Antitrust & Competition Policy Blog

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A Net Present Value Approach to Merger Analysis

A Net Present Value Approach to Merger Analysis

 

Joseph Simons

and

Malcolm B. Coate

 

Abstract

The rise of unilateral effects analysis, as quantified by merger simulation, creates the potential to balance anticompetitive effects and efficiencies and improve the merger review process. Unfortunately, sophisticated economic models impose a tight structure on the analytical process, one that ignores the probability that the various effects will occur and focuses only on a rough estimate of the merger’s price effect. We propose to address this problem through the application of a simple risk adjusted Net Present Value model to offer a more comprehensive review of the effect of the merger on a price proxy for consumer welfare. We address the importance of accounting for the probabilities that the various effects will actually occur, the need to consider all the relevant efficiencies, the timing of the anticompetitive effects and efficiencies, as well as the potential out-of-market benefits from the merger. Because our balancing model is simple, robustness analysis is relatively straightforward, with the user able to change any of the key inputs and observe the likely effect on the policy prediction. Although we understand this quantitative methodology cannot be used in every case, it should be viable in any matter that is currently quantified, as well as a number of monopoly and collusion investigations in which the tools of unilateral effects analysis are not applicable.

Strategic Delegation and Collusion: An Experiment

Strategic Delegation and Collusion: An Experiment

Jeong Yeol Kim

University of Arizona

Abstract

The assumption that firms maximize profit has been widely used in economics to explain firm behavior and market outcomes. But the profit maximization assumption may lead to incorrect predictions when firms engage in strategic delegation between owners (e.g. shareholders) and managers (e.g. executives) whose incentives might differ. This research examines firms' collusion under the assumption that firms engage in strategic delegation, compared to that under profit maximization. The experiment incorporates cartel fines for firms' managers as well as owners to more closely align with the US antitrust regime. The experiment yields three main findings: (1) the market is more competitive under strategic delegation than under profit maximization, though this does not guarantee fewer cartels will exist in a market; (2) cartel formation occurs in two distinct ways, firms simultaneously choose a low output for collusion or they periodically switch off high and low outputs to evade cartel fines; (3) cartels are more likely to be formed when each firm has different incentives for managers compared to when their incentives are the same.

Market Power in the Argentine Liquid Fuels Wholesale Chain

Market Power in the Argentine Liquid Fuels Wholesale Chain

By:	M. T. Verónica Culós (Universidad Nacional de Cuyo); M. Florencia Gabrielli (Universidad Nacional de Cuyo/CONICET); Marcos Herrera Gómez (IELDE-UNSa/CONICET)
Abstract:	The liquid fuels market in Argentina is characterized by a high level of concentration, especially in local geographic areas. This paper studies the demand of the liquidfuels wholesale chain in Argentina, using the discrete choice approach, based on the premise that different firms offer differentiated goods, by virtue of the intrinsic characteristics of the good, and that such differentiation gives them the power to set prices above marginal production costs. The difference between prices and marginal costs determines the firm’s market power. Using a novel dataset, we provide new empirical evidence that quantifies market power across firms and regions.
URL:	http://d.repec.org/n?u=RePEc:aoz:wpaper:157&r=

Behavior-based Price Discrimination in the Domestic and International Mixed duopoly

Behavior-based Price Discrimination in the Domestic and International Mixed duopoly

By:	Suzuka Okuyama
Abstract:	This study investigates mixed markets in which a social welfare-maximizing public firm and a private firm engage in behavior-based price discrimination (BBPD). Total of two cases are considered: one where domestic shareholders completely own the private firm and one where foreign shareholders completely own it. In the domestic mixed duopoly, BBPD is irrelevant from the viewpoint of social welfare. This is because poaching does not occur. In the international mixed duopoly, BBPD improves domestic social welfare, as it allows the public firm to lower its poaching price. In both cases, privatization is more undesirable under BBPD than uniform pricing.
URL:	http://d.repec.org/n?u=RePEc:dpr:wpaper:1179&r=

Competition Law and Sports Governance: Disentangling a Complex Relationship

Competition Law and Sports Governance: Disentangling a Complex Relationship

Pablo Ibáñez Colomo

London School of Economics - Law School

 

Abstract

Cases like International Skating Union and Super League show that the application of EU competition law to rules adopted by sports governing bodies is complex and occasionally controversial. This article discusses the peculiarities of sports as an activity and addresses the implications for Articles 101 and 102 TFEU. It shows, first, that the relationship between individual participants in a tournament is best described as co-opetitive, in the sense that their viability and success depend on sustained cooperation. Second, the emergence of a regulatory structure is inevitable. Third, tensions – of a horizontal and a vertical nature – are bound to emerge within an association. These tensions are explained, inter alia, by the opportunistic behaviour of individual participants (which may seek to benefit from the joint venture while simultaneously undermining it).

