public policy in private markets merger policy. announcements check iclicker grades. if you are...
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Announcements
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Homework 4 coming up (right after break)
Horizontal Merger Guidelines
• Two-step process (as in monopolization cases):
1. Define relevant market: are the two firms in the same relevant market? If so, move to the second step
2. Define if market power (i.e. price) is likely to increase in the relevant market: main measure is concentration.
Horizontal Merger Guidelines
2. Seller concentration Impact of merger: change in HHI in the relevant
market
2
1( )
number of firms
n
iiHHI Market Share
n
Horizontal Merger Guidelines
Post Merger HHI
Change in HHI
DOJ/FTC Challenge?
FTC Classification
<1000 Not Considered
Typically not Unconcentrated
1000-1800 Not specified Further analysis needed
Moderately concentrated
>1800 >100 Likely to challenge
Highly Concentrated
In-class Work (groups of 2-3 students)
There are four beer manufacturers in the market with corresponding market shares:
Pete’s: 40% Sam’s: 30% Berkshire: 20% Paper City: 10%
What is the pre-merger HHI? If Sam’s wants to merge with Berkshire, what
would be the post-merger HHI? Would this merger be challenged? What about a Berkshire-Paper City merger?
Solving last lecture’s problem
Pre-merger HHI (88% got it right): 40^2+30^2+20^2+10^2= 1600+900+400+100 = 3000
Post-merger HHI if Sam’s & Berkshire merge (93% got it right): 40^2+50^2+10^2 = 1600+2500+100 = 4200
Post HHI if Berkshire & Paper City merge (yes 67%, no 33%) 40^2+30^2+30^2= 1600+900+900=3400
Horizontal Merger Guidelines
3. Other Factors that may affect decision to challenge:
Unilateral Effects: Ability to raise prices after merger (without collusion). Why? Ruled on a case by case basis
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? Yes: less likely to challenge.
Horizontal Merger Guidelines
3. Other Factors that may affect decision to challenge:
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 Synergies (1 manager instead of 2) may reduce unit
costs and also prices. Controversial: it’s difficult to compute, it’s
difficult to verify that savings will take place, it’s difficult to ensure full pass-through
Important points
FTC challenges if concentration increases significantly
What is relevant market? Satellite radio? Other audio: other radio, internet radio, HD
radio, iPods, MP3 players Sirius-XM claims:
Efficiency gains Variety New developments
What Happened?
July 25, 2008: merger approved in a 3 to 2 vote
Controversial: 1997 FCC granted 2 licenses and stipulated
that one of the holders would ‘not be permitted to acquire control of the other’
February 10, 2009: Sirius-XM hires advisors to prepare for bankruptcy filing
February 17, 2009: Liberty Media (49% DirecTV owner) acquires 40% of Sirius-XM
Enforcement of Horizontal Merger Guidelines
Pre-merger notification FTC/DOJ can negotiate with merging parties
Sell a unit, facilities, etc. Agency announces whether it will challenge
If challenged: agency goes to a Federal District Court to seek for a preliminary injunction to block merger until full trial:
If injunction granted: companies frequently drop the merger If injunction not granted: gov’t frequently drops the case Either party can appeal decision to higher courts
Horizontal Enforcement: Bottom Line
Large horizontal mergers are (largely) strictly blocked
But smaller mergers may face challenge, too
Guidelines give us a good idea about how mergers will be treated
Exam Poll
On a scale of 1 to 10, how “fair” do you think the midterm was? (1 totally unfair, 10 totally fair)