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3 October, 2011 2pm Vanderbilt Law. Staples-Office Depot: Natural “Experiments” vs. Theoretical Models. Luke M. Froeb Vanderbilt University. FTC Merger Enforcement Data 1996-2003, “Other Industries”. What’s Wrong w/Structural Presumptions?. - PowerPoint PPT Presentation
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STAPLES-OFFICE DEPOT:NATURAL “EXPERIMENTS” VS. THEORETICAL
MODELS
LUKE M. FROEBVANDERBILT UNIVERSITY
3 October, 20112pm Vanderbilt Law
FTC Merger Enforcement Data1996-2003, “Other Industries”
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2 to 1 3 to 2 4 to 3 5 to 4 6 to 5 7 to 6 8+ to 7+
Significant Competitors
Num
ber o
f Mar
kets
Enforced Closed
What’s Wrong w/Structural Presumptions?• Market delineation draws bright lines
even when there may be none– No bright line between “in” vs. “out”
• Market Shares may be poor proxies for competitive positions of firms
• Market shares and concentration may be poor predictors of merger effects
How do we know that market structure (concentration) matters?
• Concentration is obviously correlated with merger enforcement– Oil & supermarkets have lower thresholds
• Horizontal Merger Guidelines and judges demand more– Evidence of competitive effects
• How do we draw inference about the “but-for” world?
One answer:price-concentration regression
• Policy uses of price-concentration regression– Delineate antitrust markets in merger cases– Identify market power in monopolization cases– Estimate effects of mergers
• Staples-Office Depot merger was successfully challenged by FTC using price comparisons– Prices 7.5% higher in one-office superstore cities than in two-
office superstore cities– With a 15% estimated pass-through rate, would imply a 50%
mc reduction to offset merger effect.• Would you block merger based on these data?
What could go wrong?
• Experiment is “polluted,” i.e., something else accounts for results– Unobserved demand could increase price and increase
number of firms (spurious negative correlation)– Unobserved costs could increase price and decrease
number of firms (spurious positive correlation)– Example: movie tickets (Davis, 2005)
• Measure of concentration: competitor >.5 mile away• Finding: Price is $0.90 higher with nearby competitor
• How does this manifest in Staples case?
What could go wrong? (cont.)
• Experiment might be bad metaphor for merger– Merger changes ownership concentration– Are changes in entry/exit across cities are good
metaphor for changes in ownership concentration?
• However: “some number beats no number”– “possibilities” are not enough to defeat analysis– Need alternative “positive” story
Natural Experiments are “Empirical” Models
• Compare control vs. treatment group
• Try to hold everything else constant– Backcast is the “control” group
Merger Retrospective:Marathon/Ashland Joint Venture• Combination of marketing and refining assets
of two major refiners in Midwest• First of recent wave of petroleum mergers
– January 1998• Not Challenged by Antitrust Agencies• Change in concentration from combination of
assets less than subsequent mergers that were modified by FTC
Merger Retrospective (cont.):Marathon/Ashland Joint Venture• Examine pricing in a region with a large change in
concentration– Change in HHI of about 800, to 2260
• Isolated region– uses Reformulated Gas– Difficulty of arbitrage makes price effect possible
• Prices did NOT increase relative to other regions using similar type of gasoline
Difference Between Louisville's Retail Price and Control Cities' Retail Price
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
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25.001/
1/19
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/199
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Week
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Chicago Houston Virginia
Merger Date
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What else can we do?
• Use a theoretical model• how do firms compete and how does merger change
competition?• Price, quantity, capacity, bidding, bargaining competition
• Models as “blueprints” for enforcement: • blueprint governs the assembly of the facts• facts govern the selection of the blueprint.
• Model tells you: 1. What matters2. Why it matters3. How much it matters
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Example: Altivity-Graphic (2008):
• What matters: Nicholas Hill (DOJ) “Mergers w/capacity closure,”
• Elasticity of demand for CRB; elasticity of foreign supply; closing costs
• Why it matters: Mergers increase profitability of shutdown
• Altivity (35%) + Graphic (17%) of North American capacity
• How Much it matters:• Divest 2 plants representing 11% of capacity
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Model of Parking Merger
• 1999 Central Parking $585 million acquisition of Allright.