The case law accounts for the peculiarities of sports. Measures aimed at addressing opportunistic conduct within a cooperative structure (such as the non-compete obligations imposed by governing bodies) do not have, as their object, the restriction of competition and do not invariably have anticompetitive effects, which are to be established case-by-case. Absent exclusive or special rights, moreover, governing bodies are not subject to a general duty of non-discrimination vis-à-vis competing organisations.

Antitrust Time Travel: Entry & Potential Competition

Antitrust Time Travel: Entry & Potential Competition

 

Sean Sullivan

University of Iowa College of Law

Henry Su

Bradley Arant Rose & White LLP

 

Abstract

Entry analysis and potential competition doctrine have much in common. Both draw from predictions about future entry. Both require difficult assessments of entry barriers and incentives. Both are currently a doctrinal mess. This Article offers a clarifying perspective. Instead of separating analysis according to litigation posture (who wins or loses if the argument is proved) why not merge the offensive and defensive implications of potential competition and instead focus attention on the kind of competitive time travel in question? Is the claim about forward time travel (entry will impact future competition)? Or is it about backward time travel (the possibility of future entry is impacting current competition)? Separating analysis in this way reveals analytical flaws and unprincipled asymmetries in current thinking. It also exposes problems and paradoxes that beset all time travel arguments in rule of reason analysis.

Competition Law and Supply Chain Resilience

Competition Law and Supply Chain Resilience

Elias Deutscher

University of East Anglia (UEA)

 

Abstract

Global value chains are currently experiencing a ‘perfect storm’ triggered by the coincidence of various random events, including the COVID-19 pandemic, the temporary blocking of the Suez Canal by the stranded giant container ship ‘Ever Given’, the congestion of major ports, and the outbreak of the war in Ukraine. All these events have laid bare the degree to which our economies rely on integrated and often vulnerable supply chains that form the neural system of our globalised market economies. Empty supermarket shelves, steep increases in energy prices and the bleak prospect of a global food crisis have led to a widespread awareness of the interdependence and fragility of tightly-knit networks of integrated just-in-time value chains. Against this backcloth, there are mounting calls for a general rethinking of how various economic policies and regulations could foster the resilience of integrated supply chains against exogenous shocks. This paper follows this invitation by exploring whether and how competition law – i.e., the prohibition of anti-competitive agreements, the abuse of monopoly power and anticompetitive mergers – could contribute to greater supply chain resilience. It thereby makes three contributions. First, the paper seeks to clarify the notion of value chain resilience and its relationship with competition. It thus addresses the fundamental question of whether competition is conducive or detrimental to supply chain resilience. Second, the paper maps four avenues through which competition policy can promote the shoring up of international supply chains. Third, the paper identifies a number of filters to incorporate concerns about supply chain resilience into competition law analysis. The paper thus lays down the conceptual foundations and pathways for a nascent research agenda on competition (law) and resilience.

What Should We Do about E-Commerce Platform Giants? —The Antitrust and Regulatory Approaches in the US, EU, China, and Japan

What Should We Do about E-Commerce Platform Giants? —The Antitrust and Regulatory Approaches in the US, EU, China, and Japan

