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Public Policy in Private Markets

Public Policy in Private Markets. Merger Policy. Announcements. Check iclicker grades. If you are using iclicker and do not see grades, let me know ASAP Midterm exam: being graded, expect to get it back on 3/27 Homework 4 coming up (right after break). Merger Law.

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Public Policy in Private Markets

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  1. Public Policy in Private Markets Merger Policy

  2. Announcements • Check iclicker grades. If you are using iclicker and do not see grades, let me know ASAP • Midterm exam: being graded, expect to get it back on 3/27 • Homework 4 coming up (right after break)

  3. Merger Law • Very important part of antitrust • Mergers are very common – hundreds of mergers every year • Knowing this material will be useful for you at some point • 3 types of mergers: • Vertical • Horizontal • Conglomerate

  4. Merger Typology 1. Horizontal: 2 or more direct competitors • Examples: Coke and Pepsi; McDonald’s-Burger King; Staples-Office Depot • Why may this be anticompetitive? • More concentration means less competition, therefore higher market power (↑P) 2. Vertical: firms that operate at different stages of production/distribution • Cement and concrete; microchip processors-computer manufacturers • Anticompetitive? • Foreclosure or increased costs for non-integrated firms • Barrier to entry for future potential entrants

  5. Vertical Mergers: foreclosure/increased cost Manufacturer 1 Manufacturer 2 Manufacturer 3 Distributor A Distributor B • A vertically separated industry • All Manufacturers could use eitherof the two distributors • Distributor A is larger and more efficient • Manufacturer 1 is larger.

  6. Vertical Mergers: foreclosure/increased cost Manufacturer 1 Manufacturer 2 Manufacturer 3 ? Distributor A Distributor B • 1 vertical merger (vertical integration) between large manufacturer and large distributor • Manufacturer 2 and 3 are left with “more costly” distributor potential distributor • Manufacturer 3 can be foreclosed (i.e. leaves the market as it is no longer profitable to operate) • Barriers to entry: to successfully enter the market you need to enter 2 stages

  7. Merger Typology 3. Conglomerate: neither vertical nor horizontal • Product extension: merger between firms producing different but related products • Example: Coke buys Gatorade • Market extension: similar product, different region • Safeway-Stop and Shop • Pure Conglomerate: Unrelated products • Example: GE - Samsonite

  8. Conglomerate Mergers • Anticompetitive effects: • Elimination of potential competitors: acquired firm is more likely to be a potential competitor than an inexperienced firm • Entrenchment: if acquired firm is a large company, de-concentration may be harder (when/if needed)

  9. Merger Law • Clayton Act (1914): “To arrest the creation of trusts in their incipiency and before consummation…” • INCIPIENCY is important: get at CR in early stages of development (don’t wait until monopoly) • BEFORE CONSUMMATION: mergers can be challenged before they take place; injunction keeps businesses separate pending court review • Section 7, Clayton Act, is the merger law: • Can be enforced by either DOJ, FTC or private cases

  10. Ex-Post v. Ex-Ante Regulation • Ex-Post: • After activity takes place. Examples: Collusion, Monopolization, Vertical Restrictions • Ex-Ante: • Before activity takes place. Example: Mergers! • Ex-ante regulation is generally considered to be tougher than ex-post (it deems activity potentially harmful even before it takes place)

  11. Merger Law • Section 7: • Illegal to acquire stock or assets of another corporation: “Where in any line of business, in any section of the country, the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly” • Emphasis on “may”: looking at what is possible (i.e. rule of reason)

  12. Merger Law • 1976 Hart-Scott-Rodino Act • Pre-Merger Notification: FTC & DOJ must be notified 30 days in advance of any merger where: • Acquiring party has sales > $100 million • Acquired party has sales > $10 million • Agencies have 30 days to review and may issue temporary injunction before merger • Agencies can request more information • Agencies can negotiate with parties (e.g. sell off unit)

  13. Merger Law • Enforcement impacts: • Since 1950’s, Section 7 has had impact on number and types of mergers • Biggest impact: Horizontal mergers • Rule of reason approach employed

  14. Merger Law • 1950’s-1960’s: Strict enforcement • Mergers among firms with low mkt shares are challenged • Mergers treated almost on a per se rule • 1970’s-today: More lenient enforcement • More demanding evidence to block a merger • Rule of reason approach.

