of a significant customer's merger on the capital structure of suppliers using a sample of U.S. firms that merged with rivals in the same industry. The bargaining power theory of capital structure predicts that suppliers will increase debt to decrease the surplus available for negotiation when facing customers that gain buying power by increasing their size through mergers. We find that suppliers increase their financial leverage after the effective date of their customer's merger. This increase is economically significant, permanent, and unrelated to supplier merger activity. We also find that greater concentration in the supplier's industry and higher supplier market power are associated with lower increases in supplier's leverage. Overall, the empirical evidence is consistent with suppliers increasing their financial leverage to fortify their bargaining power.

Impacts of horizontal mergers on dual-channel supply chain

<p style='text-indent:20px;'>This paper investigates the impacts of horizontal mergers on a dual-channel supply chain given the rapid development of e-commerce. Three types of horizontal mergers are considered in a dual-channel supply chain consisting of three firm types: suppliers, single-channel retailer, and dual-channel retailer. A comparison with a benchmark pre-merger scenario underscores the impacts of each horizontal merger on firms in the dual-channel supply chain. First, where horizontal mergers occur (i.e., at upstream or downstream tier) has an impact on firms in the dual-channel supply chain. Second, synergy costs trigger the domination of the synergy effect. Third, the degree of consumer preference for channels affects the trigger due to which the synergy effect outweighs the competitive effect. Although dual channels prevail in supply chain management, few studies pay attention to horizontal mergers in this context. Unlike literature on horizontal mergers in single-channel supply chains, we suggest that the impacts of horizontal mergers in dual-channel supply chains have unique features, and channel preference plays an important role in such impacts.</p>

Horizontal Merger Analysis

Economic analysis of competition regulation is most developed in the domain of horizontal mergers, and modern agency guidelines reflect a substantial consensus on the appropriate template for merger assessment. Nevertheless, official protocols are understood to rest on a problematic market definition exercise, to use HHIs and ΔHHIs in ways that conflict with standard models, and more broadly to diverge with how economic analysis of proposed mergers should be and often is conducted. These gaps, unfortunately, are more consequential than is generally appreciated. Moreover, additional unrecognized errors and omissions are at least as important: analysis of efficiencies, which are thought to justify a permissive approach, fails to draw on the most relevant fields of economics; entry is often a misanalyzed afterthought; official information collection and decision protocols violate basic tenets of decision analysis; and single-sector, partial equilibrium analysis is employed despite the presence of substantial distortions (many due to imperfect competition) in many sectors of the economy. This article elaborates these deficiencies, offers preliminary analysis of how they can best be addressed, and identifies priorities for further research.