Pre-merger Levels Research Articles

Judicial Response to the 2010 Horizontal Merger Guidelines

We study how the courts have responded to the 2010 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission. Looking at decided cases, we find that both the government and merging parties rely on the 2010 Guidelines in presenting their cases, each side respectively arguing that it should win if the court properly follows them. The 2010 Guidelines had the strongest effect on the case law in the area of unilateral effects, where a number of courts have embraced them in ways that clearly depart from earlier decisions. The case law now exhibits much greater receptivity to a government showing that the merger will lead to higher prices simply due to the loss of direct competition between the two merging firms. The courts also have followed the 2010 Guidelines by more willingly defining markets around targeted customers. We do not detect any effect on decided cases of the higher concentration thresholds found in the 2010 Guidelines. Both the average pre-merger level of market concentration and the average increase in market concentration alleged by the government in litigated cases to date declined after 2010.

The Welfare Effects of Vertical Mergers and Their Remedies

This paper extends Williamson’s (1968) classic framework of the welfare effect of mergers to the case of vertical mergers, and in particular to those in which the imposition of merger conditions (remedies) may allow an otherwise anticompetitive merger to proceed. While similarities to the case of horizontal mergers without a remedies option are present, differences also arise. Most notably, for prototypical vertical mergers remedies may yield post-merger economic welfare which is higher than pre-merger levels. This suggests that remedies directed toward vertical mergers hold the promise of a more beneficial approach than in the case of horizontal mergers. This finding leads to an examination of merger remedies policy and practice. We find that antitrust enforcers historically have implicitly recognized both the economic welfare framework and the more robust role for remedies in vertical merger cases, particularly through the application of remedies aimed at preventing identified anticompetitive conduct while facilitating merger-related efficiencies. The 2020 Vertical Merger Guidelines illuminate the basis for the U.S. antitrust agencies’ substantive analysis of vertical mergers, but do not address remedies. This paper discusses principles that may be useful in formulating much-needed guidance that would unify, clarify and reinforce the agencies’ policies for remedies in vertical merger cases.

Why some local governments choose not to free-ride when undergoing boundary reform: a study of two merger cases in Poland

ABSTRACT One of the side effects of municipal territorial reforms is the common-pool problem. The problem arises when the costs of an activity that benefits a small entity are borne by a larger entity. A review of existing empirical studies suggests that although the common-pool problem has been identified in all investigated cases, it has not as yet been sufficiently analysed and understood. This article focuses on two voluntary mergers in Poland. The authors test the impact of the merger decision on the pre-merger level of capital spending and debt. The analysis is based on a quasi-experimental design using Synthetic Control method. The paper identifies factors explaining why the behaviour of the analysed merging municipalities differs from the results of earlier studies. The most important finding is that the mechanism preventing common resources hoarding is effective when local rules are applied to the merger.

Can government industrial policy enhance corporate bidding? The evidence of China

We adopt the policy of “Opinion on Corporate Mergers and Acquisitions” (OCMA) issued by the State Council of China in 2010 as an exogenous experiment to examine the corporate bidding decisions and the post-merger performance. While the policy encourages more corporate bidding decisions, the policy-driven mergers are not appreciated by the market investors at the time of announcements. The policy-driven M&As, on average, do not increase firm performance unless those acquirers possess a high pre-merger value of internal financial sufficiency or market power. The additional analysis shows that the insignificant positive effect of the policy-driven M&As is because the value created by the non-SOE acquirers is offset by the value decreased by the SOE acquirers. The value creation in non-SOE acquirers remains consistent at different levels of financial strength and market power. Differently, policy-driven M&As decrease (increase) value for SOE acquirers with a medial and low (high) pre-merger level of financial strength or market power.

Judicial Response to the 2010 Horizontal Merger Guidelines

We study how the courts have responded to the 2010 Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission. Looking at decided cases, we find that both the government and merging parties rely on the 2010 Guidelines in presenting their cases, each side respectively arguing that it should win if the court properly follows them. The 2010 Guidelines had the strongest effect on the case law in the area of unilateral effects, where a number of courts have embraced them in ways that clearly depart from earlier decisions. The case law now exhibits much greater receptivity to a government showing that the merger will lead to higher prices simply due to the loss of direct competition between the two merging firms. The courts also have followed the 2010 Guidelines by more willingly defining markets around targeted customers. We do not detect any effect on decided cases of the higher concentration thresholds found in the 2010 Guidelines. Both the average pre-merger level of market concentration and the average increase in market concentration alleged by the government in litigated cases to date declined after 2010.

