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A ntitrust Economics 2013. Alexis G. Pirchio CPI. Elisa Mariscal CIDE, Global Economics Group. Review: Lectures 11.1, 11.2 and 12.1 market definition and horizontal mergers. Review 17 October 2013. Date. Overview. Role of Market Definition. Market Definition and Market Power.
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Antitrust Economics 2013 Alexis G. Pirchio CPI Elisa Mariscal CIDE, Global Economics Group Review: Lectures 11.1, 11.2 and 12.1 market definition and horizontal mergers Review 17 October 2013 Date
Market Definition and Context F G Firms in the market A, B, C, D, E H Firms outside of the market: F, G, H, …
How to Proceed? Demand-side then supply-side Potential substitute products Candidate Market 1 A B C 2 Demand-side A+B+C D X A+B+C 3 S1 Supply-side A+B+C+S1 S2 X
Critical Loss Analysis is a Method for Implementing SSNIP Test in Practice Price Profit = ($20 - $10) x 100 = $1,000 $20 $10 MC Quantity 100
Critical Loss Analysis is a Method for Implementing SSNIP Test in Practice Price Profit = ($20 - $10) x 100 = $1,000 $22 Profit = ($22 - $10) x 83.33 = $999.96 $20 $10 MC Quantity 100 83.33 If fewer than 16.7 units of sales switch than a 10% price increase is profitable
Critical Loss Analysis Depends on Customer Switching—an Example of a Calculation
Comparison of Actual Versus Critical Loss Determines if Market is Large Enough to be Monopolized. Actual loss greater than critical loss Implies price increase is unprofitable so assumed “market” can’t be profitably Monopolized and is therefore too small. Actual loss less than Critical Loss implies that price increase is profitable so assumed “market” can be profitably monopolized. Market is therefore at least this narrow. Critical Loss
Key Lesson: Avoid Approaches that Result in the Exclusion of a Customer Side from the Analysis
Horizontal vs. Vertical Mergers Horizontal merger of B and C in market of A, B, and C which have substitutable products C A B f e Vertical merger of A and f where f supplies a downstream service to A.
Example of Calculating HHI and Change in HHI • HHI (Pre) = 502 + 252 + 152 + 102 = 3450 • HHI (Post) = 502 + 352+ 152= 3950 • Change in HHI = 500
HHI Investigate? < 1,000 NO > 1,000 and <1,800 YES IF HHI > 100 NO OTHERWISE > 1,800 YES IF HHI > 50 NO OTHERWISE OFT’s Merger Guidelines HHI and Change in HHI Serve as Screening Devices
Merger of Firms in an Oligopoly Industrywith Homogeneous Demand P D(P) MONOPOLY PM COURNOT PCOURNOT COMPETITION MC Q qMA,B Q COURNOT qC
Consequences of a Reduction in the Number of Firms with Homogeneous Products Basic economic theory shows that reducing the number of firms results in higher prices (Cournot Model) P D(P) PM MONOPOLY N = 2 N = 3 MC N = 4 COMPETITION Q qM qC
Efficiencies and Merger to Monopoly Surplus transferred from consumers to producers Consider also when marginal cost decreases from $3.00 to $2.50 Surplus from cost savings Dead Weight Loss PPost Pre-merger Marginal Cost PPre Post-merger Marginal Cost Demand QPost QPre MR In this example price to consumers increases and social welfare declines less than consumer welfare because of efficiencies.
Efficiencies and Merger to Monopoly Surplus transferred from consumers to producers Consider also when marginal cost decreases from $3.00 to $1.50 Surplus from cost savings Dead Weight Loss PPost Pre-merger Marginal Cost PPre Post-merger Marginal Cost Demand QPost QPre MR