merger control (and more): direct and indirect effects€¦ · merger control (and more): direct...

Merger control (and more): Direct and indirect effects

Chief economist Lars Sørgard

The Norwegian Competition Authority

Conference in Brussels September 17-18, 2015

*

These are my views, and not necessarily the views of the Norwegian Competition Authority

*

1

The outline

• The basic approach

– Direct vs indirect effects

– Applied on mergers (and cartels and abuse)

• Implications for measurements and incentives

– What to measure?

– Getting the incentives right

• Some concluding remarks

Sørgard - Brussel 17.09.2015 2

The total effect

• Every action will have two types of effects:


Total effect = Direct effect + Indirect effect

• Enforcement as such, or not – Banning a merger

– Detect a cartel

– A decision of no action

• A change in behaviour – Merger ban leads to other mergers

being cancelled (deterrence)

– No action towards rebates may lead to more rebates (more aggressive behaviour)

Indirect effect – two examples

• Electricity market in Norway – Two merger bans towards Statkraft in 2002/03 – No mergers after that in the Norwegian el. market

• Telecom market after a ban of abuse rule (a la art. 102) was introduced in Norway in 2004 – Complaints from small rivals on rebate schemes – But all cases closed – The small rivals got the signals – Then fewer complaints – What happens to the two large players? – More aggressive with rebates, or ….?

Sørgard - Brussel 17.09.2015

4 0

1

2

3

4

5

2005 2006 2007 2008 2009 2010

Complaints in Telecom

The total effect cont.

• In principle, should take into account both direct and indirect effects for all decisions

• In reality very difficult, and may end up with only considering the direct effects

• Systematic differences between various cases

– Some have a large direct effect, other a large indirect effect

• A distorted allocation of resources?

• A multiplier to find deterrence effect?


Merger control

• Case by case; effects-based approach

• If mergers investigated, likely that those most harmful for society are banned

• If so, a substantial deterrence effect

– No one risk to propose merger to monopoly?

– If proposed, very likely that it will be banned

• But then the direct effect is limited

– Proposed mergers are good or in the grey area

– Can risk banning good mergers (type I errors)



Notified mergers – adverse selection

• Mergers not proposed, since high risk of a ban

Net gain for society of mergers

0 Mergers

• Mergers not challenged by NCA

• Mergers challenged by NCA, and can be banned

• Can ban good mergers (type I error)

• Direct effect zero/negative?

Merger: Direct + indirect effect

• Merger enforcement must take into account the interaction between the two effects

– Direct effect: Enforcement as such

– Indirect effect: Deterring others from merging

• Direct effects leads to indirect effects, see Seldeslacht on the deterrence effect

• Optimal merger control; not adding up effects

– Enforecment until direct effect is zero (or in theory even negative), because positive deterrence effect


Cartel detection

• Violation by object and no effects-based approach

– Makes sense based on economic theory

– Fine not affected by the overcharge (which is unknown)

• Direct effect varies a lot

– From zero to 60-70 % overcharge


• On average a substantial overcharge

• See the average we can read from the figure


Cartel detection – direct effect

Net gain for society from cartels

Karteller

• Cartels detected by NCA

0

• Green areas the gains from detection

• Those not detected are the yellow/red areas

• But what about deterrence? – Worst cartels are

deterred?

0

Cartel detection - deterrence

• Large variation in overcharges may indicate that some of the worst cartels are not deterred?

• Or even worse – worst ones not deterred?

– Maximum fines, and not based on overcharge

– Overcharge not reduced over time?


• Limited indirect effect?

– Not always deterrence of the worst ones?

– Those with low overcharges are deterred?

Abuse of dominance

• Most in common with merger control? – Case by case; effects-based approach

• If so, adverse selection? – Most harmful action deterred?

– Substantial deterrence and limited direct effect (as with merger control)

• But larger uncertainty? – Court decisions on rebates etc

– Large scope for both type I and II errors?