Post-merger Price Dynamics Matters, So Why Do Merger Retrospectives Ignore It?

The overwhelming majority of retrospective merger studies pool the post-merger data to estimate the average price effect of the merger. Pooled post-merger estimates ignore key information about price dynamics and are unable to identify if post-merger prices revert to pre-merger levels within the same time period. We provide evidence—from a meta-analysis of over 600 previous market-level price effect estimates, and a set of Monte Carlo experiments—that using pooled models often leads to erroneous conclusions: for example by wrongly concluding that the merger increased prices, even when this price increase was only temporary.

Electricity market mergers with endogenous forward contracting

We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta’s wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms’ pre-existing forward commitments. We illustrate that ignoring the endogenous nature of firms’ forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.

Will a government find it financially easier to neutralize a looming protest if more groups are involved?

We study a policy response to an increase in post-merger social stress. If a merger of groups of people is viewed as a revision of their social space, then the merger alters people’s comparators and increases social stress: the social stress of a merged population is greater than the sum of the levels of social stress of the constituent populations when apart. We use social stress as a proxy measure for looming social protest. As a response to the post-merger increase in social stress, we consider a policy aimed at reversing the negative effect of the merger by bringing the social stress of the merged population back to the sum of the pre-merger levels of social stress of the constituent populations when apart. We present, in the form of an algorithm, a cost-effective policy response which is publicly financed and does not reduce the incomes of the members of the merged population. We then compare the financial cost of implementing such a policy when the merger involves more or fewer groups. We show that the cost may fall as the number of merging groups rises.

Electricity Market Mergers with Endogenous Forward Contracting

We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta’s wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms’ preexisting forward commitments. We illustrate that ignoring the endogenous nature of firms’ forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.

Post-merger Price Variation Matters, So Why Do Merger Retrospectives Ignore It?

The price effect of past mergers has been extensively researched over the past two decades. The overwhelming majority of these studies estimate the over-time average price effect of the merger. Merger guidelines agree that mergers should be approved if market dynamics, such as entry, eliminate negative welfare effects. Estimating price averages ignores key information about the post-merger dynamics of prices and is unable to identify if post-merger prices eventually revert to pre-merger levels. We provide evidence from a set of Monte Carlo experiments to show how serious this problem might be. Firstly, potentially all the studies that concluded - estimating post-merger over-time averages - that the merger led to a price increase, could have been wrong, and in fact the merger price increase disappeared within a reasonable time. Similarly, up to half of the studies that concluded that the merger did not increase prices could have been wrong in their conclusion.

An Incentive Contract as Merger Conduct Remedy

The policy goal of merger remedies is to facilitate mergers’ potential contribution to dynamic and productive efficiencies while preserving pre-merger consumer surplus. But recent empirical scholarship shows that most remedies fail to achieve this goal. I propose an incentive contract, inspired by the theory of incentive-based regulation in general and price-cap regulation in particular, that can serve as a conduct remedy and that has strong theoretical and practical advantages relative to standard divestiture and conduct remedies. The remedy requires the merged firm to contract with a private third party to whom it makes cash payments whenever it raises price or lowers quantity or quality relative to pre-merger levels, where the payments are at least as large as the revenue gain from such actions. To cope with adverse demand shocks, the contract lets the firm sell a lower than pre-merger quantity so long as price is no higher and quality no lower than pre-merger. To cope with adverse supply shocks, the pre-merger price threshold that the contract does not allow the firm’s post-merger price to exceed can be adjusted by an index of input cost inflation. To cope with variations in product quality, the contract lets the firm vary quality so long as the post-merger product is weakly revealed-preferred by its customers to the pre-merger product. The payout structure effectively imposes a contractual obligation on the firm to preserve pre-merger consumer surplus, while giving the firm a residual claim on all merger-induced cost savings thereby eliminating moral hazard.The firm’s payouts to its contractual counterparty are contingent on the same three variables — price, quantity, and quality — that are the central terms in the firm’s own sales contracts with its customers. The same market forces, contract laws, and external auditing mechanisms that ensure adequate observability of these variables to the firm’s customers therefore ensure their observability to the counterparty. The contract does not require information on economic costs or the demand curve. In contrast to divestitures, my remedy does not require the merging firm to shed parts potentially critical to its efficiency.Standard conduct remedies suffer from risks of asymmetric information, incomplete specification, countervailing incentives, irrelevance in face of market dynamics, and agency inappropriateness for regulatory roles. In contrast, my contract conditions on variables less vulnerable to problems of asymmetric information and incomplete specification. It shapes incentives only to the minimal extent necessary to preserve consumer surplus, only as much as any other contract does, and in a way that induces the firm to find the least cost way of preserving consumer surplus. It addresses market dynamics arising from adverse demand and supply shocks and product innovation. It absolves the agencies of the fraught responsibilities of predicting merger effects and post-merger regulation. It relies on contract- and market-based mechanisms for securing the policy goals of the merger regime. It is more sensitive, specific, and implementable than standard remedies. It is potentially the most light-handed of remedies since a merged firm committed to fulfilling its part of the policy bargain will find none of its constraints binding.

