1. Settlement in Merger Cases: Remedies and Litigation Andreea Cosnita (Paris X Nanterre) Discussant: Jo Seldeslachts (WZB-Berlin)

2. Research Question and Setup How do factors influence: – likelihood of parties settling on a remedy (divestiture)? – the amount of the remedy? Main elements: – Firms possess private info on efficiency gains – (1) CA proposes a remedy, to which (2) firms may accept/reject – Additionally, firms may – Go to court if reject – Bargain with outsider over price divestiture

3. Original view of remedies CA screen firms on their efficiency gains by imposing them a ‘cost’ to pay to let them merge (the structural remedy) – Firms reveal merger characteristics by accepting/rejecting the remedy offer – Screening is “rough” -> some welfare enhancing mergers are stopped (type I error) – outside options (court) and price (selling to outsiders) influence height remedy and acceptance rate

4. Modeling issues – Only firms with efficiency gains are profitable -> Cournot setup with homogenous goods and constant MC – Not the case e.g. if Cournot and differentiated goods or Cournot with increasing MC – CA makes no type II errors -> no acceptance of anti-competitive mergers – When court is in play, firms do not propose anti-competitive mergers – There is no “ over-fixing ” -> the more remedies, the better

5. Modeling issues (2) – In reality, often firms propose the remedies, not the CA – In US, de facto – In EU, legally required (Article 1 par29-par30 of the EC Merger Regulation) E.g. Volvo/Scania merger blocked after twice divestiture proposals by Volvo deemed as insufficient by the Commission -> no signaling by firms -> less efficient outcome -> all power to CA by letting it propose -> equilibrium divestiture higher

6. Setup suited to compare legal systems CA offers divestiture Firms accept Firms reject Abandonment Court Firms win Firms loose CA offers divestiture Firms accept Firms reject Abandonment Court Firms win Firms loose prohibition EU US

7. Setup suited to compare legal systems In EU a rejection by firms leads to prohibition -> may lead to extra costs of going to court (at least in issues of timing: foregone profits) Extra costs for firms in EU to go to court -> increase the likelihood of settlement in your model -> relatively more remedies (and less court cases) in EU with respect to US

8. Interesting setup!

9. Elements of the Formal Model Antitrust authorities –Antitrust authorities clear, remedy or prohibit –With the option to alter the tendencies of its regime –Merger policy regulations exhibit a degree of uncertainty Firms –Form expectations (and update) about an AA’s stance –Decide on type of merger (‘restrictiveness’) –Decide on merging or not merging

10. Formal model Profits depend on the type of merger proposed: the chosen level of ‘restrictiveness’  Decisions over product lines, geographic markets, contracts with suppliers, … are all subsumed in this variable   AC (  ) &  PC (  ) are influenced by firms’ chosen  e.g. closing branches in bank mergers may affect both  AC (  ) &  PC (  ) Naturally,  AC (  ) depend positively on firms’ chosen level of restrictiveness (  ) As in Barros (EER 2003),.

11. Formal model (cont’d) –Competition authorities define admissible levels  * and  *+  –If   * then the merger is approved without conditions –If  *<    *+  then the merger is approved with remedies –If  >  *+  then the merger is prohibited –Actual  * is unknown to firms, expectation represented by F(  *) –Firms expected profit from merging, net of costs K, given by 1. Firm optimizes V w.r.t.  2. If V > 0, then firm merges –AA applies more remedies w.r.t. prohibitions → increase in  → increase in number of mergers

12. Predictions A Spike in Prohibitions * at the expense of less clearances or less remedies → more deterrence i.e., firms less inclined to merge A Spike in Remedies * at the expense of less clearances → more deterrence i.e., firms less inclined to merge * at the expense of less prohibitions → less deterrence i.e., firms more inclined to merge

13. The Data & Main Constructs –Annual measures of merger policy for 28 jurisdictions over the 1992-2005 period –Unit of observation: antitrust jurisdiction by year Dependent variable: Annual number of merger notifications (‘Mergers’) –Those that must notify are potentially most deterred Independent variables: 1. Annual number of Prohibitions (‘Prohibitions’) 2. Annual number of Remedies (‘Remedies’) 3. Plus: Annual number of Monitorings (‘Monitorings’)

