Presentation on theme: "Extra Slides--2014. 1982 DOJ Merger Guidelines “Hypothetical monopolist” A little arithmetic A price increase of Δp—which will result in a quantity."— Presentation transcript:
1982 DOJ Merger Guidelines “Hypothetical monopolist” A little arithmetic A price increase of Δp—which will result in a quantity decrease of Δq—is not profitable if the firm’s profits before the price increase are greater than the firm’s profits after the price increase: Rearranging, this implies that is, the loss of margin on lost sales is greater than the gain in profits on the sales that are not lost 2 Price Quantity MC = c Residual demand curve Price increase p to (p + Δp) Gain in profits from increased prices = Δp(q - Δq) Loss in profits from decreased volume = (p - c) Δq paradigm for market definition
Antitrust Law Fall 2014 Yale Law School Dale Collins Critical Loss “Hypothetical monopolist” paradigm for market definition “Critical loss” Definition: Lowest loss of quantity sold (in percentage terms) that defeats the profitability of a given price increase: A little more arithmetic—Divide prior inequality by pq: Solving: 3 where is the percentage price increase and m is the gross margin (p – c)
Antitrust Law Fall 2014 Yale Law School Dale Collins Increased emphasis on unilateral effects 2010 Guidelines—Example 5 4 Products A and B are being tested as a candidate market. Each sells for $100, has an incremental cost of $60, and sells 1200 units. For every dollar increase in the price of Product A, for any given price of Product B, Product A loses twenty units of sales to products outside the candidate market and ten units of sales to Product B, and likewise for Product B. Under these conditions, economic analysis shows that a hypothetical profit-maximizing monopolist controlling Products A and B would raise both of their prices by ten percent, to $110. How in the world does “economic analysis” predict that there will be a $10 price increase?
Antitrust Law Fall 2014 Yale Law School Dale Collins Increased emphasis on unilateral effects 2010 Guidelines—Example 5 (con’t) 5 In a symmetrical Bertrand model with linear demand and no entry, repositioning, or efficiencies: Plugging in the numbers and solving the equation for the postmerger price P* yields:
Antitrust Law Fall 2014 Yale Law School Dale Collins Increased emphasis on unilateral effects Example 5: A scary perturbation 6 So 85% of diverted sales go to other firms. Say there are 4 other firms in the marketplace with: In what appears to be a six-to-five merger, P* = $5.30 or over 5% of the preclosing price. This implies that Firms A and B constitute a relevant market and indicates that the merger is anticompetitive, notwithstanding the existence of four other firms, each of which produce closer substitutes to the products of both A and B than A’s and B’s products are to each other.