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Economic Analysis and the new EC Merger Notice. Derek Ridyard RBB Economics derek.ridyard@rbbecon.com 30 March 2004. Overview. Economic analysis under the Notice: 1. Non-coordinated effects Coordinated effects HHI thresholds

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Economic analysis and the new ec merger notice

Economic Analysis and the new EC Merger Notice

Derek Ridyard

RBB Economics

derek.ridyard@rbbecon.com

30 March 2004


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