14. Mergers and Antitrust Actions Source: annual reports on competition policy in 32 OECD Countries

15. Controlling for merger wave of 90’s –Lagged terms of Mergers –Year Dummies –Waves coincide with booms –Economic conditions (Lambrecht, 2004): GDP growth in constant PPP terms (‘Growth’) –Stock market conditions (Gugler et al.,2004): Stock market as a percentage of GDP (´Stock Market’)

16. Thresholds and Laws –Multiple dimensions for merger notification Thresholds –Worldwide sales and/or domestic sales –Individual firm and/or combined entity –Market shares and/or assets –Single measure vs. multiple measures  Dummies for threshold changes in 1992-2005  23 jurisdictions that experienced at least one change (‘Threshold1’)  12 jurisdictions experienced a second change (‘Threshold2’)  1 jurisdictions experienced a third change (‘Threshold3’) –Period 1992-2005 very active law-making period –Dummies for ‘important’, ‘substantial’ & ‘major’ changes in antitrust law. –23 jurisdictions that experienced at least one change (‘Law1’) –9 jurisdictions experienced a second change (‘Law2’) –New Set of Rules for EU & Member State Competition Policies. –Dummy variables set to 1 for 2004 & 2005 (‘EU 2004 Reform’)

17. Estimation i = the antitrust authorities t = time (year)  i = unobserved jurisdiction-specific effect t = year dummies ε i,t = disturbances k = number of included lags for mergers Antitrust Actions = [Prohibitions, Remedies, Monitorings] Controls = [Threshold1, Threshold2, Threshold3, Law1, Law2, EU 2004 Reform, Growth, Stock Market]

18. Empirical Estimation Issues –Count data → log transformation of Mergers & Antitrust Actions –Inclusion of autoregressive dynamics of Mergers (Dynamic Panel Data) –OLS and within-groups estimations yield biased & inconsistent estimates –Hence, System GMM estimator (Arellano and Bover, 1995) for Predetermined and Endogenous variables

19. Instrumented Variables –Lagged Mergers – clearly endogenous –Stock-Market as endogenous - Mergers may directly impact stock markets –Lagged Antitrust-Actions as predetermined - If antitrust decision doesnot take place in same year as notification. –Threshold dummies as predetermined - OECD reports changes in response to rise in past merger notifications - Performs well in terms of efficiency and reduces finite sample bias - But, model may be over-fitted due to too many moment conditions - Robustness Checking → OLS; Random effects; Fixed effects; GMM clearly-endogenous; GMM potentially-endogenous; GMM endogenous/predetermined treatments

20. Main Regression Results in Log Functional Form * Dependent Variable: Number of Notified Mergers * 209 Obs.; Fixed Period Effects

21. Economic Significance Prohibitions = Negative and Statistically Significant –10% Prohibitions Spike  Next year Merger decrease of 0.55% to 1.6% US: from 9 prohibitions in 2001 to 14 in 2002 - Leads to 3.1% less mergers in 2003 EU: from 5 prohibitions in 2001 to 0 in 2002 - Leads to 5.5% more mergers in 2003 –Linear functional form results –Additional Prohibition leads to 23 fewer mergers Remedies mostly Positive (but often insignificant) –Spike in Remedies  Following year increase in Mergers –Suggests Spikes in Remedies Come at the Expense of Prohibitions! –(Or No deterrence effect) Monitorings always insignificant

22. Conclusion –Antitrust Actions impact future merger frequencies –Not all actions are effective deterrents –Prohibitions ‘Yes‘ –Remedies ‘Maybe No‘ –Monitorings ‘No‘ –Remedies Have Been Criticized –Increase price-cost margins (Crandall & Winston, 2003) –Transaction-Cost based problems (Joskow, 2002) –Enhance collusion (Motta et al., 2006) –Prevent entry (Cabral, 2003) –May not Reduce anti-competitive part (Duso et al., 2006) –Our Contribution: May Have Weak Deterrence