The Monopoly Market power Monopoly equilibrium Welfare aspects.
EC365 Theory of Monopoly and Regulation Topic 4: Merger 2013-14, Spring Term Dr Helen Weeds.
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Transcript of EC365 Theory of Monopoly and Regulation Topic 4: Merger 2013-14, Spring Term Dr Helen Weeds.
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EC365 Theory of Monopoly and Regulation
Topic 4: Merger
2013-14, Spring Term
Dr Helen Weeds
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Routes to monopoly power
Monopoly power
Merge
Collude Exclude
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What is a merger?
Legal control: > 50% of voting shares
Material influence: ability to influence policy 25% shareholding (can block special resolutions) > 15% may attract scrutiny
• BSkyB/ITV: BSkyB acquired 17.9% stake in ITV• Newscorp/BSkyB: held 39% already, wanted to increase to 100%
other factors: distribution of remaining shares; voting restrictions; board representation; specific agreements
Includes joint ventures (JVs) combine operations in one area only autonomous entity, e.g. jointly-owned subsidiary
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Motives for merger
Horizontal merger Market power
• towards customers• towards suppliers (monopsony)
Efficiencies and synergies• cost savings• R&D spillovers
Vertical merger (lecture 6): complementary assets
Conglomerate mergers: portfolio effects
Stock market: under-pricing; corporate control
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Lecture outline
Measuring concentration
Merger in Cournot oligopoly symmetric firms asymmetric firms cost efficiencies merger policy and case: Staples-Office Depot
R&D joint ventures
Relevant counterfactual “failing firm defence”
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Measuring concentration
Symmetric firms Market share of each firm, s = 1/n, may be used E.g. 3 firms: s = 1/3
Asymmetric firms: no unique measure (r firm) Concentration Ratio: CRr =
Herfindahl-Hirschman index: HHI or H =
Monopoly: CR = HHI = 1 (as %: HHI = 10,000)
Perfect competition: both approx. 0
r
iis
1
i
is2
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Example: UK supermarkets
Market shares by retail by revenue(2002/03) sales area excl. petrol
Tesco 26% 31% Sainsbury’s 23% 21% Asda (Wal-Mart) 19% 21% Safeway 15% 13% Morrisons 7% 7% [Others 9% 6%]
C4 ratio? HHI?
Market: one-stop grocery shopping (stores over 1,400 sq m); local (these are national shares)
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Use of HHI in merger control
US DoJ “safe harbours”; OFT guidelines
Increase in HHI
0-150 150-250 250+
Post-merger HHI
2000+ Safe Unsafe Unsafe
1000-2000 Safe Safe Unsafe
0-1000 Safe Safe Safe
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Merger in Cournot oligopoly
Simple symmetric case identical marginal cost c; no fixed costs linear demand: P = a – bQ
Cournot with n firms set a = b = 1; c = 0
bn
canπi 2
2
1
Merger from 2 1 3 2 4 3
Pre-merger profit (combined) 2/9 1/8 2/25
Profit of merged firm 1/4 1/9 1/16
Change 1/36 -1/72 -7/400
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General case
n symmetric firms; 2 merge
Gain to merged firm: = i(n–1) – 2i(n)
sgn = sgn[2–(n–1)2]: negative when n > 1+2 2.4
Competitors benefit from positive externality merged firm q competitors q (RFs slope down) while P
b
ca
nn
n
b
ca
nnπ
2
22
22
22 1
12
1
21
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Why merge?
Cost asymmetries merger reallocates output to more efficient plant
Efficiencies / synergies resulting from merger fixed cost savings marginal cost reductions complementary assets R&D
Post-merger collusion assess change in critical discount factor
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Cost asymmetries
Pre-merger 2 firms, unit costs c1 = 1, c2 = 4; demand p = 10 – Q
Cournot eqm:
q1 = 4, q2 = 1; p = 5 welfare: W = + CS = 16 + 1 + 12.5 = 29.5
Post-merger: shut down unit 2 monopoly with c = 1: p = 5.5, Q = 4.5 welfare: W = + CS = 20.25 + 10.125 = 30.375
Despite concentration, welfare goes up what if W = + CS, with = 0.5? Critical ?
jii ccq 2103
1
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Concentration and average margin
n-firm Cournot oligopoly asymmetric marginal costs, ci
lower ci higher equilibrium qi higher market share si
Relationship between HHI (as fraction, i.e. 1) and weighted average PCM (“Lerner index”)
where = price elasticity of demand (as absolute value)
ε
H
p
cps
p
cps
p
cpsL n
n
...2
21
1
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Cost reductions
What if merger reduces costs?
Fixed cost saving lower F implies higher concentration implies P and CS
Marginal cost reduction effect on P (and CS) is ambiguous
• higher concentration• output where MR = MC is altered
NB: Cost savings must be merger-specific
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Fixed cost saving
Merger to monopoly (inverse) demand P = 1–Q; marginal cost c = 0 per-firm fixed cost F (0, 1/9)
Pre-merger (Cournot) welfare W(n=2) = + CS = 2(1/9 – F) + 2/9 = 4/9 – 2F
Post-merger: eliminate one F welfare W(n=1) = + CS = ¼ – F + 1/8 = 3/8 – F
Welfare comparison welfare increases iff F > 5/72 0.07 what if < 1?