• Remedy: divestitures if merged share >35% in 4X4 block area is
• Divestitures in 17 cities
• Results– Capacity constraints on
merging lots attenuate merger effects
– By more than consraints on non merging lots amplify them
• Super-premium ice cream in North America– Nestlé 36.5% + Dreyer 19.5% revenue share
• Remedy: divest 3 brands to new entrant
FTC v. Nestlé and Dreyer (2002)
Models help delineate markets
• Question: Is super-premium a relevant product market?
• Answer: Simulate merger-to-monopoly of four super-premium ice cream producers
• If price goes up by 5% then it is a relevant product market
17FTC
Inputs to unilateral effects analysis: Own- and Cross-Elasticity Estimates
Tenn et al., “Mergers when firms compete using price and promotion,” Int’l. J. Ind. Org.
With respect to a price increase by:Brand A Brand B Brand C Brand D
Brand A -1.67 0.08 0.13 0.03(0.06) (0.01) (0.02) (0.00)
Brand B 0.20 -1.76 0.16 0.03(0.02) (0.06) (0.03) (0.01)
Brand C 0.13 0.06 -1.61 0.02(0.02) (0.01) (0.06) (0.00)
Brand D 0.16 0.07 0.14 -1.90(0.03) (0.01) (0.02) (0.07)
Models help interpret data
• Question: did new entrant Dreyer obtain a 20% share without affecting incumbent price?– Does this mean that super-premium is not a
relevant antitrust market?• Answer: Build a model of post-merger world,
simulate exit (by raising Dreyer’s MC), and see what happens to price– Does incumbent pricing change?
Models help interpret data (continued)
• Question: How does promotional activity affect merger analysis and tools that economists use?– What happens if we ignore promotional activity?
• Answer: Build a model of promotion + price.– If promotion affects elasticity, then it matters; if
not then it doesn’t
Demand, prices, and promotion level1.None, 2.display, 3.feature, 4.both
•
21FTC
Table 4: Elasticity Varies with Promotion
• Own-price
NoPromotion
DisplayOnly
FeatureOnly
Feature & Display
Brand A -1.62 -1.87 -1.88 -2.29(0.07) (0.24) (0.15) (0.23)
Brand B -1.66 -1.96 -1.94 -2.30(0.06) (0.24) (0.15) (0.22)
Brand C -1.56 -1.80 -1.75 -2.24(0.07) (0.22) (0.14) (0.22)
Brand D -1.80 -2.31 -2.19 -2.70(0.08) (0.28) (0.18) (0.25)
Answer: promotion matters in this case
• Price-only merger models under-predict (5% instead of 12%) the price effects of mergers in industries where firms compete using price and promotion– Estimation bias: demand is too elastic– Extrapolation bias: promotion decreases 31%
in post-merger equilibrium
22Vanderbilt
Estimation Bias vs. Extrapolation Bias
23Vanderbilt
Control for Promotions in: % Change Price % Change QuantityDemand
Estimation?Merger
Simulation? Brand A Brand B Brand C Brand DCategory
Index Brand A Brand B Brand C Brand DCategory
IndexYes Yes 10.3% 19.9% 9.4% 17.0% 11.7% -13.3% -26.9% -11.9% -24.4% -15.3%Yes No 8.9% 16.2% 8.1% 14.5% 10.0% -11.5% -21.6% -10.1% -20.6% -12.9%No No 4.4% 7.8% 4.1% 7.2% 4.9% -9.3% -15.6% -8.2% -16.0% -10.1%
• B,C merge
• Merger to monopoly
Control for Promotions in: % Change Price % Change QuantityDemand
Estimation?Merger
Simulation? Brand A Brand B Brand C Brand DCategory
Index Brand A Brand B Brand C Brand DCategory
IndexYes Yes 0.1% 8.1% 2.4% -0.1% 2.2% 0.7% -13.5% -3.4% 1.2% -3.0%Yes No 0.1% 6.3% 2.0% 0.0% 1.8% 0.5% -10.0% -2.8% 0.7% -2.3%No No 0.0% 3.3% 1.1% 0.0% 0.9% 0.4% -7.4% -2.4% 0.5% -1.9%
Conclusion
• Natural experiments change focus of investigation/litigation– Did we hold everything else constant?– Is the experiment a good metaphor for merger?
• Models change focus of investigation/litigation– How well does the model explain the pre-merger
observed world?– Do the model assumptions bias its predictions for
the unobserved post-merger world?
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