Antitrust & Competition Policy Blog

Heterogeneous Merger Impacts on Competitive Outcomes

Ralph Siebert studies Heterogeneous Merger Impacts on Competitive Outcomes.

ABSTRACT: Mergers realize heterogeneous competitive effects on profits, production, and prices. To date, it is unclear whether differential merger outcomes are caused mostly by firms’ technology or product market attributes. Furthermore, empirical merger studies conventionally assume that, conditional on regressors, the impact of mergers on outcomes is the same for every firm. We allow the merger responses to vary across firms, even after controlling for regressors, and apply a random-coefficient or heterogeneous treatment effect model (in the context of Angrist and Krueger (1999), Heckman, Urzua, and Vytlacil (2006), and Cerulli (2012)). Based on a comprehensive dataset on the static random access memory industry, we find that firms’ postmerger output further increases (and postmerger price further declines) if merging firms are more efficient, operate in more elastic product markets, are more innovative, and acquire knowledge in technological areas that are relatively unexplored to themselves. A further interesting insight is that product market characteristics cause stronger postmerger outcome heterogeneities than do technology market characteristics. We also find that the postmerger effects accounting for heterogeneities differ greatly from those that consider homogeneous postmerger outcome effects. Our estimation results provide evidence that ignoring heterogeneous outcome effects can result in heterogeneity bias, just as ignoring premerger heterogeneities can lead to selectivity bias.

Let's lock them in: Collusion under Consumer Switching Costs

Niklas Fourberg says Let's lock them in: Collusion under Consumer Switching Costs.

ABSTRACT: I study consumer switching costs’ effect on firms’ price setting behavior in a 2x2 factorial design experiment with and without communication. For Bertrand duopolies the price level under consumer switching costs is lower vis-à-vis new consumers but not affected towards old consumers. Markets are overall less tacitly collusive which translates into higher incentives to collude explicitly. The results have antitrust implications especially for the focus of cartel screening.

Product innovation and two-part tariff vertical contracts

Luciano Fanti and Luca Gori investigate Product innovation and two-part tariff vertical contracts.

ABSTRACT: This article studies the effects of R&D investments in product innovation in a game-theoretic two-tier model where an upstream monopolist and downstream duopolists negotiate over the terms of a non-linear two-part tariff vertical contract.

How to compete? Cournot vs. Bertrand in a vertical structure with an integrated input supplier

Luciano Fanti and Marcella Scrimitore ask How to compete? Cournot vs. Bertrand in a vertical structure with an integrated input supplier.

ABSTRACT: We study whether a quantity or a price contract is chosen at equilibrium by one integrated firm and its retail competitor in a differentiated duopoly. Using a similar vertical structure, Arya et al. (2008) showed that Bertrand competition is more profitable than Cournot competition, which contrasts with conventional wisdom. In this paper, we first demonstrate that such a result is robust to the endogenous determination of the type of contract. Second, by introducing managerial incentives in the model, we find that delegation to managers entails conflicting choices of the strategic variable by the two firms as long as products are sufficiently differentiated, causing non-existence of equilibrium in pure strategies. Significantly high product substitutability reconciles firms’ objectives under delegation, leading unique or multiple equilibria with symmetric types of contracts to arise.

What Is at Stake with Supreme Court Review of United States v. American Express Co.?

Allan Shampine (Compass Lexecon) asks What Is at Stake with Supreme Court Review of United States v. American Express Co.?

ABSTRACT: Over the last few decades there has been a great deal of legislation, litigation, and regulation concerning payment cards in the United States and around the world. 1 Anti-steering or non-discrimination rules imposed by Visa, MasterCard, and American Express have been a prominent, recurring issue in these proceedings. Although the specifics of the rules varied among the payment networks, collectively they prevented merchants from treating customers differently depending on the type, brand, or issuer of credit or debit cards. Merchants could not surcharge a purchaser using a particular high-cost payment card, offer a discount to customers who use a lower cost card, encourage or discourage use of particular cards using other strategies, or even provide information about the costs of different payment methods to their retail customers.

Intel: Clarification or Contradiction?

Mark Taylor and Jürgen Schindler ask Intel: Clarification or Contradiction?

ABSTRACT: In the short time since it was published, much has already been written about the European Court of Justice’s (ECJ) Intel judgment,1 both in the mainstream media and specialist antitrust publications. This is no doubt related to Intel’s prominence as a household name, and the sizeable fine involved. Despite the brevity of the judgment, its 25 pages are a rich source of substantive, jurisdictional, and procedural considerations. This article will set out a brief overview of the jurisdictional and procedural issues considered in the judgment, before tackling the heart of the matter— the Commission’s newly emphasized obligation to consider the effects of allegedly anticompetitive conduct.

