Merging Parties Research Articles

Unilateral Price Effects and Vertical Relations Between Merging and Non-merging Firms

Mergers sometimes affect vertical relations between merging and non-merging firms. Vertically integrated non-merging firms may, for instance, lose its input sales to a downstream rival if the downstream rival merges with another vertically integrated firm. Thus, price responses from non-merging firms could go in the opposite direction to those of the merging parties. Consequently, estimates of unilateral price effects that do not account for these structural changes are incorrect. We extend the standard framework of unilateral price effects of horizontal mergers with linear demand to account for changes in vertical relations between merging and non-merging firms.

Upstream horizontal mergers involving a vertically integrated firm

We study upstream horizontal mergers when one of the merging parties is vertically integrated. Under observable contracting in the pre-merger case, we show that such type of mergers always harm consumers. However, under unobservable contracting in the pre-merger case, the input price may decrease and consumer surplus may increase as a result of the merger even in the absence of exogenous cost-synergies between merging firms. A necessary condition for this finding is that the unintegrated downstream firm is more cost-efficient than the downstream division of the integrated firm.

A New Perspective on Entry in Horizontal Merger Analysis

I analyze horizontal mergers in procurement settings in which sellers incur costs to participate. Considering existing sellers’ contest-level entry differs from antitrust authorities’ typical emphasis on new sellers’ market-level entry to counteract a merger’s anticompetitive harm. I show that profitable mergers can increase consumer and total surplus by inducing more and stronger contest-level entry by the merged seller, which echoes common claims from merging parties that their merger is beneficial because it creates a stronger competitor. This finding suggests caution by antitrust authorities: when contest-level entry costs matter, standard models that ignore those costs prescribe blocking procompetitive mergers.

Lessons from AT&T/Time Warner

AT&T and Time Warner is the U.S. Department of Justice’s first vertical merger challenge in decades. The merging parties hired us initially to provide economic analyses of the antitrust issues raised by the merger and ultimately to assist with and testify in the litigation. There are three keys lessons that we draw from the outcome of the litigation for future antitrust practice. First, history matters, particularly the outcomes of similar integrations or integrations, both in predicting price effects and in testing merger simulation models proposed by economic experts. Second, one should be careful of simulation models of vertical transactions as they can be complicated and fragile. Third, the fact that the courts credited cost-saving efficiencies as credible, cognizable and relevant to the analysis of net harm is likely to be important for the analysis of future mergers, as the role of efficiencies in merger litigation remains an open question.

Vertical mergers and the vGUPPI: quantifying vertical foreclosure

Competition authorities around the world have for many years used sophisticated quantitative tools to assess the likely scale of harm from horizontal mergers. More recently, vertical mergers have also been increasingly scrutinized by competition authorities using a range of quantitative tools. These tools help the authorities to quantify the incentive of the merging parties to enact vertical foreclosure strategies that would harm competition. One of those tools, known as the vGUPPI (vertical gross upward pricing pressure index), uses the same theoretical economic framework as the quantitative assessment used in horizontal merger assessments. This article explains how the vGUPPI tool works and uses two recent merger decisions of the Competition and Markets Authority in the groceries sector as case studies.

The Decision to Investigate Mergers in the UK's Voluntary Regime

As merging parties can choose whether to notify their transaction in the UK, the competition authority has a well-developed procedure for capturing those that are not notified but may raise concerns. The resulting own-initiative investigations account for a significant proportion of overall UK merger enforcement. This mergers intelligence function is crucial to the voluntary regime working effectively, yet relatively little is known publicly about this preliminary investigative phase. We provide an overview of how the decision to investigate is taken, including the extent of transactions reviewed at this stage, an overview of the decision making process, and an assessment of recent reforms to the process. We go on to analyse the extent to which decisions taken (not) to investigate are appealable.

Innovation Effects in Dow/DuPont: A Patent Analysis

In March 2017, the European Commission conditionally approved the Dow/DuPont merger. It was found that the transaction would lead to the significant impediment of innovation competition in the crop protection industry, specifically in the markets for herbicides, insecticides, and fungicides. As a result, the decision requires the divestiture of DuPont’s entire crop protection pipeline and global research and development organization. The aim of this article is to explore through patent analysis whether and to what extent the merging parties are competing in the relevant innovation spaces. The results are compared and contrasted to the findings of the Commission in the agricultural chemicals, seeds, and materials science markets.

