Industrial organization
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Industrial Organization. Mergers, Policy and Antitrust Law. Merger Typology. 1. Horizontal: 2 or more direct competitors Examples: Coke and Pepsi; San Benedetto and Ferrarelle Main concern:  concentration =  market power

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Industrial Organization

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Industrial organization

Industrial Organization

Mergers, Policy and Antitrust Law


Merger typology

Merger Typology

1. Horizontal: 2 or more direct competitors

  • Examples: Coke and Pepsi; San Benedetto and Ferrarelle

  • Main concern:  concentration =  market power

  • Vertical: firms that operate at different stages of production/distribution

    • Examples: Cement and concrete; farmer and processor

    • Main concern: foreclosure of non-integrated firms


  • Vertical mergers foreclosure

    Vertical Mergers: Foreclosure

    Farmer 1

    Farmer 2

    Farmer 3

    Processor A

    Processor B

    • A non-vertically integrated industry (i.e. no vertical mergers)

    • All Farmers could use any of the two processors


    Vertical mergers foreclosure1

    Vertical Mergers: Foreclosure

    Farmer 1

    Farmer 2

    Farmer 3

    Processor A

    Processor B

    • 2 vertical mergers (vertical integration)

    • Farmer 3 is left without potential processor

    • (foreclosure)

    • Barriers to entry: to successfully enter the market

    • you need to enter 2 stages


    Merger law

    Merger Law

    • US (Clayton Act, 1914):

      “To arrest the creation of trusts in their incipiency and before consummation…”

      • INCIPIENCY is important: get at CR in early stages of development (don’t wait until monopoly)

      • BEFORE CONSUMMATION: mergers can be challenged before they take place; injunction keeps businesses separate pending court review

    • EU:

      • Also targets mergers before consummation

      • The objective is to prevent a significant reduction of competition as a result of the merger


    Merger law1

    Merger Law

    • US (1976 Hart-Scott-Rodino Act):

      • Pre-Merger Notification: FTC & DOJ must be notified 30 days in advance of any merger where:

        • Acquiring party has sales > $100 million

        • Acquired party has sales > $10 million

      • Agencies have 30 days to review and may issue temporary injunction before merger

      • Agencies can request more information

      • Agencies can negotiate (e.g. sell off unit)


    Merger law2

    Merger Law

    • EU:

      • Pre-merger notification:

        • Combined sales > E5000 million worldwide or 250 million in EU

      • Exception:

        • When one merging party is in or near bankruptcy


    Merger policy and law

    Merger Policy and Law

    • Our focus: Horizontal mergers

      • Most common type of merger

      • Most controversial

      • More regulation


    Horizontal merger guidelines

    Horizontal Merger Guidelines

    1. Market Definition (1st step)

    • Product: physical characteristics, uses, cross-elasticity, absolute price levels, etc.

    • Geographic: transportation costs, legal restrictions, local product differentiation

    • Do 2 products belong to same market?

      • Example: Acquafrizzante v. acquanaturale

        What is the cross-price elasticity if the quantity of frizzante demanded increases by 0.1% when the price of naturale increases by 5%?


    Horizontal merger guidelines1

    Horizontal Merger Guidelines

    2. Seller concentration (2nd step)

    • Impact of merger: change in HHI in the relevant market

    • Example: Firm 1 has 60% of market, firm 2 has 20% of market and firm 3 has 20%, what is the HHI?


    Horizontal merger guidelines2

    Horizontal Merger Guidelines

    2. Seller concentration (2nd step)

    • Merger evaluated in terms of post- and pre-merger HHI:

      • Rarely challenged if post-merger HHI<1000

      • Further analysis if 1000 < post-merger HHI < 1800

      • Likely challenged if post-merger HHI>1800 and merger changes HHI by >100

    • What would the post-merger HHI if firms 2 and 3 above merge? Will this merger be challenged?


    Horizontal merger guidelines3

    Horizontal Merger Guidelines


    Horizontal merger guidelines4

    Horizontal Merger Guidelines

    3. Other Factors that may affect decision to challenge (2nd step)

    • Unilateral Effects (project 3):

      • Ability to raise prices after merger (without collusion). Why?

      • Ruled on a case by case basis (merger simulation)

    • Entry:

      • If easy: post-merger HHI may be easily eroded (less concern)

      • If hard: smaller mergers may be more of a concern

      • Benchmark: are BTE’s small enough to erode prices to pre-merger levels within 2 years?


    Horizontal merger guidelines5

    Horizontal Merger Guidelines

    3. Other Factors that may affect decision to challenge (2nd step)

    • Other market characteristics:

      • Is coordination between firms more or less likely?

      • Example: merger in homogeneous product market may be more of a concern than in a differentiated product market

        4. Cost Savings and Efficiency Gains (2nd step)

    • Synergies (1 manager instead of 2) may reduce unit costs and also prices.


    Horizontal enforcement

    Horizontal Enforcement

    • Large horizontal mergers are (typically) strictly blocked

    • Smaller mergers may also be challenged, depending on specifics of the case


    Industrial organization1

    Industrial Organization

    Product Differentiation and Merger Analysis


    Merger analysis

    Merger Analysis

    • Assume a model of competition (Bertrand-Nash) in pre-merger world:

    • Find prices that make FOC equal to zero in post-merger world:

    Back out marginal cost


    Project

    Project

    • To simplify computation, we will assume that:

    • Hence:

    New Ownership structure


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