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Marginal cost reduction
Merger to monopoly P = a – bQ; marginal cost falls from c0 to c1 < c0
look at CS alone ( = 0)
Pre-merger (Cournot):
Post-merger:
CS increases iff
b
cacCS
20
0 9
2 ;2
b
cacCS
21
1 8
1 ;1
b
ca
b
ca 20
21
9
2
8
1
001 3
1cacc
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Figure 1: Marginal cost reduction
p , c
q
D
c 0
c 1
p m (c 1 )
p C (c 0 )
Q C Q m
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Merger policy
US: Clayton Act (1914) “substantial lessening of competition” (SLC) test
UK: Enterprise Act (2002) replaced “public interest” criteria with SLC test
EU merger regulation (1989/2003) 1989: “create or enhance a dominant position” 2003: “significant impediment to effective competition”,
including creation or strengthening of a dominant position captures reduction of competition in an oligopoly industry
(without losing existing case law)
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Assessing a merger (OFT guidance 2003)
Competitive assessment loss of rivalry, not constrained by other competitors? entry: sufficient in scope, likely and timely? buyer power: will this constrain any price rise?
Are there offsetting efficiency gains, benefiting consumers?
Relevant counterfactual what would happen absent the merger? e.g. is the target a “failing firm”?
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Competitive assessment
Are merging firms (close) competitors? bidding data diversion ratio: if A raises price, what proportion of lost
demand goes to B? (ratio of cross- to own-price elasticity)
Other competitors does presence of third parties constrain prices? supply side as well as demand substitution
Framework: “market definition” set of products which compete closely with one another aspects: products, geographic market
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Case: Staples-Office Depot (US 1997)
Product: consumable office supplies FTC’s market definition: “office superstores” (OSS)
• Office Depot (1), Staples (2), OfficeMax (3)• merging parties had >70% share
non-OSS outlets: Wal-Mart, Kmart, Target, etc.
Issue: are non-OSS outlets in the same market? econometric analysis of prices in local markets (cities)
• prices lower where Staples competes with Office Depot than with non-OSS alone (FTC: 7.3%, parties: 2.4%)
• prices lower where all 3 OSS compete than where Staples and OfficeMax alone
Competition effect: merger would raise prices
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Staples-Office Depot: cost savings
Would cost savings offset the (ve) competition effect?
Parties’ claims large cost savings 67% pass-through to customers net effect: prices by –2.2%
FTC’s claims 43% of cost savings achievable without merger; some
unreliable: actual savings = 1.4% of sales 15% pass-through net price effect = 7.3% – 0.15 x 1.4% = +7.1%
District Court ruled in favour of FTC: merger blocked
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R&D joint ventures
Innovation generates dynamic efficiency gains
Benefits of cooperative R&D complementary skills/inputs of different firms R&D involves large up-front costs; high risk
• may be too much for one firm alone
Against cooperation would each firm innovate on its own? Likely to reduce R&D effort (Team issue) more competitive product market is desirable
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Policy towards cooperative R&D
Principles underlying R&D JVs research would not otherwise be undertaken must not extend beyond activities necessary for R&D
• e.g. joint R&D only; separate production & distribution treated as a merger (rather than under Art. 101) if JV
operates on an autonomous and permanent basis some concern over networks of JVs involving same party:
may inhibit competition / entry
E.g.: GM- Renault-Nissan JV to design a “light van” Also joint production: large economies of scale separate labels (Trafic, Vivaro), marketing and sales
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Counterfactual to the merger
Ideally, we want to compare future with merger (1) future without merger (2)
(2) often proxied by actual pre-merger situation
Sometimes using pre-merger is not valid target will exit the market (it is a “failing firm”) committed entry or expansion regulatory changes: market liberalisation;
new environmental controls
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Failing firm defence
Key idea competition deteriorates even in the absence of merger relative to this benchmark, merger does not lessen comp.
FFD: a merger which raises antitrust concerns may nonetheless be permitted if the failing firm would otherwise exit the acquirer would gain the target’s market share no alternative purchaser poses a lesser threat to competition
(regardless of price)
[US; similar principles in EU, UK, etc.]
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Difficulties in using the FFD
Evidential difficulties extent of losses?; are losses unavoidable?
• e.g. Detroit newspapers: suspicion that firms were fighting “too hard” in order to gain merger clearance
are there other potential bidders?
Predictive difficulties will losses continue?; will exit occur? what would happen to market share, assets, etc?
Comparing 2 counterfactual situations 2 hypotheticals not one
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Successful FFD cases
Potash: Kali und Salz–Mitteldeutsche Kali (EC 1993) combined market share 98% MdK very likely to go bankrupt (supported by Treuhand);
30% fall in demand 1988-93 market share would go to K&S; no alternative purchaser
Solvents: BASF–Pantochim–Eurodiol (EC 2001) targets already in receivership no other buyer; merger would keep capacity in market
Other cases Detroit News–Free Press: local newspapers (US 1988) P&O–Stena: cross-Channel ferries (UK 1997) Newscorp–Telepiù: Italian pay-TV (EC 2003)