Appraising Merger Efficiencies

Mergers of business firms violate the antitrust laws when they threaten to lessen competition, which generally refers to a price increase resulting from a reduction in output. However, a that threatens competition may also enable the post-merger firm to reduce its costs or improve its product. Attitudes toward mergers are heavily driven by assumptions about efficiency gains. If mergers of competitors never produced efficiency gains but simply reduced the number of competitors, a strong presumption against them would be warranted. We tolerate most mergers because of a background, highly generalized belief that most or at least many produce cost savings or improvements in products or service. This article considers the current approach of enforcement policy to merger-induced efficiencies. Merger analysis today takes efficiencies into account in two ways. First, it makes assumptions about efficiencies in determining where the line for prima facie illegality should be drawn. Second, it recognizes an efficiencies once prima facie illegality has been established, with the burden of proof on the defendant. The rapidly growing empirical literature on post-merger performance suggests that policy today is more likely to permit an anticompetitive than to prohibit a harmless one. At the same time, however, the fault appears not to lie with the efficiencies defense. The defense has almost never successfully defended a after the government has made out a prima facie case of illegality. In that case the under deterrence problem must lie in the prima facie case itself. Welfare tradeoff models attempt to assess the welfare effects of mergers by comparing consumer harms and producer gains. One problem with the well known welfare tradeoff model developed by Oliver E. Williamson is that the efficiencies it contemplates occur at output levels that are lower than they were prior to the merger. While efficiencies at lower output levels are possible, they properly require additional proof. Of course, efficiencies might be so substantial that post-merger output is higher, and prices lower, than at premerger levels. But in that case there is nothing to trade off -- both producers and consumers would benefit from the merger. Williamson's model also assumed a market that was perfectly competitive prior to the but monopolized thereafter. Virtually no challenged mergers today fall into that territory. Most mergers occur in moderately concentrated markets where pre-merger prices are already substantially above marginal cost. In that case consumer welfare losses are much larger and efficiency gains must be spread over a much smaller output. The 2010 Horizontal Merger Guidelines also require that efficiencies be merger specific -- that is, that they could not reasonably be brought about except by the merger. Under a general welfare test that trades actual consumer losses against producer gains that approach makes sense, but under the consumer welfare test that the Merger Guidelines apply it is perplexing. First, if the efficiencies are not of sufficient magnitude to offset fully any propensity toward a price increase, then the efficiency defense will be rejected whether or not the claimed efficiencies are specific. However, if the efficiencies are in fact of sufficient magnitude to predict that the post-merger price will be no higher than the pre-merger price, then why do we care? Such a does not harm consumers, and as a result is not anticompetitive.

A policy response to a downside of the integration of economies: An impossibility theorem

Recent research shows that the merger of economies increases aggregate stress. This paper shows that there is no income distribution policy which will ensure that the wellbeing of the individuals belonging to merging economies does not fall below their pre-merger level.