A Call for Greater Consistency in the Failing Firm Defense

Norman A. Armstrong Jr. and Christopher C. Yook make A Call for Greater Consistency in the Failing Firm Defense.

ABSTRACT: Earlier this year, the U.S. District Court for the District of Delaware sided with the Department of Justice’s Antitrust Division (DOJ) and blocked Energy Solutions’ attempted $367 million acquisition of Waste Control Solutions (WCS) following a bench trial. The DOJ alleged that the two companies, if consolidated, would have been the sole provider of certain nuclear waste disposal services in 36 states. The parties attempted to defend the acquisition, in part, through the failing firm defense, presenting evidence that WCS had never generated an operating profit and pointing to a series of investments that had yet to yield expected returns. Adding to the line of cases rejecting the defense, Judge Sue L. Robinson held that WCS failed to show that Energy Solutions was “the only available purchaser” despite prior efforts to solicit bids.

The Energy Solutions decision illustrates the challenges of successfully raising the failing firm defense, which is “narrow in scope” and judged against a “strict legal standard.” Although the guidance from the DOJ, the Federal Trade Commission (collectively “the antitrust agencies”), and the courts indicate that the failing firm defense is still viable in theory, Energy Solutions illustrates a critical inconsistency in the application of the failing firm defense. In particular, the antitrust agencies and courts have articulated two different standards regarding the failing firm’s obligation to solicit alternative offers, referred to here as the “alternative purchaser element.” Key court decisions on this issue have held that the acquiring party must be “the only available purchaser” while the antitrust agencies’ guidance explicitly requires “good-faith efforts to elicit reasonable alternative offers.” These two different tests for the alternative purchaser element continue to be inconsistently applied, making it difficult for the merging parties and their advising counsel to realistically rely upon the failing firm defense.

30th CLaSF Workshop, 19 April 2018, Antitrust at the Intersection of Law and Economics

On 19 April 2018 the Graz Institute of Corporate and Commercial Law is hosting the 30^th edition of the CLaSF Workshop, on the topic of 'Antitrust at the Intersection of Law and Economics'.

The keynote will be delivered by Theodor Thanner (Director General, Austrian Competition Authority), and confirmed speakers include Ignacio Herrera Anchustegui (University of Bergen), Stefan Holzweber (University of Vienna), Carsten König (University of Cologne), Heinrich Kühnert (DORDA), Justin Lindeboom (University of Groningen), Sandra Marco Colino (Chinese University of Hong Kong), Agustín Reyna (BEUC - The European Consumer Organisation), Thibault Schrepel (Panthéon-Sorbonne), Ryan R. Stones (LSE), Peter Thalmann (Vienna University of Economics and Business), Maria Wasastjerna (University of Helsinki), Anne C. Witt (University of Leicester), and Hans Zenger (DG Competition, European Commission).

For the full programme, see attached or here. To register, email [email protected]. Participation is free of charge.

Geographic Market Definition in Urban Hospital Mergers: Lessons from the Advocate-NorthShore Litigation

Steven Tenn and Sophia Vandergrift discuss Geographic Market Definition in Urban Hospital Mergers: Lessons from the Advocate-NorthShore Litigation.

ABSTRACT: Geographic market definition has been, and remains today, the key battleground on which hospital merger cases are won or lost. True to this paradigm, geographic market definition was the central issue in the Federal Trade Commission’s recent success in blocking the merger of two Chicago-area health systems: Advocate Health Care Network and NorthShore University Health System. In FTC v. Advocate Health Care, the FTC and the State of Illinois alleged an 11-hospital geographic market that covered much of Chicago’s northern suburbs. The district court was unconvinced, and denied the FTC’s motion for a preliminary injunction based on its finding that the FTC had failed to prove a relevant geographic market. The FTC subsequently appealed to the Seventh Circuit. The Seventh Circuit reversed the district court and remanded the case, deeming the district court’s geographic market findings clearly erroneous. In a robust and detailed opinion, the Seventh Circuit took stock of the evolution of hospital merger geographic market analysis. It assessed the tools that have historically been deployed in this analysis, including Elzinga-Hogarty and the hypothetical monopolist test. In its analysis, the court retired the former and solidified the latter. Ultimately, the Seventh Circuit’s Advocate opinion and the litigation upon which it is based provide litigants on both sides of a deal useful guidance about how to effectively define geographic markets in future hospital merger cases. This article reviews the Advocate litigation, the Seventh Circuit opinion, and the state of hospital merger geographic market definition in the case’s wake

Assistant Attorney General Makan Delrahim Delivers Remarks for the Inaugural Jackson-Nash Address

Assistant Attorney General Makan Delrahim Delivers Remarks for the Inaugural Jackson-Nash Address. See here.

