Horizontal Mergers

Question 1

What is the Williamson (1968) tradeoff?

Answer 1

A merger can be welfare enhancing if there are sufficient efficiency gains

However, nowadays the CMA only looks at the effect on consumer surplus

Question 2

What happens to Consumer welfare when a duopolist with homogeneous products merges?

Answer 2

The consumer welfare falls as the new firm increases its prices to the monopoly level

Question 3

Why do the competition authorities now only look at consumer surplus rather than total welfare change?

Answer 3

1. It is easier to calculate consumer surplus than total welfare change
2. Consumers are much smaller than a firm and so need help, whereas firms can look after themselves

Question 4

What is the merger paradox?

Answer 4

The merging parties do not actually increase their profits as a result of the merge

Question 5

What is an Anticompetitive Merger?

Answer 5

A Substantial Lessening of Effective Competition (SLEC)

(just SLC in the UK)

Question 6

What are the potential anticompetitive effects? (4)

Answer 6

Unilateral Effects, Coordinated Effect, Conglomerate Effects, Vertical Effects

Question 7

What is a unilateral effect?

Answer 7

A merger is likely to increase prices noncooperatively

Question 8

What is a coordinated effect?

Answer 8

A merger may increase the likelihood of tacit collusion

Question 9

What is a conglomerate effect?

Answer 9

A merger brings together a portfolio of complementary products which, when bundled together, may foreclose rivals without full range

Question 10

What is a vertical effect?

Answer 10

A merger may foreclose rivals in a downstream market

Question 11

What are the common defences firms use when accused of anticompetitive mergers? (3)

Answer 11

Usual line, Efficiency defence, Failing firm defence

Question 12

What is the usual line defence?

Answer 12

Low entry barriers and/or the market is defined too narrowly (widely)

Question 13

What is the efficiency defence?

Answer 13

Expected marginal cost savings would lower prices

Question 14

What is the failing firm defence?

Answer 14

One of the parties claims it would exit without a merger

Question 15

What solutions are there to anticompetitive mergers? (2)

Answer 15

Prohibition and Remedies (Structural or Behavioural)

Question 16

What is prohibition?

Answer 16

The market authority stops the merger from taking place at all (i.e. Sainsburys and Asda)

Blunt tool, so although the downsides are stopped, none of the upsides are retained either (i.e. increased welfare)

Question 17

What are remedies?

Answer 17

The merger is allowed to go through as long as the firms meet certain conditions post merger

These can be structural or behavioural

Question 18

What is a structural remedy?

Answer 18

The firm is forced to sell off some of its assets to prevent the anticompetitive effects

These are used much more than behavioural remedies because the competition authority doesn’t need to monitor the firm as closely

Question 19

What is a behavioural remedy?

Answer 19

The firm is told to behave in certain ways to prevent anticompetitive effect

Question 20

Why may the remedial approach not be socially optimal? (3)

Answer 20

Type 1 - it is too harsh and eliminates efficiencies

Type 2 - it is too lenient and anticompetitive effects remain

-Investigations may delay mergers and require substantial resources

Question 21

What is Single Dominance?

Answer 21

Where the largest firm can unilaterally raise prices

Question 22

What is Collective Dominance?

Answer 22

Where firms can collectively raise prices through collusion

Question 23

What are the two phases of the bargaining process in the merger investigation?

Answer 23

Phase 1 is a short sharp look at the merger (this can last about 6 weeks). If issues aren’t sorted in this time then the merger can be referred to phase 2

Phase 2 gives the agencies an indefinite amount of time to look at the merger

Question 24

What happens if the issues aren’t sorted after phase 2?

Answer 24

The merger is prohibited

Question 25

How does the European Commission screen for anticompetitive mergers?

Answer 25

They look at the post-merger market shares (assumed to be the sum of the pre-merger market shares)

Question 26

What are the 3 assessments of post-merger market shares?

