Merger Efficiency Research Articles

The Union Pacific/Southern Pacific Rail Merger: A Retrospective on Merger Benefits

This retrospective case study of merger efficiencies focuses on the 1996 merger of two large, U.S. rail networks. Information on the public record permits some evaluation of pre-merger efficiency claims, and the weighing of those claims against regulatory and antitrust standards. Access to additional public and non-public information also permits at least a preliminary determination that a number of the claimed efficiencies were plausibly merger-specific and actually realized post-merger. This is contrary to skepticism expressed about merger efficiency claims, both generally and with respect to this particular rail merger, and thereby illustrates the value of doing retrospective studies of merger outcomes.

“Pass-on” in Merger Efficiency Defence

Efficiency pass-on requirement has been traditionally regarded as one of the most controversial aspects of merger efficiency analysis. Theoretical studies on pass-on suggest that in the case of most oligopolies intermediate market shares lead to the greatest firm-level pass-on. This underlines the need to seriously recognise efficiency considerations in view of the “non-collusive oligopoly” interpretation of the EC Merger Regulation dominance test proposed in Commission’s Draft Merger Guidelines. At the same time, distilling the pass-on rate into workable guidelines in isolation from the whole competitive effects analysis is not only difficult, but also sub-optimal from an economic theory point of view. This article proposes a formalised conceptual framework of incorporating efficiency analysis into a merger review and then draws pass-on and general merger efficiency defence implications.

Chaotic advection by two interacting finite-area vortices

This article deals with the advection of fluid particles in the velocity field of two identical vortices with various vorticity distributions. The two-dimensional velocity field is aperiodic in the range of parameters studied here, namely, the neighborhood of the critical distance for merger. Ideas and methods from the theory of transport in dynamical systems are used to describe and quantify particle advection. These methods are applied to the numerical representation of the velocity field, which is obtained by solving the Euler equations with the vortex-in-cell method. It is found that the strongest stirring of vortex fluid occurs slightly above the critical distance for merger. In this regime the fluid located between the vortices is subjected to intense stirring, and some vortex fluid may be entrained into the chaotic region depending on the smoothness of the vorticity distribution. Initial conditions below the critical distance lead to stirring of fluid mainly before merger. In this case the flow geometry is used to quantify the efficiency of merger, which is defined as the ratio of the circulation of the resultant vortex to the total circulation of the original vortices. It is found that the vortices with the smoothest vorticity profile have the lowest efficiency. Experimental visualizations in a two-dimensional rotating fluid confirm the intense stretching and folding of fluid elements that occurs before the vortices merge.

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.

Mergers Among Asymmetric Bidders: A Logit Second-Price Auction Model

In this paper, we derive estimators of, and closed-form (non-integral) expressions for, the distribution of bids in an extreme value, asymmetric, second-price, private-values auction. In equilibrium, prices (winning bids) and shares (winning probabilities) have a simple monotonic relationship--higher-value firms win more frequently and at better prices than lower-value firms. Since the extreme value distribution is closed under the maximum function, the value of the merged coalition also has an extreme value distribution and thus lies on the same price/share curve. Consequently, merger price effects can be computed as a movement along the price/share curve, from the average pre-merger share to the post-merger aggregate share. The parameter determining how much winning prices change is the standard deviation of the extreme value component. Merger efficiency claims can be benchmarked against the marginal cost reductions necessary to offset merger price effects.

The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function

This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank ‘megamergers’. We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.

The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function

This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank "megamergers." We find that merged banks experience a statistically significant 16 percentage point average increase in profit-efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.

The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function

This paper examines the efficiency and price effects of mergers by applying a frontier profit function to data on bank ‘megamergers’. We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenues, including a shift in outputs from securities to loans, a higher-valued product. Improvements were greatest for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small.

The creation of economic efficiencies in hospital mergers

Antitrust evaluation of proposed mergers requires the assessment of merger-created efficiencies, the beneficial effects of which may swamp any competitively adverse effects of higher market concentration. There are many potential sources of such efficiencies, and this paper investigates one that has been largely overlooked. Because merger often makes it possible to consolidate two small clinical departments into one larger unit, it can reduce the relative variability - the “peak load problem” - of daily patient census. This in turn makes it possible to reduce the costs of staffing adequately for random periods of high demand. Based upon a sample of two years of daily admissions data for several merging hospitals, and confirmed with data averaged over all U.S. hospitals, the efficiency effects of such clinical consolidation are estimated to be a substantial percentage of affected operating costs.

