Assessing the efficacy of structural merger remedies: choosing between theories of harm? Steve Davies and Matt Olczak, CLEEN New Researchers Workshop, University of East Anglia June 2008. Motivation. Motta et al (2002) important trade-off inherent in structural merger remedies:
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Assessing the efficacy of structural merger remedies: choosing between theories of harm?Steve Davies and Matt Olczak, CLEEN New Researchers Workshop, University of East AngliaJune 2008
Motta et al (2002) important trade-off inherent in structural merger remedies:
Motta (2004) ideally a merger should be cleared subject to remedies ONLY if neither single dominance (SD) or collective dominance (CD) are expected to result post remedy.
Previous literature on the efficacy of merger remedies:
- Ex-post evaluations conducted by CA’s:
e.g. FTC (1999) and EC (2005) - focus on 1).
- Davies and Lyons (2007).
Outline choosing between theories of harm?
A model for assessing the ‘competiveness’ of alternative market structures
Using the model to assess the ‘competitiveness’ of market structures:
Resulting from structural merger remedies
3) Consider markets where the CA made a decision NOT to intervene
N=222 markets (30 CD & 88 SD):
** indicates significance at 99% level Pseudo R2 = 0.445 Correct predictions 79%
92 markets in which the EC intervened (& Pre MS data available):
36/92 ‘uncompetitive’ PRE merger
FINDING 1: Almost 40% of markets present pre-merger structures which would have been identified by the Commission as displaying dominance (23% SD and 16% CD) – had they been the result of a merger.
66 markets (17 mergers) able to identify the post remedy market structure:
FINDING 2: in 31 (47%) of the cases in this sample, divestment remedies have resulted in market structures (15 SD & 16 CD) which the EC would have sought to remedy had they been the result of a merger, rather than a remedy.
And typically the purchaser is an entrant, Thus:
But we have seen the pre merger outcomes are not always ‘competitive’.
Motta (2004) ideally a merger should be cleared subject to remedies ONLY if no CD or SD expected post remedy
– often too stringent a requirement given pre merger market structures.
25 cases where dominance PRE=Dom & MERGER=Dom and remedy ineffective:
19 PRE & POST presented same type of dominance
(14 SD & 5 CD)
When PRE=Dom & MERGER=Dom:
may ‘prefer’ MERGER to DOM and therefore not intervene
Examining markets where the EC did not intervene reveals in particular 11 where:
i) PRE=SD and MERGER=SD
ii) the merged entity is NOT the number 1 firm post merger
Why did no intervention occur:
Instead consider an intervention on CD grounds? However:
2) Merger counteracts the largest outsiders pre-existing dominant position
Take into account an additional issue not reflected in original structural model – RANK of the merged entity:
Re-estimate structural model dividing sample:
EXAMPLE: consider a post merger market structure with S1=40% & S2=30%. The EC is predicted to find:
- CD if the merged entity is number 1
- Can reduce symmetry (and thus CD concerns)
- Cannot reduce the size of the market leader
Any remedy moves the market structure closer to a position of SD
If, (as in weak-finding 5) SD is viewed as more of a concern than CD this explains a greater tolerance of CD in such markets
For markets in area where predict CD ONLY if ME = #1 use revised model to predict probability of SD pre merger: