[7](1): Clayton Act (1914)

1. [7](1): Clayton Act (1914) • Section 7: Mergers are illegal if they “substantially lessen competition” or “tend to create a monopoly” • Mergers which violate Section 7 are NOT a criminal offense • Joint enforcement jurisdiction for both Antitrust Division of the Justice Department (JD) and Federal Trade Commission (FTC) • Civil remedies: injunction preventing the merger • Section 4: Private lawsuits to block mergers • State Attorneys General can sue on behalf of their consumers • obtain an injunction to block the merger • obtain treble damages from higher prices • Consumers can sue for treble damages from higher prices • Competitors can sue to treble damages or to block the merger

2. [7](2): Premerger Notification • Hart-Scott-Rodino (1976) premerger notification • Proposed merger must be filed with JD and FTC • 30 day waiting period before consummation of the merger • Agencies can make a “second request” for more information • After compliance with second request, an additional 30 day waiting period • Agencies create a team of lawyers and economists investigate competition • Lawyers and economists for the corporations can meet with the agencies • Consent Decree or Litigation • If JD or FTC decides no competitive problem, then merger proceeds • If JD or FTC decides that there is a competitive problem, then negotiations for a consent decree with divestitures or competitive conditions • If NO agreement on a consent decree, then JD or FTC files suit for a preliminary injunction to block the merger, and court holds a hearing on the merits

3. [7](3): Merger Guidelines - Market Power • (1) Define product and geographic markets • (2) Identify competitors in the market • Current suppliers, uncommitted entrants, product substitution • Including foreign suppliers who export into the market • (3) Measure concentration and market power • Calculate the market shares of the firms in the industry • Industry Concentration using the post-merger HHI: HHI =  si2 • Highly Concentrated Industries: HHI > 1800 • Example: five firms each with 20% share results in an HHI = 2000 • (4) Potential Adverse Competitive Effects • Coordinated Interaction: collusion is easier with fewer competitors • Unilateral Effects: price increases from less competition among firms

4. [7](4): Relevant Product Markets • Economic Factors • Consumer choices among the products of the different suppliers • Supplier decisions about competition with the products of other suppliers • Similarity of product characteristics of different products • Similarity of prices and price movements of different products • Which products should be “included” in the market? • Differentiated products: • How substitutable are the products of the different suppliers? • Product lines: • How different are the products within the product lines of the competitors? • Price differences: • Do the prices of the products move together?

5. [7](5): Relevant Geographic Markets • Economic Factors • Consumer choices among suppliers located at different places • Supplier perceptions and decisions about competition with other suppliers • Transportation costs of suppliers or consumers • Price differences and price movements • Which suppliers should be “included” in the market • Suppliers located outside the geographic market can have a market share inside the geographic market if they ship into the market • U.S. geographic market, but foreign suppliers export into the U.S. • Local markets for consumer products with high transportation costs • example: supermarkets • Global markets in some products • example: commercial aircraft

6. [7](6): Merger Guidelines • If merger has potential anti-competitive effects, then the JD or FTC will examine moderating factors: Entry and Efficiencies • Ease of Entry: Will entry of new suppliers reduce prices? • Would entry be timely, likely, and sufficient to reduce the prices? • Efficiencies: Will efficiencies from the merger lower costs? • Efficiencies must be specific to the merger and result in lower prices • Real efficiencies are more compelling: economies from integration of facilities or plant specialization, lower transportation or distribution costs • Reductions in overhead costs are also considered, but are less compelling justifications for the merger • Failing Firm • Bankruptcy would cause productive assets to exit the industry

7. [7](7): FTC v. Coca-Cola (1986) • What is the Product Market? • Carbonated Soft Drinks • Excludes fruit drinks, bottled water, milk, beer, and wine • What is the Geographic Market? • National market • but also seven-state region of southern states where Dr. Pepper is popular • What are the Market Shares of Current Suppliers? • Coke 37.4% Dr. Pepper 4.6% • Pepsi 28.9% 7-Up 5.7% • Is the Market Concentrated? • Yes, highly concentrated • Post-Merger HHI = 2700 (Coke market share would be 42%)

8. [7](8): FTC v. Coca-Cola (1986) • Bottling Stage of the Industry: • 208 Coke exclusive bottlers distribute 39% of Dr. Pepper • 166 Pepsi exclusive bottlers distribute 31% of Dr. Pepper • 75 Independent bottlers distribute 30% of Dr. Pepper • Independent bottlers also distribute 7-Up, RC Cola, and Crush • What are the Barriers to Entry for a new soft drink supplier? • Brand loyalty as a result of trade secrets • Economies of scale in promotion and advertising • Merger would reduce the number of independent bottlers • FTC blocks Coca-Cola’s acquisition of Dr. Pepper • FTC also blocks Pepsi’s acquisition of 7-up • Cadbury’s acquires 7-up, Dr. Pepper, and other minor players

