1. Class 15 Antitrust, Winter, 2018 Horizontal Mergers
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Class 15 Antitrust, Winter, Horizontal Mergers
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. The Key Merger Tradeoff
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The Key Merger Tradeoff P
Demand Curve P1 Q1
DWL P0
AC0
Savings
AC1 Q0 Q
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1976 as a Dividing Line
Pre-1976
Many cases are litigated under Sec. 7 of the Clayton Act
Over an extended period, the Supreme Court averages almost one case per year
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4. 1976 as a Dividing Line After-1976 Cases vanish
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1976 as a Dividing Line
After-1976
Cases vanish
Passage of Hart-Scott-Rodino in 1976 changes antitrust practice from court-driven to agency driven
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5. Merger Policy as Regulatory Policy
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Merger Policy as Regulatory Policy
Mergers are controlled through regulation.
Mergers of any real size will trigger HSR notification duties.
This results in a negotiation with the FTC or DOJ over how the transaction might be structured to eliminate competitive concerns.
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6. Merger Policy as Regulatory Policy
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Merger Policy as Regulatory Policy
Absent a consent decree, most parties abandon proposed mergers.
Litigation over the statute is rare.
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7. Clayton Act Section 7 Key Text
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Clayton Act Section 7
Key Text
No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of
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8. 11/14/2018
Clayton Act Section 7
another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
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9. November 14, 2018
HSR Annual Report 2016

