Effects-Based Analysis: Mergers and Vertical Restraints€¦ · Luke M. Froeb, Bureau of Economics,...
Transcript of Effects-Based Analysis: Mergers and Vertical Restraints€¦ · Luke M. Froeb, Bureau of Economics,...
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EffectsEffects--Based Analysis:Based Analysis: Mergers and Vertical RestraintsMergers and Vertical Restraints
Luke M. Froeb, Bureau of Economics, FTC
December 6, 2004; 16:15British Institute of International &
Comparative Law (BIICL)London House, Mecklenburgh Square
The views expressed herein are not purported to reflect those of the Federal Trade Commission, nor any of its Commissioners
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AcknowledgementsAcknowledgements
z James Cooper, Dan O’Brien, Mike Vita, FTC
z Tim Brennan, RFF and UMBC z Greg Werden, DOJ z Dan Hosken, Chris Taylor, Lou Silvia,
FTC. z John Parisi and Randy Tritell, FTC
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OutlineOutline
z I. Policy motivation: movement towards “effects-based” analysis
z II. How to determine Effects? – Natural Experiments – Theory-based inference
z III. Apply to Mergers and Vertical Practices
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Movement towards EffectsMovement towards Effects--Based Analysis of MergersBased Analysis of Mergers
zMario Monti’s antitrust legacy – Merger Guidelines; SIEC – Best Practices – Chief Economist
zMoving away from “Form” towards “Effect”
z How do we determine effects of mergers?
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Movement Toward EffectsMovement Toward Effects--BasedBased Analysis of Vertical PracticesAnalysis of Vertical Practices
z US 1977 Sylvania Decision. z EC Article 81 Block Exemption Regulation. zMovement away from “form” towards
“effect” z How do we determine effects of contracts
between manufacturers and retailers (RPM, exclusivity, loyalty discounts, bundling, refusal to deal)?
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How to Determine Effects?How to Determine Effects?
z “Effects” question compares two states of world, – “with” vs. “without” merger – “with” vs. “without” vertical restraint
z But only one is observed z Two ways of drawing inference
– Natural experiments – Theory-based inference
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Natural ExperimentsNatural Experiments
z Control group, e.g., without merger z Experimental group, e.g., with merger z Difference between groups is estimate
of merger effect. z Questions for the parties
– Did you hold everything else constant? – How well does experiment mimic effect in
question?
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Example: Consummated MergerExample: Consummated Merger
z Control Group: Pre-merger period z Experimental Group: Post-merger period
– ÎDid price increase? z BIG question: “Compared to what?”
– Compared to “control” cities hit by the samedemand and cost shocks
z Jargon: “Differences-in-differences” – First difference: pre- vs. post-merger – Second difference: target vs. control cities
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Marathon/Ashland Joint VentureMarathon/Ashland Joint Venture
z Combination of marketing and refining assets of two major refiners in Midwest
z First of recent wave of oil mergers – January 1998
z Not challenged by antitrust agencies z Change in concentration from combination
of assets less than subsequent mergers that were modified by FTC
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Merger Retrospective (cont.):Merger Retrospective (cont.): Marathon/Ashland Joint VentureMarathon/Ashland Joint Venture z Examine pricing in a region with a large change in
concentration – Change in HHI of about 800, to 2260
z Isolated region – uses Reformulated Gas – Difficulty of arbitrage makes price effect possible
z Prices did NOT increase relative to other regions using similar type of gasoline
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Difference Between Louisville's Retail Price and Control Cities' Retail Price Ce
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We ek
Chicago Houston Virginia
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TheoryTheory--based Inferencebased Inference
z Posit pro- and anti-competitive theories z Which one better explains the evidence? z Questions for the parties
– How well does theory explain observed competition?
z Example: Merger Simulation – Posit model – Estimate parameters – Simulate Merger Effects
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Vertical Restraints:Vertical Restraints: Natural ExperimentsNatural Experiments
z Growing body of evidence on vertical – Control Group (with restraint) – Experimental group (without restraint)
z Find that vertical contracts and integration – Reduce price – Induce demand-increasing services
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Representative ExperimentsRepresentative Experiments
z Gasoline: prices 2.7¢/gallon higher in states with vertical divorcement laws
– Vita and Sacher (2000) z Beer: UK divorcement of “tied” pubs raised price
– Forced to offer the beer of at least one rival brewer. – Slade (1998).
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Vertical TheoryVertical Theory
z Anticompetitive theories – Softening horizontal competition. – Multilateral opportunism. – Dynamic entry/exit/investment effects.
z Pro competitive theories – Elimination of double mark-ups – Cost savings. – Dealer services efficiencies.
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What Vertical Theory Tells usWhat Vertical Theory Tells us
z There is possibility that vertical restraints harm competition
z Harm occurs in same instances where restraints likely to have efficiencies. – Search for screens is probably futile.
z ÎThe “possibility theorems” do not give us practical ways for distinguishing pro-competitive from anti-competitive restraints.
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LessonsLessons
z Theory-based inference about effects of vertical restraints is not likely to tell you very much.
z Take lesson from economists who use natural experiments to determine effects of vertical
z ÎBring cases when good natural experiments indicate restraints are anticompetitive. – Before and after restraint – Compare markets with and without restraint
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FAQ’s AboutFAQ’s About Merger SimulationMerger Simulation
Luke M. Froeb
The views expressed herein are not purported to reflect those of the Federal Trade Commission,
nor any of its Commissioners
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Isn’t merger simulation built onIsn’t merger simulation built on unrealistic assumptions?unrealistic assumptions?
z Behind every competitive effects analysis is an economic model. – Simulation makes the model explicit – Forces economists to “put cards on table”
z Every model makes unrealistic assumptions – Crucial question is whether model ignores
factors that lead to biased predictions
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Has merger simulation been testedHas merger simulation been tested against real data?against real data?
z No methodology has been shown to predict effects of real mergers
– No coordinated effects theory, – No unilateral effects theory, – No market concentration theory.
z Model should be judged by how useful it is – Does it focus investigation? – Does it capture current competition?
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Is merger simulation worth theIs merger simulation worth the money?money?
z Demand estimation is often expensive, open ended, yet can yield very little. – Often done without simulation, e.g., Kraft
z Merger simulation does NOT require demand estimation. – Can be done quickly, with very little information
z Virtue of simulation is focusing investigation on facts and assumptions that matter
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Does merger simulation swayDoes merger simulation sway decisiondecision--makers at agencies?makers at agencies?
z Merger simulation is a standard methodological tool – No tool is definitive. – Used to organize evidence, not to substitute for it.
z First used in 1994 in US v. IBC – Expert declaration published in Int’l J. Economics
of Bus. with five other examples from real cases. z Use in recent litigated cases
– Lagardere; Oracle/Peoplesoft;
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Doesn’t simulation always predict aDoesn’t simulation always predict a price increase?price increase?
z Every anticompetitive theory predictsprice increase – We have safe harbours for concentration
z Use simulation to organize evidence,focus investigation, benchmarkefficiency claims, evaluate remedies. – Can compute cost reductions that offset
price increase.