Quantitative Analysis of Coordinated Effects

Posted by D. Daniel Sokol

One area in which we are developing a better sense of antitrust is in understanding coordinated effects.  A new paper by William E. Kovacic, Robert C. Marshall, Leslie M. Marx, and Steven P. Schulenberg that focuses on coordinated effects in a merger context entitled Quantitative Analysis of Coordinated Effects sheds light and challenges some previously held assumptions.  Among other things, it has made me rethink the Arch Coal case.

Abstract: Mergers can affect the extent, probability, and payoffs of coordinated interaction among firms in an industry. Current analyses of coordinated effects typically provide little quantification of these effects and instead typically rely on arguments based on the number of firms, Herfindahl Index, ability to detect and punish deviations, ease of entry, and maverick firms. We offer an approach for quantifying the magnitude of the potential post-merger gains from incremental explicit collusion by subsets of firms in the post-merger industry. If the incremental payoffs to post-merger collusion are small (large), then coordinated effects are less (more) of a concern. Our approach also allows one to identify which post-merger cartels create the greatest concern and to quantify the effects of post-merger collusion on consumer surplus. We illustrate the implementation and value of this approach with applications to Hospital Corporation and Arch Coal.