The Impact of Horizontal Merger and Acquisitions in Price Competition Models

The question of what impact mergers and acquisitions have on key equilibrium performance measures is fundamental to our understanding of competitive dynamics in an oligopolistic industry. We address these questions in the context of price competition models with differentiated goods and asymmetric firms allowing for general non-linear demand and cost functions merely assuming that both the pre- and post-merger competition games are super modular along with two minor technical conditions. We show that, in the absence of cost synergies, post-merger equilibrium prices exceed their pre-merger levels. Moreover, the post-merger equilibrium profit of the merged firms exceeds the aggregate of the pre-merger equilibrium profits of the merging firms. The equilibrium profit of the non-merging firms increases as well. We establish our results, at first, for settings where each firm in the industry offers a single product; we then generalize them to industries with multi-product firms. We also derive conditions under which cost synergies, by themselves, result in lower equilibrium prices than otherwise observed post-merger, and discuss how the combined effect of increased market concentration and cost synergies can be assessed efficiently.

A Policy Response to a Downside of the Integration of Economies: An Impossibility Theorem

Recent research shows that the merger of economies increases aggregate stress. This paper shows that there is no income distribution policy which will ensure that the wellbeing of the individuals belonging to merging economies does not fall below their pre-merger level.

Horizontal mergers, efficiency gains and remedies

The combination of structural remedies and efficiency gains in a merger may lead to pro-competitive outcomes, thus maintaining pre-merger prices. Two types of efficiencies are necessary. The first corresponds to a flatter marginal cost function, the second to a decrease in the intercept of the marginal cost curve. If these efficiency gains are not sufficient to keep the post-merger price at the pre-merger level, then divestitures by the resultant merged entity are adopted. This paper allows a comparison between two kinds of divestitures and it can be shown that, depending on the efficiency gains, divested capital distributed among the remaining competitors in the market is optimal when compared to divested capital being placed on the hands of a single competitor.

Policy Responses to a Dark Side of the Integration of Regions and Nations

In this paper I study policy responses to an increase in post-merger distress. I consider the integration of regions and nations as a merger of populations which I view as a revision of social space, and I identify the effect of the merger on aggregate distress. The paper is based on the premise that the merger of groups of people alters their social landscape and their comparators. Employing a specific measure of social distress that is based on the sensing of relative deprivation, a merger increases aggregate distress: the social distress of a merged population is greater than the sum of the social distress of the constituent populations when apart. In response, policies are enacted to ensure that aggregate distress and/or that of individuals does not rise after a merger. I consider two publicly-financed, cost-effective policies designed so as not to reduce individuals’ incomes: a policy that reverses the negative effect of the merger on the aggregate level of relative deprivation, bringing it back to the sum of the pre-merger levels of aggregate relative deprivation of the two populations when apart; and a policy that is aimed at retaining the relative deprivation of each individual at most at its pre-merger level. These two policies are developed as algorithms. Numerical examples illustrate the application of the algorithms.

Integration, social distress, and policy formation

I study the integration of regions in the form of a merger of populations, which I interpret as a revision of people’s social space and their comparison set; I illustrate the way in which a merger can aggravate social distress; and I consider policy responses. Specifically, I view the merger of populations as a merger of income vectors; I measure social distress by aggregate relative deprivation; I demonstrate that a merger increases aggregate relative deprivation; and I show that a social planner is able to reverse this increase by means of least-cost, post-merger increases in individual incomes, but is unable to counter it by relying exclusively on a self-contained income redistribution that retains individual levels of wellbeing at their pre-merger levels.

The effects of mergers on company employment in the USA and Europe

We systematically analyse the effects of mergers and acquisitions on the demand for labour in the USA and Europe. We do not find adverse effects of mergers on labour demand in the USA, however we do find negative effects in Europe of the order of −10% compared to pre-merger levels. We attribute this significant difference to more rigid labour markets in Europe than in the USA.

Market power analysis for the Colombian electricity market

In this paper, a dynamic Cournot model is used to evaluate the likely impacts of possible mergers in the Colombian wholesale market for electricity. Our simulations showed that a substantial degree of energy withholding resulted in spot prices that on average were 24% above pre-merger levels. However, when high levels of ex-ante contracting were incorporated into the model, post-merger prices did not increase substantially or even drop below pre-merger prices. A short discussion on how these results were used for policy making at the regulatory commission is presented.