Economics of digital mergers

The article reveals the main problems of antitrust law caused by the widespread use of digital technologies. The greatest challenge brought by the proliferation of digital technology and data is the emergence of new forms of pricing, which do not fit well with our traditional approach to the market definition or with our traditional assessment of the likely effect of mergers on prices. Digital sellers have the ability not only to recognize previous buyers more effectively but also to collect, store and exploit information about this buyer’s past behaviour in order to display products and prices aimed at maximising the seller’s profits given the available buyer profile. Individualised pricing enabled by digitalisation raises issues relative to market definition. In a world where digital sales enable customised pricing, the market is much more liable to segmentation. As a result, one must pay close attention to whether the merging parties are or not “especially close competitors” not only in terms of products but also in terms of consumer information. The authors conclude that AI-based algorithms could be used to facilitate tacit collusion between rivals. Coordination between independent parties is easier to achieve and maintain if the parties can agree on a common price, can detect any deviation from this agreement quickly and precisely and can react to such deviations quickly. Establishing this type of infringement would likely require expertise not currently available to most competition authorities. The article identifies several mechanisms through which the emergence of digital conglomerates, and hence the approval of digital conglomerate mergers, can affect competition adversely. The platform’s “market power” now depends on its ability to retain users within its own ecology and to use this to restrict the supply of advertising, leading to higher prices for both advertising and the corresponding products. This ability is increased by any acquisition which helps populate this ecology. Traditional measures of concentration can therefore easily understate, or even miss entirely, this type of merger-specific increase in market power.

Do All Hospital Systems Have Market Power? Association Between Hospital System Types and Cardiac Surgery Prices.

Objective:This study explores the price implications of hospital systems by analyzing the association of system characteristics with selected cardiac surgery pricing.Data Source:Using a large private insurance claim database, the authors identified 11 282 coronary artery bypass graft (CABG) cases and 49 866 percutaneous coronary intervention (PCI) cases from 2002 to 2007.Study Design:We conducted a retrospective observational study using generalized linear models.Principal Findings:We found that the CABG and PCI prices in centralized health and physician insurance systems were significantly lower than the prices in stand-alone hospitals by 4.4% and 6.4%, respectively. In addition, the CABG and PCI prices in independent health systems were significantly lower than in stand-alone hospitals, by 15.4% and 14.5%, respectively.Conclusion:The current antitrust guidelines tend to focus on the market share of merging parties and pay less attention to the characteristics of merging parties. The results of this study suggest that antitrust analysis could be more effective by considering characteristics of hospital systems.

Antitrust Analysis of Vertical Mergers: Recent Developments and Economic Teachings

The generally well-accepted belief motivating modern antitrust analysis of vertical mergers — i.e., acquisitions that combine companies in different levels of the same supply chain — is that they are generally procompetitive or neutral. That belief is based upon a significant body of empirical evidence. Indeed, as former U.S. Federal Trade Commission (FTC) Bureau of Economics head Francine Lafontaine and Margaret Slade concluded, “[c]onsistent with the large set of efficiency motives for vertical mergers . . . the [empirical] evidence on the consequences of vertical mergers suggests that consumers mostly benefit from mergers that firms undertake voluntarily.” That view of the empirical evidence is consistent with other meta-studies of the empirical evidence by leading industrial organization economists from academia and the U.S. antitrust agencies. Consistent with this evidence, the U.S. antitrust agencies typically have rarely challenged vertical mergers. When they have challenged vertical mergers, they have tended to resolve concerns with narrowly tailored behavioral remedies, such as firewalls to prevent the sharing of rivals’ competitively sensitive information, non-discrimination clauses to eliminate incentives to disfavor rivals, and requirements to supply and/or license competitors. This Article is organized as follows: Section I sets forth the empirical evidence supporting the widespread understanding that vertical integration is generally procompetitive or neutral, and responds to the major critiques of these studies. Section I also discusses typical justifications for vertical integration, namely avoiding the costly and risky processes of forming, administering, and enforcing contracts with independent suppliers and customers. Section II lays out the economic approach to antitrust analysis of vertical mergers, briefly addressing calls for the U.S. antitrust agencies to update their 1984 Non-Horizontal Merger Guidelines. Section III discusses remedies. The final section offers closing thoughts focusing on the relative expertise of agencies and courts as compared to merging parties in evaluating the costs and benefits of vertical integration.

Jumping the gun: lessons learnt from recent EU cases

In most jurisdictions, the parties to a merger are not allowed to implement the transaction prior to receiving clearance from the relevant competition authority. Competition authorities have become increasingly vigilant about enforcing this standstill obligation. Recent high profile cases involving record fines provide some insight into which activities may be regarded as impermissible ‘gun jumping’ and which measures are permitted in preparing to implement a merger. This article analyses the European Commission's decision in Altice and the Court of Justice's judgment in Ernst & Young and draws conclusions, in particular, on the implications for information exchange between merging parties and the identification of ‘ordinary business’, which must remain unaffected until closing of a prospective concentration.

A Quantitative Methodology for Determining Relevant Geographic Markets in Higher Transportation Cost Industries

The U.S. Department of Justice/Federal Trade Commission Horizontal Merger Guidelines describes the hypothetical monopolist test (HMT) and significant and nontransitory increase in price (SSNIP) as tools to define antitrust markets. However, the discussion leaves some ambiguities with regards to the implementation of such tools. In this article, we present a methodology for quantitatively delineating geographic markets that is consistent with the Guidelines. In particular, for geographic markets that are based on the locations of customers, the market boundaries encompass the region into which sales are made from the merging parties’ plants, and competitors in the market are firms that sell to customers in the specified region. We use two approaches to identify the competitive reach of a plant—one based on actual shipping distances, which reflect the areas where the plant actually sells; and the other based on distances at which the plant’s product can be shipped profitably, which reflect all areas where the plant can potentially compete for customers. These distances are used to “draw circles” around plants to identify areas where one merging party plant’s competitive reach overlaps with the reach of another plant belonging to the merging partner, thus identifying the overlap customers. For each identified overlap customer area, the HMT is implemented using the critical loss analysis following a SSNIP by the hypothetical monopolist. We explain how to calculate the critical loss as well as the likely actual loss from the SSNIP.

The Welfare Consequences of Mergers with Endogenous Product Choice

Merger simulations focus on the price changes that result once previously independent competitors set prices jointly and other market participants respond. We consider the incentives for firms to adjust the set of offered products after a merger. Using a model of product choice and pricing, we conduct simulations of equilibrium market outcomes of a merger in a variety of scenarios. Product offering adjustments result in additional effects on profitability and consumer welfare not realized by price responses only, particularly when the merging parties offer relatively similar products pre‐merger. Cost synergies may furthermore entail the pro‐competitive introduction of additional products.

Effectiveness of Merger Remedies: Evidence from the Retail Gasoline Industry

This article assesses the effectiveness of outlet divestitures as remedies in a merger between two large gasoline retailers. Results show that divestitures are effective in disciplining the increase in margins generated by the merger, but only for competing gas stations located within a one kilometer radius and only in municipalities with a low density of stations impacted by the merger. Interestingly, this density indicator is a good predictor of both the anticompetitive effect of the merger and the effectiveness of divestitures. Finally, prices of one merging party decreased in locations unaffected by higher concentration, evidencing the presence of efficiency gains.

How effective are remedies in merger cases? A European and national assessment

ABSTRACTRemedies form an essential tool of any enforcement action and need to be devised with great caution from National Competition Authorities (NCAs). If the remedy is ineffective, the enforcement action does not reach the desired objective and resources will have been wasted. If the remedy is disproportionate, the decision is put at risk in a possible subsequent appeal. Remedies either behavioural or structural imposed by competition authorities seek to eliminate unilateral or/and coordinated effects as a result of the merger and restore competition on the relevant market(s) to the status quo ante. Moreover, remedy packages have typically included extensive structural divestments to remove competition concerns. The scope of this paper is to examine various issues relating to the imposition of remedies in merger cases focusing on the gas and electricity sectors (i.e. commodity and capacity release programmes, customer release schemes, network related remedies). This study relies on the energy sector with a view to developing general principles for imposing effective remedies in other sectors as well. Given the nature of competition in energy markets, particularly effective remedies are those that involve gas release programmes, the sale of price-setting generation plants, network assets, and controlling stakes in merging parties’ competitors.

The Effect of Market Consolidation on Innovation in the HDD Industry

This is an ex-post evaluation of how innovation changed following mergers and subsequent policy interventions, using an industry case study involving the 5-to-3 consolidation of three related mergers in the worldwide hard disk drive (HDD) industry, in 2011/12. Unlike most previous empirical papers in the merger-innovation literature, it drills down to the firm level to explore heterogeneity in the innovation response to the merger. It adopts a holistic view of innovation, employing four different measures: R\&D and patents as indicators of innovative inputs, and the number of new models, and their unit prices as indicators of innovative output. This allows us to distinguish the magnitude of the merging parties’ innovative efforts from the productivity of those efforts. The results confirm that there are indeed important asymmetries between the players, which are at least partly attributable to differences in the severity of remedies required by competition authorities. Methodologically, the paper sheds light on some of the challenges when conducting future retrospective studies on innovation, in a market which is world-wide with no obvious comparators, and at a specific part of its product cycle, which may be difficult to replicate in a comparator industry.