From direct to total effects

• Hard to decide on the optimal allocation – Direct effect an argument for cartel detection? – But indirect effect show that merger and abuse cases can be

important?

• Cannot just multiply up the direct effect to find the indirect effect


Cartel

Abuse

Merger

Direct effect

++

+/-

+/-

Indirect effect

+?

+?

++

The outline



– Applied on mergers, cartels and abuse






Measurements and incentives

• Counting the # of decisions clearly wrong

– Should ideally deter firms from violating the law

– Few decisions can be good!

• Since total effect unknown, measuring and incentives are of importance

– NCA adapt to the chosen measurements?

– Problematic to measure only direct effect

• Must detect the overall effect of NCAs

– How will the firms’ decisons be affected?


Merger control – direct effect

• Can ex post evaluation influence NCAs incentives?

• Problematic to evaluate accepted mergers

– Incentives to be aggressive, since then fewer harmful mergers are proposed?

• Even worse to evaluate banned mergers?

– Merger policy too lenient, since then a banned merger is more likely to be a harmful merger?

• If we observe large direct effect, a too lenient merger policy?

– A large direct effect can be bad news!


Merger control – total effect

• Important to show the deterrence effect – Ask competition lawyers/firms about mergers that are

modified/dropped – Do empirical studies across countries, see Seldeslacht’s

and Duso’s talks

• Combine it with a check of direct effect – Check both banned and accepted mergers – Not quantify, but rather check whether these are

correct decisions (few type I and II errors)?

• Should not simply assume that merger bans are correct, and use merger simulations – Deterrence not a multipler of direct effect


Cartels – total effect

• The direct effect overestimates the (potential) overcharge for a deterred cartel?

• Very hard to estimate the indirect effect? – Asking competition lawyers will not help much?

• If measuring # of cartels detected, what about incentives to prevent cartels from being formed?

• Important for cartel policy to understand why no cartel in an industry – I: Not profitable (participation constraint)? – II: Not stable (incentive constraint)?

• II is the binding one for those with high overcharges?


Cartels and direct effect

• Measuring direct effect of cartels will not help to deter the worst cartels? – Will not in itself deter the cartels with the highest

overcharges

– But can direct NCAs investigation towards those industries with the potential for a high overcharge?

– Leniency can undermine such a targeted policy?

• Cartel policy formulation to violate the incentive constraint (to stop cartels with high overcharges) – High fines combined with private litigation

– Leniency for both fines and (at least partly) damages?


The outline



– Applied on mergers (and cartels and abuse)






Some concluding remarks • Very hard to exactly measure the total effect

– Indirect effect especially difficult to quantify for cartels?

• But helpful to have a systematic understanding of direct vs indirect effects

• Measurement of direct effect, or using a multi-plier, can lead to distortion of NCAs resources – Too few resources to merger control? – Low direct effect of mergers can be a good sign!

• A systematic reasoning can help us to understand what we should not measure – Understand how measuring may affect incentives


Selected references

• Harrington, J. Jr. (2011): ’ "When is an Antitrust Authority not Aggressive Enough in Fighting Cartels?," International Journal of Economic Theory, 7, 39-50.

• Jensen, S. and L. Sørgard (2015): ’Enforcement with heterogeneous cartels’, Journal of Competition Law & Economics, forthcoming.

• Katsoulacos, Y. and D. Ulph (2009): On optimal legal standards for competition policy’, Journal of Industrial Economics, 57, 410-437.

• Neven, D. and H. Zenger (2008): ’Ex post evaluation of enforcement: A principal-agent perspective’, De Economist, 156, 477-490.

• Schinkel, M. P. and J. Tuinstra (2006): ’Imperfect competition law enforcement’, International Journal of Industrial Organization, 24, 1267-1297.

• Sørgard, L. (2009): ’Optimal merger policy: Enforcement vs deterrence’, Journal of Industrial Economics, 57, 438-456.


merger control (and more): direct and indirect effects€¦ · merger control (and more): direct...

Documents