Public Policy in Private Markets

Merger Policy

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Homework 4 coming up (right after break)

Merger Law

3 types of mergers: Vertical Horizontal Conglomerate

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

Next time

Second Microsoft case (1998)

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

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Exam Poll

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