Toshiaki Takigawa

Kansai University

Abstract

This paper focuses on one of the most important digital platform sectors—E-commerce—addressing the antitrust enforcement, comparing it with new regulatory approaches, learning from experiences in the US, EU, China, and Japan. E-commerce is shown to have distinct characteristics, as compared to other platform sectors: in particular, prevalence of multihoming and product differentiation. As a result, e-commerce market shares in the US, China and Japan all have shown no tendency toward monopoly. It is, therefore, misguided to adopt ex-ante fixed regulation on digital platforms as a whole, as now envisaged by the EU Digital Markets Act proposal. Instead, competition in e-commerce should be protected by competition-law enforcement, which has the merit of a flexible case-by-case approach. Focus by competition authorities should be put on exclusionary practices of e-commerce giants, most pernicious of which is exclusive dealing (or “pick one from two” practice), since this practice destroys multi-home nature of e-commerce. A striking example of this is a crackdown recently conducted by the Chinese competition authority against Alibaba and Tencent. On the other hand, forced data sharing, as well as interoperability, has recently received particular attention as public policy aimed at ameliorating competition in digital platforms. However, for e-commerce, such forceful intervention leads to negative consequences of robbing enterprises of incentives to analyze data and innovate. Instead, competition-law enforcement is called for, although competition law jurisprudence on refusal-to-deal does not lead to enforcement on e-commerce giants. Meanwhile, exploitative abuse (or superior-bargaining-position) regulation has attracted increasing attention, in order to protect suppliers from abuse by e-commerce giants. This regulation needs exacting application, in order to achieve transparency in finding exploitation, and then needs to weigh the need to protect suppliers against benefits to consumers realized through efficiency in e-commerce.

Criminal Enforcement of Section 2 of the Sherman Act: An Empirical Assessment

Criminal Enforcement of Section 2 of the Sherman Act: An Empirical Assessment

 

Daniel A. Crane

University of Michigan Law School

Abstract

The Biden Justice Department has announced that it may begin to bring criminal monopolization cases under Section 2 of the Sherman Act, a practice that the Department has not employed in almost half a century. The Department's leadership has justified this idea by asserting that it used to be common practice for the Antitrust Division to bring such cases. This Article presents the findings of an empirical study of all of the Justice Department's antitrust case filings. It finds that the Justice Depart brought 175 criminal monopolization cases between 1903 and 1977, but that only 20 of these involved unilateral exclusionary conduct (as opposed to concerted cartel behavior), that only 12 of these resulted in a finding of criminal liability, that only one case involving non-violent conduct resulted in a prison sentence, and that the total fines meted in these cased amounted to less than $9 million in 2022 dollars. Thus, although there is historical precedent for bringing criminal monopolization cases, if the Justice Department carries through on its recent threats to begin bringing criminal monopolization cases again and it does so for non-violent unilateral conduct offenses and seeks significant penalties, it will be breaking new ground.

A Dynamic Model of Predation

A Dynamic Model of Predation

By:	Patrick Rey; Yossi Spiegel; Konrad O. Stahl
Abstract:	We study the feasibility and profitability of predation in a parsimonious infinite-horizon, complete information setting where an incumbent may face an entrant, in which case it needs to decide whether to accommodate or predate it. If the entrant exits, a new entrant is born with positive probability. We show that there always exists a Markov perfect equilibrium, which can be of three types: accommodation, predation with no future entry, and predation with hit-and-run entry. We use the model to study alternative antitrust policies, derive the best rules for these policies, and compare their welfare effects.
URL:	http://d.repec.org/n?u=RePEc:ces:ceswps:_9819&r=

Calling antitrust merger practitioners - please take this merger survey

Dear Blog Readers,

I’d like to invite you to complete a short survey asking you about your antitrust merger and acquisition activities in the past two years for a research project I’m leading on our profession’s experience with the U.S. antitrust agencies and changes in this administration. It should take only 10-15 minutes of your time and all individual responses will be kept confidential.   I would very much appreciate it if you also could forward the survey to anyone else who does antitrust merger work in front of the DOJ and/or the FTC.

You can access the survey through this link: https://www.surveymonkey.com/r/D7TN5YJ

I really appreciate the time you’ll dedicate to this.

Thank you,

Danny

Understanding Basic Principles and Facts about Antitrust to Create a Basis for Some (Any?) Consensus

Understanding Basic Principles and Facts about Antitrust to Create a Basis for Some (Any?) Consensus

 

 

Dennis W. Carlton

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Abstract

The debates around antitrust reform have sometimes involved participants taking extreme positions. In some sense, this is good because it helps attract attention and there has been lots of attention from politicians, policy makers, academics, and the public. But it is not good if the debate winds up creating myths that are unhelpful in forging a path forward. I am convinced that there is a sufficient body of evidence to establish that, although there are many improvements that can be made in antitrust doctrine and enforcement, the claims by a growing number of academics, politicians, and government officials (often referred to as “Neo-Brandeisians”) that antitrust needs to be radically redirected and that the core principles that have guided it for the past half century should be jettisoned are wrongheaded and would lead to undesirable policy outcomes. My goal in this short essay is to explain a few key points that I hope many will see as obvious. I first start out with some basic theoretical/philosophical observations, and then move on to empirical ones. After setting a common theoretical and empirical background, I discuss whether there is a need for change and, if so, what change, for the major antitrust doctrines concerning cartels, mergers and exclusionary behavior. I then go on to discuss some possible improvements in how economics can be used in antitrust matters, as well as other ways in which we can better obtain the benefits of competition without, in effect, throwing the baby out with the bath water.

