How do Economists use Evidence?

1. How do Economists use Evidence? 10:30am, 24 April 2012 NAAG Midwestern Region Meeting Wyndham Hotel 633 N St. Clair St. Chicago, IL 60611 Luke Froeb Vanderbilt University luke.froeb@owen.vanderbilt.edu

2. Acknowledgements • Michael Doane, Competition Economics • Forbes Belk, Competition Economics • Greg Werden, US Deptof Justice

3. OUTLINE (15 minutes) • I. What do economists do? • II. “Natural” experiments • Perch bid rigging • Car Rental merger • III. Structural Models • CRB merger • IV. Lessons for NAAG’s

4. I. What good are economists, anyway? • Antitrust litigation poses “but-for” (counter-factual) questions • Did this conspiracy raise price? • Will this merger harm consumers? • Economists are trained to answer these questions? • Econometric comparisons (“natural” experiments) • How good is the experiment? • Is the experiment a good “metaphor” for effect? • Economic models • How well does the model fit the evidence? • Are the predictions of the model biased?

5. II. Perch Bid-rigging Conspiracy • Price collapsed suddenly after DOJ began investigation • Use the post-conspiracy period to estimate model of frozen fish prices. • Backcast into conspiracy period to determine “but for” prices • Froeb, Luke, Robert Koyak & Gregory Werden, What is the Effect of Bid-Rigging on Prices?, Economics Letters, 42 (1993) pp. 419-423. available at SSRN

6. Conspiracy raised price 23% above “but-for” prices

7. Is Big Bad Again?:Staples-Office Depot Aftermath • Staples-Office Depot merger was successfully challenged by FTC using price comparisons • Prices 7.5% higher in one-office superstore cities than in two-office superstore cities • With a 15% estimated pass-through rate, would imply a 50% mc reduction to offset merger effect. • Would you block merger based on these data?

8. What could go wrong? • Experiment is “polluted,” i.e., something else accounts for results • Spurious correlation • Example: movie tickets (Davis, 2005) • Finding: Price is $0.90 higher with competitor <.5 mile away • Movie theatres are locating in areas with high demand • Experiment might be bad metaphor for merger • Merger changes ownership concentration • Does data mimic this effect?

9. New Work on Car Rental Mergers • Doane, Michael J., Luke M. Froeb, and David Zimmer, and Gregory Werden, Pricing and Ownership Concentration: A New Estimation Strategy (April 4, 2012), available at SSRN. • Dollar-Thrifty rebuffed two suitors • Avis-Budget • Hertz-Advantage • Expedia Price Data from 400 airports in US • Compare prices with at airports with same number of brands, but different ownership structures • Are prices higher at airports with three 1-brand firms, or one 3-brand firm? • Comparison can “predict” effects of ownership change caused by merger.

10. At Which Airports will the Proposed Car Rental Mergers Raise Price?

11. III. Model Example:US v. Altivity and Graphic (2008) • US DOJ challenge • Altivity (35%) + Graphic (17%) of North American capacity • Market • Geographic: North America • Product: Coated Recycled Board

12. Theory of Harm • Nicholas Hill, “Analyzing Mergers with Capacity Closures,” DOJ Working paper, at SSRN • Model: Once built, mills produce at capacity; and merger would increase incentive to close mills • Mechanism: mill shutdown  supply decrease  higher price • Model tells us • What matters: demand elasticity, import supply response • Why it matters: increases profitability of shutdown • How much it matters: divest 2 plants representing 11% of capacity

13. Why Attorneys Should Care About Modeling • Models are “blueprints” for enforcement • Model guides interpretation of evidence • Evidence guides selection of model • Agencies do it • 2011 DOJ blocked H&R Block/TaxAct proposed merger • 2009 FTC blocked CCC Holdings/Aurora proposed merger • Other reasons • Analysis of models provides a solid foundation for enforcement concerns • Analysis of models clarifies the precise nature and determinants of mergers in particular settings. • Application of models to cases permits a fact-based, quantitative assessment of merger effects.

14. Conclusions • Economists are uniquely trained to answer the kind of “but-for” questions that arise in litigation • The earlier you get an economist involved, the better off you will be • But you have to communicate frequently • Tip for communicating: ask three questions • 1. How will economist investigate the questions posed by the case? • 2. What are the possible outcomes of the investigation? • 3. How will the outcomes influence judge or jury?