A Defense of Using the Hypothetical Monopolist Test in Health Care Provider Mergers

Antara Dutta and Elisa F. Kantor offer A Defense of Using the Hypothetical Monopolist Test in Health Care Provider Mergers.

ABSTRACT: Over the last 20 years, federal hospital merger enforcement cases have turned largely on one issue: the proper definition of the relevant geographic market in which to analyze potential anticompetitive effects. Recent history is no exception; in 2016, the Federal Trade Commission initially lost two preliminary injunction actions—one against Pennsylvania hospital systems Penn State Hershey Medical Center and PinnacleHealth System, 1 and one against Chicago-area systems Advocate Health Care Network and NorthShore University HealthSystem2—primarily because the district courts found that the FTC had failed to properly define a relevant geographic market. The courts of appeals reversed both decisions, ruling that the district courts had erred in formulating and applying the Horizontal Merger Guidelines’ hypothetical monopolist test to establish a relevant geographic market. The FTC won these appeals for good reason

Comment on The Flaws in Using the Hypothetical Monopolist Test from the “Payor Perspective” in Health Care Merger Cases, by Field, Fisher, and Coglianese

Dov Rothman and David Toniatti Comment on The Flaws in Using the Hypothetical Monopolist Test from the “Payor Perspective” in Health Care Merger Cases, by Field, Fisher, and Coglianese.

ABSTRACT: In a recent article, The Flaws in Using the Hypothetical Monopolist Test from the “Payor Perspective” in Health Care Merger Cases, Kenneth Field, Louis Fisher, and William Coglianese (Field et al.) observe that in reviewing mergers of health care providers, courts have concluded that the relevant geographic market should be defined from the perspective of the payor assembling a network of providers for a health plan. Field et al. claim this raises a host of problems when applying the “hypothetical monopolist test” to delineate the relevant geographic market. They argue that applying the hypothetical monopolist test is conceptually straightforward in a setting where sellers post prices and buyers decide whether to pay a seller’s posted price, but more complicated in the health care context because payors (buyers) and providers (sellers) negotiate to set prices for services to patients who are covered by the payors’ plans. According to Field et al., a key question raised by the hypothetical monopolist test is whether a payor could successfully market a network without any providers in the proposed market area, and if the answer is no, then a hypothetical monopolist of providers in the proposed market area would have substantially greater bargaining leverage and be able to raise prices by a small but significant non-transitory increase in price, or a SSNIP. Field et al. then argue that—in practice— applying the hypothetical monopolist test from the payor perspective has a number of problems. In particular, they argue that determining whether the hypothetical monopolization of a candidate market would result in a significant price increase is more difficult in the health care setting where prices are negotiated rather than posted. We agree with Field et al. that whether a payor could successfully market a network without any providers in a proposed market area is a key question for assessing the relevant geographic market. We differ with Field et al. with regard to the implications for market definition.

Third Parties under Merger Review in Brazil

Eduardo Caminati Anders and Guilherme Teno Castilho Missali investigate Third Parties under Merger Review in Brazil.

ABSTRACT: Overall, the corporate environment has been becoming more sophisticated when it comes to the structuring of corporate deals and transactions, many of which depicting significative interfaces with the competition realm. Indeed, complex transactions that require notification before the Administrative Council for Economic Defense (CADE) involving competitively sensitive markets may give rise to an opportune context for third parties with interests/rights affected by the future decision to seek the competition authority to submit counterpoints to the arguments of the parties, underlining the concerns arising from the case. Lately, one could see a gradual increase in the intervention of third parties before CADE in Brazil; this year, in particular, one could notice some high-profile transactions reviewed by CADE that counted with third parties’ interventions, whose manifestations were important for the final outcome. In essence, what may help explain the greater interest of third parties within CADE relates to the institutional strengthening of this antitrust authority since the advent of Law No. 12,529/2011, which, in turn, introduced the pre-merger review system and set forth the third interested party's institute in light of a democratic and collaborative spirit, to ensure, fundamentally, greater quality and legitimacy to CADE’s decision.

Inter-Competitor Licensing and Product Innovation

Baojun Jiang, Washington University in Saint Louis - John M. Olin Business School and Hongyan Shi, Nanyang Technological University (NTU) - Division of Marketing and International Business examine Inter-Competitor Licensing and Product Innovation.