The Distortive Effects of Antitrust Fines Based on Revenue

The Distortive Effects of Antitrust Fines Based on Revenue

 

 

Yannis Katsoulacos

Athens University of Economics and Business

Vasiliki Bageri

Athens University of Economics and Business

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Abstract

In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.

Merger Deregulation, Wages, and Inequality: Evidence from the U.S. Banking Industry

Merger Deregulation, Wages, and Inequality: Evidence from the U.S. Banking Industry

 

Abhay Aneja

University of California, Berkeley

Prasad Krishnamurthy

University of California, Berkeley

Abstract

We study the effect of bank merger deregulation on market structure and wages in the banking industry. We show that state deregulation of bank mergers and acquisitions increased the market share of large, multi-state banks and lowered wages for bank workers by up to 8 percentage points, with wage reductions occurring uniformly across the wage distribution. Deregulation had no measurable effect on employment within the banking industry, and no direct effect on banking-market concentration, though its effect on wages was larger in states with lower initial levels of concentration. These findings suggest that enhanced product-market competition between banks eroded worker rents. In contrast to theories predicting that increased competition will lower the racial wage gap, we find that deregulation increased the wage gap between black and white bank workers--especially for higher-wage workers and managers. This increase in the racial wage gap cannot be fully explained by increased product market competition, changes in technology, or enhanced market power.

A Refutation of 'Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry'

A Refutation of 'Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry'

 

 

José Azar

University of Navarra, IESE Business School; CEPR

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Isabel Tecu

Charles River Associates (CRA)

Date Written: July 12, 2022

Abstract

We show that the main claim in Dennis, Gerardi, and Schenone (JF forthcoming) (DGS), namely "that the documented positive correlation between common ownership and ticket prices stems from the market share component of the common ownership measure, and not the ownership and control components," is factually incorrect. In particular, we show empirically that the placebo that according to DGS "keeps market shares fixed" is in fact highly negatively correlated with market shares. This correlation is mechanical and arises because the data set is an unbalanced panel, as we show analytically. We make a methodological contribution to the literature by showing how one can actually separate variation from market shares from variation in ownership. Contrary to DGS' claims, ownership changes do predict price changes once one constructs a valid placebo that actually separates the variation from market shares from the variation in ownership. AST's panel regressions in fact underestimated the price effect of common ownership, due to the endogeneity of market shares.

Tethering Vertical Merger Analysis

Tethering Vertical Merger Analysis

 

Daniel P. O'Brien

Microfoundations

 

Abstract

Antitrust practitioners are mis-applying simple vertical merger screening techniques (e.g., vertical foreclosure arithmetic, price pressure analysis) to reach flawed and internally inconsistent conclusions about vertical mergers. Specifically, practitioners have struck on a formula for claiming harm from vertical mergers: They argue that relatively low upstream margins mean that, post-merger, the merged firm has an incentive to disadvantage rivals’ access to the upstream product thus driving more sales to the merged firm’s relatively more profitable downstream product. This reasoning is backwards in the same way that standard critical loss analysis was backwards when it concluded that large pre-merger margins make harm from horizontal mergers less likely. A low upstream profit share implies that the upstream firm faces significant competition and likely lacks the ability to foreclose competition, whereas a high upstream profit share admits foreclosure as a possibility (though by no means a certainty). This paper discusses the issues and touches on how to fix them, a topic addressed in more detail in a forthcoming companion paper.

