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 • Homework 4 coming up (right after break)

Merger Law • 3 types of mergers: • Vertical • Horizontal • Conglomerate

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.

Horizontal Merger Guidelines 2. Seller concentration • Impact of merger: change in HHI in the relevant market

Horizontal Merger Guidelines

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?

Solving last lecture’s problem • Pre-merger HHI (88% got it right): • 40^2+30^2+20^2+10^2= • 1600+900+400+100 = 3000 • Post-merger HHI if Sam’s & Berkshire merge (93% got it right): • 40^2+50^2+10^2 = • 1600+2500+100 = 4200 • Post HHI if Berkshire & Paper City merge (yes 67%, no 33%) • 40^2+30^2+30^2= 1600+900+900=3400

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.

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. • Controversial: it’s difficult to compute, it’s difficult to verify that savings will take place, it’s difficult to ensure full pass-through

Next time • Second Microsoft case (1998)

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

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

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

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

Exam Poll • On a scale of 1 to 10, how “fair” do you think the midterm was? (1 totally unfair, 10 totally fair)

Exam Poll • On a scale of 1 to 10, how “difficult” do you think the midterm was? (1 piece of cake, 10 hardest exam ever)

Public Policy in Private Markets