1. Public Policy in Private Markets Merger Policy

2. Announcements Check iclicker grades. If you are using iclicker and do not see grades, let me know ASAP Homework 4 coming up (right after break)

3. Merger Law 3 types of mergers:  Vertical  Horizontal  Conglomerate

4. 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.

5. Horizontal Merger Guidelines 2. Seller concentration Impact of merger: change in HHI in the relevant market

6. Horizontal Merger Guidelines Post Merger HHI Change in HHI DOJ/FTC Challenge? FTC Classification <1000Not Considered Typically notUnconcentrated 1000-1800Not specifiedFurther analysis needed Moderately concentrated >1800>100Likely to challenge Highly Concentrated

7. 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?

8. 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

9. 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.

10. 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

12. Next time Second Microsoft case (1998)

13. 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

15. 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

16. 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

17. 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

18. Exam Poll On a scale of 1 to 10, how “fair” do you think the midterm was? (1 totally unfair, 10 totally fair)

19. Exam Poll On a scale of 1 to 10, how “difficult” do you think the midterm was? (1 piece of cake, 10 hardest exam ever)