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Industrial Organization

Industrial Organization. Mergers, Policy and Antitrust Law. Merger Typology. 1. Horizontal: 2 or more direct competitors Examples: Coke and Pepsi; San Benedetto and Ferrarelle Main concern:  concentration =  market power

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Industrial Organization

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  1. Industrial Organization Mergers, Policy and Antitrust Law

  2. Merger Typology 1. Horizontal: 2 or more direct competitors • Examples: Coke and Pepsi; San Benedetto and Ferrarelle • Main concern:  concentration =  market power • Vertical: firms that operate at different stages of production/distribution • Examples: Cement and concrete; farmer and processor • Main concern: foreclosure of non-integrated firms

  3. Vertical Mergers: Foreclosure Farmer 1 Farmer 2 Farmer 3 Processor A Processor B • A non-vertically integrated industry (i.e. no vertical mergers) • All Farmers could use any of the two processors

  4. Vertical Mergers: Foreclosure Farmer 1 Farmer 2 Farmer 3 Processor A Processor B • 2 vertical mergers (vertical integration) • Farmer 3 is left without potential processor • (foreclosure) • Barriers to entry: to successfully enter the market • you need to enter 2 stages

  5. Merger Law • US (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 • EU: • Also targets mergers before consummation • The objective is to prevent a significant reduction of competition as a result of the merger

  6. Merger Law • US (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 (e.g. sell off unit)

  7. Merger Law • EU: • Pre-merger notification: • Combined sales > E5000 million worldwide or 250 million in EU • Exception: • When one merging party is in or near bankruptcy

  8. Merger Policy and Law • Our focus: Horizontal mergers • Most common type of merger • Most controversial • More regulation

  9. Horizontal Merger Guidelines 1. Market Definition (1st step) • 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? • Example: Acquafrizzante v. acquanaturale What is the cross-price elasticity if the quantity of frizzante demanded increases by 0.1% when the price of naturale increases by 5%?

  10. Horizontal Merger Guidelines 2. Seller concentration (2nd step) • Impact of merger: change in HHI in the relevant market • Example: Firm 1 has 60% of market, firm 2 has 20% of market and firm 3 has 20%, what is the HHI?

  11. Horizontal Merger Guidelines 2. Seller concentration (2nd step) • 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 • What would the post-merger HHI if firms 2 and 3 above merge? Will this merger be challenged?

  12. Horizontal Merger Guidelines

  13. Horizontal Merger Guidelines 3. Other Factors that may affect decision to challenge (2nd step) • Unilateral Effects (project 3): • Ability to raise prices after merger (without collusion). Why? • Ruled on a case by case basis (merger simulation) • 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?

  14. Horizontal Merger Guidelines 3. Other Factors that may affect decision to challenge (2nd step) • 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 (2nd step) • Synergies (1 manager instead of 2) may reduce unit costs and also prices.

  15. Horizontal Enforcement • Large horizontal mergers are (typically) strictly blocked • Smaller mergers may also be challenged, depending on specifics of the case

  16. Industrial Organization Product Differentiation and Merger Analysis

  17. Merger Analysis • Assume a model of competition (Bertrand-Nash) in pre-merger world: • Find prices that make FOC equal to zero in post-merger world: Back out marginal cost

  18. Project • To simplify computation, we will assume that: • Hence: New Ownership structure

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