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A ntitrust Economics 2013. Alexis G. Pirchio CPI. Elisa Mariscal CIDE, Global Economics Group. Review: Lectures 11.1, 11.2 and 12.1 market definition and horizontal mergers. Review 17 October 2013. Date. Overview. Role of Market Definition. Market Definition and Market Power.

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review lectures 11 1 11 2 and 12 1 market definition and horizontal mergers

Antitrust Economics 2013

Alexis G. Pirchio

CPI

Elisa Mariscal

CIDE, Global Economics Group

Review: Lectures 11.1, 11.2 and 12.1 market definition and horizontal mergers

Review 17 October 2013

Date

market definition and context
Market Definition and Context

F

G

Firms in the market

A, B, C, D, E

H

Firms outside of the market: F, G, H, …

how to proceed demand side then supply side
How to Proceed? Demand-side then supply-side

Potential substitute products

Candidate Market

1

A

B

C

2

Demand-side

A+B+C

D

X

A+B+C

3

S1

Supply-side

A+B+C+S1

S2

X

critical loss analysis is a method for implementing ssnip test in practice
Critical Loss Analysis is a Method for Implementing SSNIP Test in Practice

Price

Profit = ($20 - $10) x 100 = $1,000

$20

$10

MC

Quantity

100

slide9

Critical Loss Analysis is a Method for Implementing SSNIP Test in Practice

Price

Profit = ($20 - $10) x 100 = $1,000

$22

Profit = ($22 - $10) x 83.33 = $999.96

$20

$10

MC

Quantity

100

83.33

If fewer than 16.7 units of sales switch than a 10% price increase is profitable

comparison of actual versus critical loss determines if market is large enough to be monopolized
Comparison of Actual Versus Critical Loss Determines if Market is Large Enough to be Monopolized.

Actual loss greater than critical loss Implies price increase is unprofitable so assumed “market” can’t be profitably

Monopolized and is therefore too small.

Actual loss less than Critical

Loss implies that price increase is profitable so assumed “market” can be profitably monopolized. Market is therefore at least this narrow.

Critical Loss

horizontal vs vertical mergers
Horizontal vs. Vertical Mergers

Horizontal merger of B and C in market of A, B, and C which have substitutable products

C

A

B

f

e

Vertical merger of A and f where f supplies a downstream service to A.

example of calculating hhi and change in hhi
Example of Calculating HHI and Change in HHI
  • HHI (Pre) = 502 + 252 + 152 + 102 = 3450
  • HHI (Post) = 502 + 352+ 152= 3950
  • Change in HHI = 500
oft s merger guidelines

HHI

Investigate?

< 1,000

NO

> 1,000

and

<1,800

YES IF  HHI > 100

NO OTHERWISE

> 1,800

YES IF  HHI > 50

NO OTHERWISE

OFT’s Merger Guidelines

HHI and Change in HHI Serve as Screening Devices

merger of firms in an oligopoly industry with homogeneous demand
Merger of Firms in an Oligopoly Industrywith Homogeneous Demand

P

D(P)

MONOPOLY

PM

COURNOT

PCOURNOT

COMPETITION

MC

Q

qMA,B

Q COURNOT

qC

consequences of a reduction in the number of firms with homogeneous products
Consequences of a Reduction in the Number of Firms with Homogeneous Products

Basic economic theory shows that reducing the number of firms results in higher prices (Cournot Model)

P

D(P)

PM

MONOPOLY

N = 2

N = 3

MC

N = 4

COMPETITION

Q

qM

qC

efficiencies and merger to monopoly
Efficiencies and Merger to Monopoly

Surplus transferred from consumers to producers

Consider also when marginal cost decreases from $3.00 to $2.50

Surplus from cost savings

Dead Weight Loss

PPost

Pre-merger Marginal Cost

PPre

Post-merger Marginal Cost

Demand

QPost

QPre

MR

In this example price to consumers increases and social welfare declines less than consumer welfare because of efficiencies.

efficiencies and merger to monopoly1
Efficiencies and Merger to Monopoly

Surplus transferred from consumers to producers

Consider also when marginal cost decreases from $3.00 to $1.50

Surplus from cost savings

Dead Weight Loss

PPost

Pre-merger Marginal Cost

PPre

Post-merger Marginal Cost

Demand

QPost

QPre

MR