ABSTRACT: This paper studies how licensing of non-core technology between an incumbent and an entrant affects market competition and the entrant's optimal product quality. We show that a royalty licensing contract between the incumbent and the entrant will soften competition. More importantly, the effect of such licensing on the entrant’s optimal quality depends on whether the entrant’s core technology can significantly or only incrementally increase its quality over the incumbent’s product. The royalty contract will tend to increase the entrant’s optimal quality when the entrant’s core technology can allow for a significant quality improvement over the incumbent. By contrast, if the entrant’s technology can raise its product quality only incrementally over the incumbent’s product, the royalty licensing contract will tend to reduce the entrant’s optimal quality. A wide range of royalty contracts are mutually acceptable; the incumbent (entrant) can benefit from a licensing contract even when the entrant pays a total royalty fee that is lower (higher) than its alternative R&D cost. These results hold even when the incumbent endogenously chooses its royalty licensing fee. We show that our main results are robust to several alternative modeling assumptions, e.g., alternative game sequence, endogenous quality decision by the incumbent, and alternative licensing contract.

Deputy Assistant Attorney General Roger Alford Delivers Remarks at King's College in London

Deputy Assistant Attorney General Roger Alford Delivers Remarks at King's College in London.  See here.

Of note (given Makan Delrahim's speech earlier this week):

Let me touch briefly on innovation in the context of digitalization and online platforms. There is no doubt that digitalization, including the aggregation and commercial use of large quantities of data, has created a multitude of dynamic product offerings that deliver incredible benefits to consumers. And there also is no doubt that these products are technologically complex and rapidly evolving. But there is no reason to think that the lessons we have learned over the past several decades about the role of antitrust enforcement in protecting and respecting innovation do not apply to the digital marketplace. Quite the opposite: there is a strong case to be made that years of consistent application of antitrust law, with innovation as a key concern, fueled the growth of digital companies in the first place.

As in other contexts, when evolving technology is involved, evidence-based investigations are better than static, one-size-fits-all solutions. It is for this reason that we do not employ the term “Big Data.” We view that term as ill-defined and vague, and too blunt to capture the nuances of the modern information-based marketplace. It is not even clear in the taxonomy of markets whether Magnus Notitia is a species, genus, or family. As Commissioner Margrethe Vestager has stated, it is important to keep the conversation complicated, because when you oversimplify the term “Big Data” you miss some of the real benefits and opportunities that it may have to offer. 

With respect to a firm’s unilateral business conduct, if we abandon the approach of carefully assessing the facts on a case-by-case basis in favor of a one-size-fits-all approach that presumes anticompetitive effects simply because of the nature of the industry, there is a genuine risk of reaching the wrong conclusion. When a major antitrust agency rushes to judgment in challenging a digital market competitor, one can be confident that other agencies will follow in its footsteps. The price of a poor enforcement decision is not borne only by the companies under investigation, it is also borne by consumers, who suffer when incentives to innovate are diminished. So it is critical that we are careful in how we proceed in analyzing digital markets. 

Innovation Spillover and Merger Decisions

Mahdiyeh Entezarkheir, University of Western Ontario - Huron University College and Saeed Moshiri, University of Saskatchewan - Saint Thomas More College analyze Innovation Spillover and Merger Decisions.

ABSTRACT: Merger activities in innovative industries point to a relation between mergers and innovation. Firms' innovative ideas may spillover to other firms dis-incentivizing innovation activities, but merger may be a way to capture innovation spillover. The merger-innovation nexus has been well studied in the theoretical literature and recently in the empirical papers, but empirical evidence on merger and innovation spillover is limited. In this paper, we investigate the impact of innovation spillovers on firms' merger likelihood using a panel data set of mergers among publicly traded U.S. manufacturing firms from 1980 to 2003. In our empirical model, we also control for business cycles and proxies of neoclassical, behavioural and Q theories of mergers. Innovation is measured using R&D investments and citation-weighted patents, and innovation spillover is proxied using technological proximity of firms. As a source of R&D spillover (outward spillover), a firm can internalize its spillover effects by acquiring the targets that benefit from the spillover. As a receiver of an R&D spillover (inward spillover), a firm may want to merge to control the negative impact of other's innovation on its competitive edge. We find that innovative firms are on average more likely to merge. These findings are robust to using a measure of patent fragmentation as our instrumental variable. Our results also show that within industry inward R&D spillovers increase mergers but between industry inward R&D spillovers do not influence the merger decisions significantly. Our main results are robust to alternative measures of spillovers and different estimation methods.