Price or Variety? An Evaluation of Mergers Effects in Grocery Retailing

Assortment decisions are key strategic instruments for firms responding to local market conditions. We assess this claim by studying the effect of a national merger between two large Dutch supermarket chains on prices and on the depth as well as composition of assortment. We adopt a difference-in-differences strategy that exploits local variation in the merger’s effects, controlling for selection on observables when defining our control group through a matching procedure. We show that the local change in competitive conditions due to the merger did not affect individual products’ prices but it led the merging parties to reposition their assortment and increase average category prices. While the low-variety and low-price target’s stores reduced the depth of their assortment when in direct competition with the acquirer’s stores, the latter increased their product variety. By analyzing the effect of the merger on category prices, we find that the target most likely dropped high priced products, while the acquirer added more of them. Thus, the merging firms reposition their product offerings in order to avoid cannibalization and lessen local competition. Further, we show that other dimensions of heterogeneity, such as market concentration, whether a divestiture was imposed by the Dutch competition authority, and the re-branding strategy of the target stores, are important for explaining the post-merger dynamics. A simple theoretical model of local-market variety competition explains most of our findings.

Should Profit Margins Play a More Decisive Role in Horizontal Merger Control?

In a recent speech,1 DG Competition’s Chief Competition Economist, Prof Tommaso Valletti explained that, while there is no evidence of increased market concentration in the five largest European countries (EU-5), profit margins have increased since 2010, reaching a historical maximum in 2016. In his view, the upward trend in profit margins ought to have implications for competition policy in general and, in particular, for merger control. Prof Valletti wrote: ‘The higher the merging parties’ margins in a given case, the more likely traditional market share thresholds will underestimate competitive effects (all else equal)’;2 and added: ‘Merger control matters especially in preventing anticompetitive effects in a world of high margins’.3 Prof Valletti concluded: ‘If we do not properly adapt to changing markets, the risk is politics will (in ways we might not approve of)’.4 If I understand this speech correctly, Prof Valletti advocates in favour of reinvigorating horizontal merger control in Europe in order to prevent further increases in market concentration and thus further increases in profits and inequality. He also seems to believe that such a policy would also deter the emergence of firms with the ability and incentive to foreclose rivals. This policy proposal is in line with that defended by several competition lawyers and economists in the USA. In a recent paper,5 Prof Hovenkamp and Prof Shapiro express concern that merger enforcement has not been aggressive enough in recent years and support proposals, currently discussed in the US Senate,6 to make merger enforcement more aggressive.

Restructuring of the Danish pork industry: The role of mergers and takeovers, 1960–2010

This article examines the origins and effects of the evolution of the Danish pork industry characterised by three main merger waves resulting in 43 realised mergers and takeovers. The findings illuminate – in contrast to the traditional strategically motivated rationale – that the majority of the mergers were realised by cooperatives due to the inability to give the pig farmers competitive yearly refunds vis-à-vis local competitors, to financial difficulties or to the lack of investment capability of one of the merging parties. Despite a high-risky strategy, mergers and takeovers became the preferred consolidation mean due to capital constrains and the ‘close’ ownership structure of the cooperatives. Moreover, the study demonstrates that the outcomes of the M&A activities were generally positive.

Price or Variety? An Evaluation of Mergers Effects in Grocery Retailing

Assortment decisions are key strategic instruments for firms responding to local market conditions. We assess this claim by studying the effect of a national merger between two large Dutch supermarket chains on prices and on the depth as well as composition of assortment. We adopt a difference-in-differences strategy that exploits local variation in the merger’s effects, controlling for selection on observables when defining our control group through a matching procedure. We show that the local change in competitive conditions due to the merger did not affect individual products’ prices but it led the merging parties to reposition their assortment and increase average category prices. While the low-variety and low-price target’s stores reduced the depth of their assortment when in direct competition with the acquirer’s stores, the latter increased their product variety. By analyzing the effect of the merger on category prices, we find that the target most likely dropped high priced products, while the acquirer added more of them. Thus, the merging firms reposition their product offerings in order to avoid cannibalization and lessen local competition. Further, we show that other dimensions of heterogeneity, such as market concentration, whether a divestiture was imposed by the Dutch competition authority, and the re-branding strategy of the target stores, are important for explaining the post-merger dynamics. A simple theoretical model of local-market variety competition explains most of our findings.