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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

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 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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