European Cartel Criminalisation and Regulation 1/2003: Avoiding Potential Problems

Peter Whelan, Leeds explains European Cartel Criminalisation and Regulation 1/2003: Avoiding Potential Problems.

ABSTRACT: There is a growing tendency within the EU to criminalise ‘hard core’ cartel activity. It is frequently argued that this type of enforcement is superior to administrative enforcement in achieving the deterrence of ‘hard core’ cartel activity. While the criminalisation of cartels has some merit in theory, it also engenders significant practical problems that need to be overcome if criminalisation is to be as effective as claimed. One of the major challenges in this context is the challenge of respecting the dictates of EU, in particular those contained within Regulation 1/2003. Indeed, that particular implementing Regulation, if applicable to cartel criminalisation within an EU Member State, can arguably have a significant impact on the content and operation of the national criminal cartel offence. 

This chapter will analyse this particular challenge of EU cartel criminalisation. Specifically, it will analyse: 

(i) the potential (negative) impact that Regulation 1/2003 can have upon cartel criminalisation within the EU Member States; and 

(ii) what can be done to eliminate or reduce any potential (negative) impact identified. 

In so doing, this chapter will provide concrete advice to those European legislators that wish to implement a successful policy of cartel criminalisation while respecting the dictates of EU law.

The Judgment of the EU Court of Justice in Intel and the Rule of Reason in Abuse of Dominance Cases

Nicolas Petit, University of Liege offers thoughts on The Judgment of the EU Court of Justice in Intel and the Rule of Reason in Abuse of Dominance Cases.

ABSTRACT: This paper discusses the judgment of the EU Court of Justice of 06 September 2017 in the Intel case. It argues that the case-law of the Court of Justice has now embraced the rule of reason for the assessment of the legality of dominant undertakings exclusivity rebate systems in particular, and for the analysis of exclusionary practices in general. The judgment also establishes that efficiency is the public policy behind abuse of dominance law. This evolution of the case-law is likely to produce consequences in competition enforcement, by increasing reliance on tools like the "As Efficient Competitor" test, if not to make recourse to it unavoidable when the competition agency has publicly expressed a policy preference for this framework of analysis.

The Implications of Public Interest Considerations on the Interpretation and Application of the Failing Firm Doctrine in South African Merger Analysis

Ignatious Nzero, Chinhoyi University of Technology hs written on The Implications of Public Interest Considerations on the Interpretation and Application of the Failing Firm Doctrine in South African Merger Analysis.

ABSTRACT: In 1998 South Africa adopted a comprehensive new competition statute, the Competition Act. However, prior thereto, other statutes had existed which were all effectively repealed on the basis of either material deficiencies or not being in sync with the changing socio-economic and political environment. 

The 1998 Competition Act aims at establishing an effective competition regulatory system that address the country’s socio-economic needs. The Act’s stated objectives goes beyond the traditional goal of promoting and maintaining competition through the regulation of anti-competitive market behaviour to encompass broader policy considerations in the form of so-called non-competition factors. This feature mirrors the country’s social and economic historical development and is an acknowledgement of the notion that the law derive its credibility from the environment in which it operates hence must not ignore the practical realities existing in such an environment. It must be noted that this characteristic is not alien to South Africa as it is common in many developing countries’ competition statutes which statutes have been adopted as part of broader economic reform programmes. However, what sets the South African system apart from these other jurisdictions is its demonstrated effectiveness in the application of these public interest considerations in competition matters, especially in merger regulation.

Exploitative Abuse and Abuse of Economic Dependence: What Can We Learn from the Industrial Organization Approach?

Patrice Bougette, Université Côte d'Azur, CNRS, GREDEG, Oliver Budzinski, Ilmenau University of Technology, and Frédéric M. Marty, Research Group on Law, Economics and Management (UMR CNRS 7321 GREDEG) / Université Nice Sophia Antipolis; OFCE ask Exploitative Abuse and Abuse of Economic Dependence: What Can We Learn from the Industrial Organization Approach?

ABSTRACT: This article aims to provide a detailed analysis of the concept of economic dependence and exploitative abuse through their evolution in competition law and economics and in European case law. First, while the theoretical roots of these concepts may be found in economic theory, we show that the issue has long been ignored or only reluctantly considered in competition law enforcement, mainly because of a lack of available and reliable economic criteria. Second, although its primary objective was to measure market power in an oligopoly context, we examine how current empirical industrial organization methodology allows a sophisticated measure of the economic dependence among suppliers and distributors. Third, we discuss the possibility of relying on the industrial organization approach to address these issues.