Download Recent Margin Squeeze Cases: An Economic Critique

Economic Analysis and the
new EC Merger Notice
Derek Ridyard
RBB Economics
[email protected]
30 March 2004
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Overview
Economic analysis under the Notice:
1. Non-coordinated effects
2. Coordinated effects
3. HHI thresholds
4. Impact of procedural/institutional changes
on substantive analysis
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Classification of competition
concerns
Historic
practice
Draft Notice
Single firm
dominance
Paramount
market position
“the gap”
Non-collusive
oligopoly
Collective
dominance
Coordinated
effects
Final Notice
Non-coordinated
effects
Coordinated
effects
 Notice creates a new category of concern to fill the
perceived “gap” under the old regime.
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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
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1.2 Illustration of non-coordinated
effects
Model
Sales
Share
Implied
Sales
Gain
Actual
Sales
Gain
Ford
80,000
40%
+5,000
+1,000
VW
40,000
20%
+2,500
+1,500
BMW
40,000
20%
+2,500
+7,500
Mercedes
40,000
20%
-10,000
-10,000
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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.”
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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?
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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
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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 noncoordinated effects have been ignored
• The real impact is:
– Greater DG COMP discretion
– Less predictability
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2.1 Coordinated effects – stage 1
Identify focal point for co-ordination:
• Price
• Customer / territory sharing
• Output / Capacity
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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
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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
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3.1 HHI “safe harbour” thresholds
in the Notice
HHI
< 1,000
>1,000
<2,000
Delta
<150
>2,000
?
>150
>250
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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
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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)
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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 …
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4.1 Process changes
Chief Economist’s
Office
Tri-partite
meetings
CFI Judgments
Internal Review
Hypothesis
testing
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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
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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
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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
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4.5 Internal review panel
• Another independent check on case team
• Some notable influence already
Consequences:
– chance to stop the juggernaut in its
tracks
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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
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