9. [7](9): FTC v. Staples (1999) • What is the geographic market? • Local urban markets - because of consumer transportation costs • What is the product market? • Consumable Office Supplies (paper, pens, folders, disks, and toner cartridges) • Excludes durable goods such as computers, fax machines, furniture • Sold through Office Superstores (even though only 5.5% of sales) • Excludes stationary stores and mass merchandise stores such as WalMart • Why only office superstores? • Pricing strategies and expansion plans focus on competition from office superstores • Office superstores are much larger with more items and a larger inventory • Who are the competitors? • Staples: 550 stores in 28 states, $4 billion in revenues (1996) • Office Depot: 500 stores in 38 states, $6 billion in revenues (1996) • Office Max: 575 stores in 48 states, $3 billion in revenues (1997)

10. [7](10): FTC v. Staples (1999) • What is the unilateral effect of merger in markets with Staples? • No effect where no change in competition: (24% of markets in 2000) • Staples only: 17% in 1995 12% in 2000 • Staples and Office Max: 37% in 1995 12% in 2000 • Higher prices from reduced competition: (76% of markets in 2000) • 2 to 1: No Office Max 29% in 1995 7% in 2000 • 3 to 2: Office Max 17% in 1995 69% in 2000 • What is the estimated price increase? • 2 to 1 local markets (monopoly): 8.6% - 11.6% increase • 3 to 2 local markets (duopoly): 4.9% increase • Collusion between Staples/Office Depot and Office Max may also be easier after the merger

11. [7](11): FTC v. Staples (1999) • Is entry easy or difficult? • Easy to open one superstore, but one store will not be competitive • Chain of superstores is necessary to obtain discounts from manufacturers • Chain of superstores requires capital and time • Smaller chains have exited: 23 chains to 3 chains now • Does the merger generate any important efficiencies? • Economies of scale in purchasing? lower variable costs • Economies of scale in advertising? lower fixed costs • JD arguments against additional economies of scale from merger • Economies are exhausted by the current size of the chains • Additional economies of scale could be achieved by internal expansion of chains • Savings in overhead expenses are rarely compelling • Merger documents report lower economies that the expert reports in court

12. [7](12): Airline Mergers • AIRLINE 1980 1990 2002 • American 16% 20% 28% JD approved merger with TWA • United 16% 20% 20% JD blocked merger with US Air • Eastern 12% ---- ---- Bankruptcy and liquidation • Delta 12% 18% 16% JD approved merger with Western • Northwest 6% 12% 10% JD blocked acquisition of Continental • Continental 6% 10% 8% Reorganized from bankruptcies • TWA 6% 6% ---- Merged into American (2002) • Peoples Air 6% ---- ---- Merged with Continental • US Air 4% 8% 8% Bankruptcy and reorganization • Western 4% ---- ---- Merged into Delta • Republic 4% ---- ---- Merged into NW • Southwest 2% 3% 7% Non-union entrant • America West 2% 3% 3% Non-union entrant

13. [7](13): Airline Hubs - Local Markets • Charlotte, NC US Air 70% • Dallas/Ft Worth American 70% • Nashville American 70% • Cincinnati Delta 70% • Atlanta Delta 65% • Minn/St. Paul NW 65% • Detroit NW 55% • St. Louis TWA 55% • Chicago United 45%

14. [7](14): Defense Mergers • Defense Mergers are difficult to analyze • Development costs are subsidized by the Defense Department • Federal Government is the primary buyer (later foreign governments) • Auctions with typically one firm winning a sole-source contract • Dramatic consolidation of defense industry • Costs of development have increased dramatically for complex systems • Government tries to buy more units at a lower unit price from fewer suppliers • But two recent mergers blocked by Justice Department • Lockheed Martin and Northrup Grumman • monopoly (2 to 1) in airborne radar systems, and duopoly (3 to 2) in sonar systems • General Dynamics and Newport News • monopoly (2 to 1) in nuclear submarines, and duopoly (3 to 2) in large ships

15. [7](15): Telecommunications Mergers • Worldcom and Sprint • Largest two suppliers of Internet backbone services • Second and third largest long-distance voice telecommunications firms • But what about competition from the four regional Bell companies who are entering long-distance service? • Real reason?: Worldcom was built on acquisitions and was informal warned not to acquire Sprint after it had acquired MCI • Hughes DirectTV and Echostar DISH Network • Largest two suppliers of direct broadcast satellite television service • Competition in local markets will be reduced • But what about competition from VHF television and cable television?

16. [7](16): GE - Honeywell • General Electric is the leading manufacturer of aircraft jet engines • Honeywell is the leading manufacturer of aircraft avionics equipment • European Commission blocks the merger • Justice Department investigates but does not challenge • GECAS is a subsidiary of GE and is the largest purchaser of commercial jet aircraft for lease to smaller foreign airlines • GECAS purchased 10% of the commercial jets (900) from 1996 - 2000 • ILFC purchased 600 aircraft, but the rest were purchased by the large airlines • Competitive Problem: Leverage by GECAS • GECAS only purchases aircraft with GE engines, and would probably require Honeywell avionics after the merger (although GE denied this) • GECAS purchase decisions could induce aircraft manufacturers to favor Honeywell avionics (and GE engines) when designing aircraft