Inspecting Cartels over Time: With and without Leniency Program

Inspecting Cartels over Time: With and without Leniency Program

 

Takako Fujiwara-Greve

Keio University - Faculty of Economics

Yosuke Yasuda

Osaka University - Graduate School of Economics

 

Abstract

Research on cartel inspection has considered dynamic behaviors of firms but not of the regulator. The current paper allows the antitrust authority to choose the level of cartel monitoring intensity and its dynamic patterns. Specifically, we compare stationary monitoring policies with "switching" policies that randomize cartel detecting probabilities over time with the same mean probability as the former. We show that (i) without leniency, both policies have the same effect on cartel deterrence, but stationary policies can be more costly if the implementation cost is the usual inverted S-shape, and (ii) with leniency, switching policies can use lower amnesty rates (reduction of the fine) without compromising the effectiveness of cartel deterrence. The advantage of randomizing monitoring intensity arises because firms give up colluding in high-intensity periods, which reduces the continuation value of the cartel agreement even in low-intensity periods. Our results provide new scope for competition policy.

Federalism, Free Competition and Sherman Act Preemption of State Restraints

Federalism, Free Competition and Sherman Act Preemption of State Restraints

 

 

Alan J. Meese

William & Mary Law School

Abstract

The Sherman Act establishes free competition as the rule governing interstate trade. Banning private restraints cannot ensure that competitive markets allocate the nation’s resources. State laws can pose identical threats to free markets, posing an obstacle to achieving Congress’s goal to protect free competition.

The Sherman Act would thus override anticompetitive state laws under ordinary preemption standards. Nonetheless, the Supreme Court rejected such preemption in Parker v. Brown, creating the “state action doctrine.” Parker and its progeny hold that state-imposed restraints are immune from Sherman Act preemption, even if they impose significant harm on out-of-state consumers. Parker’s progeny also immunizes “hybrid” restraints—private agreements that states encourage or supervise.

Both the Supreme Court and numerous scholars have invoked federalism and state sovereignty to justify Parker’s state action doctrine. Some suggest that preemption would violate the Constitution. Others contend that these values manifest themselves as canons of construction that illuminate the statute’s original meaning. According to these scholars, the Act should not intrude upon traditional state prerogatives unless Congress plainly intended this result.

This article demonstrates that federalism and state sovereignty do not rebut the strong case for Sherman Act preemption of state-created restraints. Such preemption would be a garden-variety exercise of Congress’s commerce power. Moreover, Sherman Act preemption would not interfere with any constitutionally recognized attribute of state sovereignty.

Turning to canons of construction, the article concludes that such preemption is so plainly constitutional that the avoidance canon is inapposite. The federal-state balance and anti-preemption canons do protect traditional state regulatory spheres from inadvertent national intrusion. Neither supports Parker itself, which sustained a regime that directly burdened interstate commerce and injured out-of-state consumers. Application of these canons instead reveals that the Court’s invocation of federalism is selective at best. Indeed, the Court’s rejection of the federal-state balance canon and resulting application of the Act to local private restraints that produce no interstate harm created the very conflict between the Sherman Act and local regulation that the state action doctrine purports to resolve.

Consistent application of federalism principles bolsters the case for preemption, albeit within a much smaller sphere than the Sherman Act currently operates. Such considerations counsel retraction of the scope of the Act and concomitant allocation to states of exclusive authority over restraints that produce only intrastate harm. The resulting allocation of authority over trade restraints would nearly eliminate conflicts between local regulation and the Sherman Act and restore the uniform rule of free competition that best replicates the regulatory framework the 1890 Congress anticipated. Proponents of Parker who see states as laboratories for economic experimentation should welcome such reform, which would ironically result in less preemption of state-created restraints and strengthen the institution of competitive federalism.

Media Conglomeration, Local News, and Capital Market Consequences

Media Conglomeration, Local News, and Capital Market Consequences

 

Travis Dyer

Brigham Young University

Mark H. Lang

University of North Carolina at Chapel Hill

Jun Oh

Cornell University

Abstract

We examine the effect of news media consolidation on local business news dissemination and its consequences for local investors and capital markets. We use acquisitions of television stations by Sinclair Inc. as plausibly exogenous shocks to local news coverage since Sinclair is alleged to reduce local news budgets and homogenize news coverage. Using large-scale television transcripts data, we find that coverage of local firms drops substantially following Sinclair acquisitions. Further, we document that investor attention, trading, portfolio holdings, and stock return synchronicity all become less locally concentrated for firms in treated geographic areas, and that the informational advantage of local analysts decreases and bid-ask spreads increase. The results are pronounced for small firms, for stations with higher ex-ante viewership, and for stations with greater decreases in local coverage. In combination, these results provide insight into the consequences of media consolidation for local business coverage, investors, and capital markets.