10. November 14, 2018
HSR Annual Report 2016

11. November 14, 2018
HSR Annual Report 2016

12. November 14, 2018
HSR Annual Report 2016

13. Judging Concentration
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Judging Concentration
Concentration Ratios
Just add the market shares for a given number of firms
So speak of four-firm concentration ratio or 8-firm concentration ratio
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14. Judging Concentration
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Judging Concentration
Examples
A: (25,25,25,25): 4-firm ratio is 100%
B: (100,0,0,0): 4-firm ratio is 100%
C: (40,20,10,10,5,5,5,2,2,1): 4 firm ratio is 80%
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15. The Herfindahl-Hirschman Index
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The Herfindahl-Hirschman Index
Comparing A and B
In the prior example, Industries A and B had the same four-firm ratio, but competition is almost certainly quite different.
Try an alternative measure: square the market shares and add
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16. Calculating HHIs Examples A: 25*25 + 25*25 * 25*25 + 25*25 = 2,500
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Calculating HHIs
Examples
A: 25* *25 * 25* *25 = 2,500
B: 100 * *0 + 0*0 + 0*0 = 10,000
C: 40* * * *10 + 5*5 + 5*5 + 5*5 + 2*2 + 2*2 + 1*1 = 2,284
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17. 11/14/2018
Mergers and HHIs
A merger of two firms increases the HHI by 2 * S1 * S2
When the firms merge, their combined market share will be S1 + S2.
(S1 + S2) * (S1 + S2) = S1*S1 + 2*S1*S2 + S2*S2
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18. Mergers and HHIs Prior Examples
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Mergers and HHIs
Prior Examples
When the top two firms in Industry C merge, the HHI goes up by 2 * 40 * 20, or 1600, from 2284 to 3884.
When the first firm merges with the fifth firm, the HHI rises by 2 * 40 * 5, or 400, from 2284 to 2684.
This is a 1200 difference.
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19. Pre-2010 DOJ-FTC Grid Increase in Post-Merger Concentration < 50
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Pre-2010 DOJ-FTC Grid
Increase in Post-Merger Concentration
< 50
50 to 100
> 100
Unconcentrated:
< 1000
Moderately Conc:
1000 to 1800
Highly Conc.:
> 1800
No challenge
Post-Merger HHI
No challenge
High scrutiny
No challenge
High scrutiny
Presumed unlawful
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20. Revised DOJ-FTC Grid Increase in Post-Merger Concentration < 100
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Revised DOJ-FTC Grid
Increase in Post-Merger Concentration
< 100
100 to 200
> 200
Unconcentrated:
< 1500
Moderately Conc:
1500 to 2500
Highly Conc.:
> 2500
No challenge
Post-Merger HHI
No challenge
Scrutiny
Scrutiny
No challenge
Scrutiny
Presumed unlawful
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21. Implementing the Grid Increase in Post-Merger Concentration
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Implementing the Grid
Increase in Post-Merger Concentration
Remember that the increase in the HHI is 2*S1*S2.
50 points is two 5% market share firms or a 10% firm and a 2.5% firm
100 points is roughly two 7% firms or a 10% firm and a 5% firm.
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22. Mergers and Markets Don’t necessarily need to define the market
“The Agencies’ analysis need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.”
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23. Mergers and Markets Substitutes and Market Definition
“Market definition focuses solely on demand substitution factors, i.e., on customers’ ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service.”
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24. Market Definition The Hypothetical Monopolist Test
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Market Definition
The Hypothetical Monopolist Test
“The Agencies employ the hypothetical monopolist test to evaluate whether groups of products in candidate markets are sufficiently broad to constitute relevant antitrust markets. The Agencies use the hypothetical monopolist test to identify a set of products that are reasonably interchangeable with a product sold by one of the merging firms.”
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25. Market Definition The Hypothetical Monopolist Test
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Market Definition
The Hypothetical Monopolist Test
“The hypothetical monopolist test requires that a product market contain enough substitute products so that it could be subject to post-merger exercise of market power significantly exceeding that existing absent the merger.”
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26. Market Definition and SSNIP
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Market Definition and SSNIP
Defining SSNIP
“Specifically, the test requires that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products (“hypothetical monopolist”) likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”)
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27. Market Definition and SSNIP
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Market Definition and SSNIP
Defining SSNIP
“on at least one product in the market, including at least one product sold by one of the merging firms.”
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28. Market Definition Example
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Market Definition Example
Example 5
“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
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29. Market Definition Example
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Market Definition Example
Example 5
“twenty units of sales to products outside the candidate market and ten units of sales to Product B, and likewise for Product B.”
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30. Guidelines Example Example 5
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Guidelines Example
Example 5
“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. Therefore, Products A and B satisfy the hypothetical monopolist test using a five percent
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31. Guidelines Example Example 5
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Guidelines Example
Example 5
“SSNIP, and indeed for any SSNIP size up to ten percent. This is true even though two-thirds of the sales lost by one product when it raises its price are diverted to products outside the relevant market.”
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32. Doing the Numbers in Ex 5 Pre-Merger Position
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Doing the Numbers in Ex 5
Pre-Merger Position
A selling 1200 units at a price of 100 with a marginal cost of 60
Profits = 1200*(100-60) = 48000
Same for B
Total profits of 96000
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33. 11/14/2018
Doing the Numbers in Ex 5
Would A be willing to raise its price to $110 in the pre-merger world?
For every $1 increase in price, A loses 10 units to B and 20 units to other sellers
A $10 price increase would lose 300 units total
A profits would be 900*(110-60) = 45000
Profits drop, so A wouldn’t raise its price
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34. 11/14/2018
Doing the Numbers in Ex 5
Would the merged firm be willing to raise its prices to $110 in the post-merger world?
For every $1 increase in price, A loses 10 units to B and 20 units to other sellers
But with the merger diversion outside the merged firm drops
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35. 11/14/2018
Doing the Numbers in Ex 5
Would the merged firm be willing to raise its prices to $110 in the post-merger world?
( )*( )
=1000*50 = 50,000 (for each product (A&B))
With A and B raising price together as part of the merged firm, the price increase to $110 would be profitable
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36. 11/14/2018
Doing the Numbers in Ex 5
Meaning: Treat A and B as being in the same market
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37. Market Analysis v. Direct Harms Analysis
But …
What work is the idea of market doing here?
Do we need it?
Shouldn’t we just evaluate harm to consumers?
Critical loss analysis (4.1.3) gets at this idea
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38. Critical Loss Analysis Approach to Example 5
Set Up
Hypothetical monopolist raises price on A & B by $10
What is the drop in sales such that the hypo monop will just be indifferent between leaving prices as is and raising prices by $10?
That number is the critical loss
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39. Critical Loss Analysis Approach to Example 5
On the numbers
Pre-merger profits for A, $48K and B, $48K for total of $96K on 1200 units sold of each
At a new price of $110, profits would be $50 per unit
At what X, does X*50 = 96,000? 1920
Critical loss = 2400 – 1920 = 480 units
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40. Critical Loss Analysis Approach to Example 5
On the numbers
Critical loss = 2400 – 1920 = 480 units
Predicted loss was 400 units (200 units outside the new firm on each of A & B)
Critical loss > Predicted loss
Meaning, again, price increase is profitable
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41. Unilateral Effects and Differentiated Products
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Unilateral Effects and Differentiated Products
Upward Pricing Pressure
“In some cases, where sufficient information is available, the Agencies assess the value of diverted sales, which can serve as an indicator of the upward pricing pressure on the first product resulting from the merger.
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42. Unilateral Effects and Differentiated Products
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Unilateral Effects and Differentiated Products
Upward Pricing Pressure
“Diagnosing unilateral price effects based on the value of diverted sales need not rely on market definition or the calculation of market shares and concentration.”
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43. Unilateral Effects and Differentiated Products
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Unilateral Effects and Differentiated Products
Upward Pricing Pressure
“The Agencies rely much more on the value of diverted sales than on the level of the HHI for diagnosing unilateral price effects in markets with differentiated products. If the value of diverted sales is proportionately small, significant unilateral price effects are unlikely.”
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Coordinated Effects
Assess potential competitive problems from the merger
Will the merger enhance coordination in a concentrated industry?
How many sellers must we have for cartelization or tacit collusion to be difficult?
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45. Entry Contestable Market Theory
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Entry
Contestable Market Theory
Cannot judge market power by number of actual sellers
Potential entry make exert substantial control over prices
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46. Efficiency Benefits Merger-specific efficiencies Market by Market
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Efficiency Benefits
Merger-specific efficiencies
Efficiencies that would not be achieved but for the merger
Market by Market
Assess each market, and challenge if anti-competitive in any market
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47. 11/14/2018
Efficiency Benefits
Not: assess net gains, net costs and go forward if gains exceed costs
But: restructure in harmed markets to solve problem
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