Answer 26

Safe Havens: combined market shares does not exceed 25%

Dominant Position: Very large market shares - 50% or more

40% Threshold: “between 40% and 50%, & in some cases below 40%, to lead to the creation or the strengthening of a dominant position”

Question 27

How does the US assess post-merger market power?

Answer 27

Through the HHI (Herfindahl-Hirschman Index)

Question 28

How do we calculate ∆HHI?

Answer 28

2s₁s₂

(simplified from HHIpost - HHIpre)

Question 29

What value of ∆HHI is of potential concern to the US DoJ?

Answer 29

Greater than 100 points

Question 30

What does the US DoJ consider a moderately concentrated market?

Answer 30

A post-merger HHI between 1500 and 2500
Any HHI above 2500 is highly concentrated

Question 31

What are the assumptions of the Equilibrium Analysis in Cournot Framework? (3)

Answer 31

1. There are n≥1 firms competing in quantities
2. Constant marginal costs c≥0 and fixed costs f=0
3. Suppose there is linear demand: P=A-BQ where A > c

Question 32

What is the inverse demand for the firm?

Answer 32

P = A - B[Q(-i)+q(i)]

Question 33

What are the profits of firm i given its rival produces Q(-i)?

Answer 33

π[q(i),Q(-i)] = (P-c)q(i) = (A - B[Q(-i) + q(i)] - c)q(i)

Question 34

How do we solve for Nash equilibrium?

Answer 34

q(i) = q(N), Q(-i) = 2q(N) (because we assume there are three firms in the market all with q(N), so Q(-i) is q(2) + q(3) = 2q(N))

Then put this into the formula for the BRF (through differentiation) q

(N) = [1-2q(N)]/2 2q(N) = 1-2q(N)

q(N) = 1/4

Question 35

What is the Welfare in the market (pre-merger)?

Answer 35

Q = 3q(N) = 3/4 (because Q = q(1) + q(2) + q(3))

P = 1-Q = 1/4

π(N) = Pq(N) = 1/4*1/4 = 1/16

Question 36

What is the necessary and sufficient condition for Nash equilibrium in quantities?

Answer 36

Each firm must not want to change their quantity supplied, given quantity of others

Question 37

What is the effect on profits if firm i increases its quantity in Cournot?

Answer 37

πi ↑ because it sells another unit of output

πi ↓ because it lowers the market price to do so

Question 38

What is the Best Response Function of firm i in Cournot?

Answer 38

It occurs where δπi/δqi = A - BQ-i - 2Bqi - c = 0

qi = A-c/2B - Q-i/2

Question 39

What are the implications of this equilibrium in Cournot? (4)

Answer 39

• firm i’s quantity falls as rivals produce more (qi↓ Q-i↑)
• firm i’s quantity rises as demand rises (demand is A) (qi↑ A↑)
• firm i’s quantity falls for lower demand (qi↓ B↑)
• firm i’s quantity falls as marginal cost rises (qi↓ c↑)

Question 40

What is the output of the rival firms in Cournot Nash equilibrium?

Answer 40

(n - 1)q^N

Question 41

What is the value of q^N when its rival produces (n-1)q^N?

Answer 41

qN = A-c/2B - (n-1)qN/2

this simplifies to:

qN = A-c/B(1+n)

Question 42

What is the price with this value q^N?

Answer 42

P = A - B(Q^N_-i + q^N) = A - n(A-c)/n+1 = A+nc/n+1

Question 43

What is the Cournot paradox in the merger model?

Answer 43

• Two firms merge and they reduce their joint output to exploit new market power
• rivals increase their output (which undermines the effect of the merger) [see diagram in lecture for BRF of insider/outsider]
• Only a merger to monopoly is privately optimal!

Question 44

What is the Bertrand paradox in the merger model? (with homogeneous products)

Answer 44

• firms receive zero profit before the merger
• firms receive zero profit after the merger

Question 45

How does the Bertrand model with differentiated products solve the merger paradox?

Answer 45

• when two firms merge they increase price to exploit market power
• rivals increase their price (which strengthens the effect of the merger)

Question 46

What is the Merger Paradox?

Answer 46