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Economic Analysis and the new EC Merger Notice. Derek Ridyard RBB Economics [email protected] 30 March 2004. Overview. Economic analysis under the Notice: 1. Non-coordinated effects Coordinated effects HHI thresholds

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Presentation Transcript
overview
Overview

Economic analysis under the Notice:

1. Non-coordinated effects

  • Coordinated effects
  • HHI thresholds

4. Impact of procedural/institutional changes on substantive analysis

classification of competition concerns
Classification of competition concerns
  • Notice creates a new category of concern to fill the perceived “gap” under the old regime.
1 1 non coordinated effects
1.1 Non-coordinated effects
  • Measures the impact that a merger has on incentives to keep prices low
  • Encompasses dominance and other “close competitor” cases in differentiated product markets
  • Some examples (old and new)
    • Scott/Kimberley Clark
    • Volvo/Scania
    • GE/Instrumentarium
1 3 evidence of the gap
1.3 Evidence of the gap?
  • Lloyds TSB/Abbey National?
  • FTC baby foods merger?

John Vickers (2004):

“numerous mergers that could seriously jeopardise competition without crossing the threshold of dominant market power.”

1 4 non coordinated effects the role of economic theory
1.4 Non-coordinated effects – the role of economic theory
  • Draft Notice relied explicitly on Bertrand and Cournot models
  • See DG COMP study:
    • “A merger between competitors increases market power .. leading .. to higher prices and lower output”
    • “HHIs can be considered a good indicator [of the effect of a merger on price]”
  • Same theory is embedded in merger simulation models
  • All merging firms are “guilty” – but are they guilty enough to justify prohibition?
1 5 forgotten role of supply side effects
1.5 Forgotten role of supply-side effects
  • Unilateral effect theories rely on passive demand-side effects
  • They ignore elements such as:
    • strategic buyer power
    • entry and investments by rivals
    • underlying market dynamics
  • See OFT 1999 oligopoly study for an antidote
1 6 non coordinated effects conclusions
1.6 Non-coordinated effects - conclusions
  • Notice remains heavily influenced by simple theoretical models
  • Logic of the Notice suggests a move towards greater intervention
  • But costs of extending powers to analyse non-coordinated effects have been ignored
  • The real impact is:
    • Greater DG COMP discretion
    • Less predictability
2 1 coordinated effects stage 1
2.1 Coordinated effects – stage 1

Identify focal point for co-ordination:

  • Price
  • Customer / territory sharing
  • Output / Capacity
2 2 coordinated effects stage 2
2.2 Coordinated effects - stage 2

Evaluate stability of coordination in terms of:

  • Transparency
  • Availability of credible enforcement mechanism
  • Resilience to external shocks and fringe competition
2 3 coordinated effects stage 3
2.3 Coordinated effects- stage 3

What changes as a result of merger?

  • Creation or strengthening?
  • Importance of eliminated factors
  • Impact on asymmetries and incentives
  • Surprisingly, this critical stage is not properly addressed in the Notice
3 2 the safe harbour is mined
3.2 “The safe harbour is mined!”

HHI safe harbours have 6 caveats:

  • Potential competition
  • One merging firm is an innovator
  • Cross-shareholdings
  • Merger takes out a “maverick” player
  • Past or ongoing coordination is evident
  • One merging firm has >50% share
3 3 hhis and the us guidelines
3.3 HHIs and the US Guidelines

EC HHIs are modelled on US Guidelines, but in a study of US practice:

  • Median HHI for unchallenged cases is 2,500
  • Median HHI for challenged cases >5,000
  • Lowest challenged HHI >2,000 since 1985

(From Scheffman, Coate and Silva, FTC)

summary on notice
Summary on Notice
  • The Notice has:
    • confirmed the role of economic analysis
    • created a sophisticated debate on merger enforcement
  • But:
    • it continues to shows undue dependence on theoretical models
    • creates very wide discretion
    • and can only be part of the story …
4 1 process changes
4.1 Process changes

Chief Economist’s Office

Tri-partite meetings

CFI Judgments

Internal Review

Hypothesis testing

4 2 hypothesis testing
4.2 Hypothesis - testing
  • CFI Judgment criticisms are fundamentally about empirical analysis
  • Draft Notice does not help here – even adds to the problem

Consequences:

- much more work for parties

- a better chance to prove case

4 3 chief economist s office
4.3 Chief Economist’s office
  • Professor Röller: leading academic with empirical orientation
  • Assembling dedicated team of economists

Consequences:

    • another audience for Oral Hearings
    • greater sophistication in analysis
4 4 tri partite meetings
4.4 Tri-partite meetings
  • Provision for a crowded schedule during Phase I and II
  • Consequences:
    • Greater scrutiny of 3rd parties?
    • More work for parties
    • More transparency
4 5 internal review panel
4.5 Internal review panel
  • Another independent check on case team
  • Some notable influence already

Consequences:

    • chance to stop the juggernaut in its tracks
conclusion the new regime
Conclusion – the new regime
  • Changes signal a new era in ECMR enforcement
  • The key areas to watch will be:
    • controlling DG COMP discretion and reliance on untested economic theory
    • maintaining the genuine scrutiny that has arisen from CFI Judgments
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