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Assessing the efficacy of structural merger remedies: choosing between theories of harm? Steve Davies and Matt Olczak, CLEEN New Researchers Workshop, University of East Anglia June 2008
Motivation Motta et al (2002) important trade-off inherent in structural merger remedies: 1)Create a viable competitor. 2)Avoid symmetry - makes collective dominance more likely. Motta (2004) ideally a merger should be cleared subject to remedies ONLY if neither single dominance (SD) or collective dominance (CD) are expected to result post remedy. Previous literature on the efficacy of merger remedies: - Ex-post evaluations conducted by CAs: e.g. FTC (1999) and EC (2005) - focus on 1). - Davies and Lyons (2007).
Outline 1)A model for assessing the competiveness of alternative market structures 2)Using the model to assess the competitiveness of market structures: i)Pre merger ii)Resulting from structural merger remedies 3) Consider markets where the CA made a decision NOT to intervene
Structural Model - estimated using POST merger market shares SUM=S1+S2 & RATIO=S2/S1 Davies et al (2008) Structural Model Sample: 62 mergers from 1990-mid 2004 in which the EC seriously considered CD. 25/62 mergers involved a intervention in 1 or more market (4 mergers prohibited) – here can control for X factors e.g. barriers to entry, price transparency ** indicates significance at 99% level Pseudo R2 = Correct predictions 79% N=222 markets (30 CD & 88 SD):
Graphical implications of estimated structural model SD CD NI
Assessing competitiveness of market structures pre and post merger 92 markets in which the EC intervened (& Pre MS data available): 36/92 uncompetitive PRE merger FINDING 1: Almost 40% of markets present pre-merger structures which would have been identified by the Commission as displaying dominance (23% SD and 16% CD) – had they been the result of a merger.
Remedy outcomes 66 markets (17 mergers) able to identify the post remedy market structure: FINDING 2: in 31 (47%) of the cases in this sample, divestment remedies have resulted in market structures (15 SD & 16 CD) which the EC would have sought to remedy had they been the result of a merger, rather than a remedy. Possible interpretations: 1)EC applies inconsistent criteria between assessing a merger and designing a remedy. 2)Sympathetic possibility: when framing a remedy constrained by pre merger status quo. If status quo is characterised by CD or SD so too will be any structure attainable by a remedy.
The scale of divested assets Relative to ME2 ProhibitionRemedyTotal Less99 Equal More44 TOTAL303666
Return to the status quo FINDING 3: the typical divestment remedy returns the market share of the merged entity to the pre- merger share of the larger party. And typically the purchaser is an entrant, Thus: FINDING 4: the most common outcome following a structural remedy is return to the pre merger market structure. But we have seen the pre merger outcomes are not always competitive.
Overall support for sympathetic explanation – pre merger outcome can constrain remedy effectiveness REM:Prob Dom post remedy FreqNIDOM PRE=NI, MERGER=Dom Scope for successful remedy % PRE=Dom, MERGER=Dom Remedy likely to be ineffective % Motta (2004) ideally a merger should be cleared subject to remedies ONLY if no CD or SD expected post remedy – often too stringent a requirement given pre merger market structures.
Collective v Single Dominance 25 cases where dominance PRE=Dom & MERGER=Dom and remedy ineffective: 19 PRE & POST presented same type of dominance (14 SD & 5 CD) Remaining 6: PREMERGERREMFreq CDSDCD5 SDCDSD1 WEAK FINDING 5: hint EC appears more tolerant of CD than SD
Non-intervention markets When PRE=Dom & MERGER=Dom: may prefer MERGER to DOM and therefore not intervene Examining markets where the EC did not intervene reveals in particular 11 where: i) PRE=SD and MERGER=SD ii) the merged entity is NOT the number 1 firm post merger Why did no intervention occur: 1)SD intervention requires merged entity to be number 1 ranked firm. Instead consider an intervention on CD grounds? However: 2) Merger counteracts the largest outsiders pre-existing dominant position
Taking into account rank merged entity Take into account an additional issue not reflected in original structural model – RANK of the merged entity: Re-estimate structural model dividing sample: Merged-entity number 1 MN logit: SD,CD,NI Merged-entity number 2 binary probit: CD,NI
Revised predicted theories of harm NI (#2) NI (#1) SD (#1) CD (#1) CD (#2)
Alternative depiction (with S1 and S2 on axes) SD (#1) NI (#2) CD (#1) CD (#2) NI (#1) NI (#2) CD (#1) NI (#2)
Greater tolerance for CD when merged entity is not the market leader FINDING 6: for a given post merger market structure, the EC is less likely to remedy on grounds of CD if, post merger, the merged entity would be the number 2 firm. EXAMPLE: consider a post merger market structure with S1=40% & S2=30%. The EC is predicted to find: -CD if the merged entity is number 1 -NI if the merged entity is number 2
Explanations for Finding 6 When the merged entity is number 2, a structural remedy: - Can reduce symmetry (and thus CD concerns) - Cannot reduce the size of the market leader Any remedy moves the market structure closer to a position of SD If, (as in weak-finding 5) SD is viewed as more of a concern than CD this explains a greater tolerance of CD in such markets For markets in area where predict CD ONLY if ME = #1 use revised model to predict probability of SD pre merger: Rank MEMean Prob SD PRE merger (where data available)
Conclusions Assessment of the competitiveness of the outcomes arising from structural merger remedies: -Significant proportion of EC interventions result in an uncompetitive market structure -Pre merger status quo imposes a significant constraint -Weak evidence EC more disposed to CD than SD In markets where the merged entity is number 2: -EC more tolerant of CD in markets where would intervene if merger entity number 1 firm -Imposing a remedy for CD leaves an outsider closer to a singly dominant position
Postscript Additional evidence from decisions made under the new ECMR (post May 2004): -Interventions for Unilateral effects (UE)/SD typically in markets where under the old Merger Regulation SD would be predicted -Continued reluctance to intervene when merged entity number 2 -CE findings very rare and coupled together with UE