Comment on ?small firms and merger mania?

Considering its importance to the field of industrial organization, our understanding of the determinants of firm size has some major gaps. This becomes quite clear upon reading Aiginger and Tichy's recent review (hereafter, A&T (1991)) of the many empirical studies of firm size. They critically examine the separate literatures on the performance of large and small firms and on the efficiency of mergers. They find inconsistencies within each of these literatures. More interesting, they discuss a glaring inconsistency between the evidence in the literature and actual behavior. While much of the performance literature indicates that small firms have average or superior performance, large firms typically takeover smaller firms. Efficiency and survival would seem to dictate against this "merger mania." A&T provide a number of interesting insights. They offer six hypotheses on why small firms might outperform large firms, and challenge the industrial organization view that economies of scale and scope require large firm size. They stop short, however, of arguing that large firms are inefficient, recognizing that they may simply perform different roles than small firms. Their discussion or mergers is more critical of large firms. While they do not entirely dismiss the possibility that mergers may yield efficiencies, they offer six alternative hypotheses. They suggest that mergers tend to r&ieCi tnance, StotiniAierormanagenTeili optimism, nonprofit maximizing behavior, and other unproductive tendencies. This comment focuses on the role of firmspecific capital, product life cycles and product niches. The relative performance of large vs. small firms is reconsidered in this light, followed by an examination of the merger literature and the practice of takeovers by large firms. Large firms are viewed less skeptically here than by A&T. Nevertheless, the purpose of this note is less to challenge A&T, than to elaborate on some of their points and suggest additional possibilities. The questions raised by A&T are central to the field of industrial organization and worthy of further attention.

The efficiency of symmetric vortex merger

The coalescence of two identical vortices with uniform vorticity is investigated using the numerical method of ‘‘contour surgery,’’ for two-dimensional inviscid, incompressible vortex dynamics (2VD), and quasigeostrophic shallow-water dynamics (QGSW), to quantify the differences and similarities between the two models. High-resolution calculations show that the evolution of the vortices may fall into three different regimes depending on the initial intercentroid separation. The efficiency of the merger of two vortices into a single elliptical-like vortex is determined by calculating the loss of globally conserved quantities to filaments and small-scale structures. In the 2VD model, it is found that the resultant central vortex always has at least 56% more circulation than either of the initial vortices, showing that the merger process indeed forms larger scales. From energetics, the initial separation for an inviscid transition from two elliptical vortices to a single elliptical vortex is determined, and is shown to be close to the critical merger separation obtained from full numerical calculations. Confirming the results of Polvani et al. [J. Fluid Mech. 205, 215 (1989)], the calculations in the QGSW model show that as the radius of deformation LR decreases, the critical merger separations decrease, the resultant vortex is nonelliptical, fewer filaments are shed, and those filaments shed show an increased propensity to roll up into small vortices (consistent with previous analysis of the stability of strips of potential vorticity with imposed shear). Furthermore, the efficiency of the merger process increases as LR decreases (to perfect efficiency in the limit of small LR).

The trade-off between market power increases and efficiencies in horizontal mergers

The trade-off between market power increases and efficiencies in horizontal mergers

The Use of Real Cost as an Efficiency Measure: An Application to Merging Firms

IA recurring theme in industrial economics is firm efficiency, yet the state of the art of its measurement is not very far advanced. At one extreme are theoretically elegant methods, based on the estimation of production or cost functions, which present daunting estimation problems. At the other extreme are measures straightforward enough for practical use-such as the rate of return on capital or labour productivity-but which actually measure efficiency in only the most unusual circumstances. We became interested in this problem whilst engaged on a project which studied the economic effects of mergers, as whether firms have increased their efficiency as a result of mergers is obviously of crucial importance. Profitability alone is no guide since one would expect there to be market power effects, especially from horizontal mergers, which might alter prices; in the extreme case profits may rise simply as a result of an increase in monopoly power.1 Despite this, most of the studies of merger impact (for example, Singh [i6], Utton [I 7], Meeks [i i]) use profitability to assess the efficiency of mergers.