  15. Horizontal Merger Guidelines • Two-step process (as in monopolization cases): • Define relevant market: are the two firms in the same relevant market? If so, move to the second step • Define if market power (i.e. price) is likely to increase in the relevant market: main measure is concentration.

  16. Horizontal Merger Guidelines 1. Market Definition • Product: physical characteristics, uses, cross-elasticity, absolute price levels, etc. • Geographic: transportation costs, legal restrictions, local product differentiation • Do 2 products belong to same market? • If so, then merged firm can more easily increase price of either of its products: customers will keep buying (other products) from this firm. • Example 1: Soda and Milk. What is the cross-price elasticity if the quantity of soda demanded increases by 0.1% when the price of milk increases by 5%? • Example 2: Diet Coke and Diet Pepsi.

  17. Horizontal Merger Guidelines 2. Seller concentration • Impact of merger: change in HHI in the relevant market • Clicker question: Firm 1 has 60% of market, firm 2 has 20% of market and firm 3 has 20%, what is the HHI? (enter a number between zero and 10,000)

  18. Horizontal Merger Guidelines 2. Seller concentration • Merger evaluated in terms of post- and pre-merger HHI: • Rarely challenged if post-merger HHI<1000 • Further analysis if 1000 < post-merger HHI < 1800 • Likely challenged if post-merger HHI>1800 and merger changes HHI by >100 • Clicker question: Suppose firms 2 and 3 in the prior example merge. Will this merger be challenged? • Yes • No

  19. Horizontal Merger Guidelines

  20. In-class Work (groups of 2-3 students) • There are four beer manufacturers in the market with corresponding market shares: • Pete’s: 40% • Sam’s: 30% • Berkshire: 20% • Paper City: 10% • What is the pre-merger HHI? • If Sam’s wants to merge with Berkshire, what would be the post-merger HHI? • Would this merger be challenged? • What about a Berkshire-Paper City merger?

  21. In-class Work (groups of 2-3 students) • What is the pre-merger HHI? (enter a number between 0 and 10,000) • If Sam’s wants to merge with Berkshire, what would be the post-merger HHI? (enter a number between 0 and 10,000) • Would this merger be challenged? A. Yes, B. No • What about a Berkshire-Paper City merger? A. Yes, B. No

  22. Horizontal Merger Guidelines 3. Other Factors that may affect decision to challenge: • Unilateral Effects: • Ability to raise prices after merger (without collusion). Why? • Ruled on a case by case basis • Entry: • If easy: post-merger HHI may be easily eroded (less concern) • If hard: smaller mergers may be more of a concern • Benchmark: are BTE’s small enough to erode prices to pre-merger levels within 2 years? Yes: less likely to challenge.

  23. Horizontal Merger Guidelines 3. Other Factors that may affect decision to challenge: • Other market characteristics: • Is coordination between firms more or less likely? • Example: merger in homogeneous product market may be more of a concern than in a differentiated product market 4. Cost Savings and Efficiency Gains • Synergies (1 manager instead of 2) may reduce unit costs and also prices.

  24. Next time • Second Microsoft case (1998)

  25. Important points • FTC challenges if concentration increases significantly • What is relevant market? • Satellite radio? • Other audio: other radio, internet radio, HD radio, iPods, MP3 players • Sirius-XM claims: • Efficiency gains • Variety • New developments

  26. What Happened? • July 25, 2008: merger approved in a 3 to 2 vote • Controversial: • 1997 FCC granted 2 licenses and stipulated that one of the holders would ‘not be permitted to acquire control of the other’ • February 10, 2009: Sirius-XM hires advisors to prepare for bankruptcy filing • February 17, 2009: Liberty Media (49% DirecTV owner) acquires 40% of Sirius-XM

  27. Enforcement of Horizontal Merger Guidelines • Pre-merger notification • FTC/DOJ can negotiate with merging parties • Sell a unit, facilities, etc. • Agency announces whether it will challenge • If challenged: agency goes to a Federal District Court to seek for a preliminary injunction to block merger until full trial: • If injunction granted: companies frequently drop the merger • If injunction not granted: gov’t frequently drops the case • Either party can appeal decision to higher courts

  28. Horizontal Enforcement: Bottom Line • Large horizontal mergers are strictly blocked • But smaller mergers may face challenge, too • Guidelines give us a good idea about how mergers will be treated

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