Public Policy in Private
Markets
Merger Policy
Announcements
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Homework 4 due today
Debate # 2 next Tuesday, HW 5 due
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Debaters: video due to my on March 30th
(Friday)
Midterm grades have been posted, as
well as answer key (will discuss at the
end of class today)
Clicker issue still present for 4 students
Merger Law
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Important part of antitrust
3 types of mergers:
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Horizontal
Vertical
Conglomerate
Oracle acquires PeopleSoft
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Market definition:
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DOJ
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Geographic: US
Product: “high function enterprise” software
(customer testimony)
3 to 2 merger: post merger HHI > 1800 and
increased by more than 1000 points
Oracle
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Worldwide, based on LIFO and LOFI rules (i.e.
there was a lot of sales going abroad and a lot
of domestic sales coming from abroad).
Clicker questions
1.
What was the unilateral effects argument
used by the DOJ?
A.
B.
C.
D.
That advertising by the merging firms would
increase
That the merging firms would collude with the
non-merging firms after the merger
That customers of both merging and non-merging
firms would face higher prices as a result of the
merger
That customers of non-merging firms would face
higher prices after the merger
Oracle acquires PeopleSoft
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DOJ – showing unilateral effects:
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Statistical analysis of transactions data: Oracle
and PeopleSoft less likely to win auction when the
other is present
Price regressions: when PeopleSoft competes
with Oracle, Oracle offers a 9.7% greater price
discount.
Merger simulation: 5%-28% price increase
Oracle:
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Model is flawed, bargaining model is more
appropriate (instead of auction model)
Clicker questions
1.
How was merger simulation used by the DOJ?
A.
B.
C.
D.
DOJ interviewed customers and asked what they
thought the post-merger prices would be
DOJ forecasted the post-merger price based on a
time-series model
DOJ forecasted the post-merger prices based on an
economic model calibrated to reflect the industry in
the pre-merger period
DOJ forecasted the post-merger prices based on
the behavior of a control group (i.e. other firms in a
similar market) that resembled the post-merger
scenario
The role of merger simulation
1.
2.
3.
4.
Come up with an economic model that depicts
market (e.g. Cournot; in this case an auction
model)
Use data from market to “calibrate” model: i.e.
choose demand intercept, constant and supply
functions that are consistent with observed p and q
Use the calibrated model to remove one of the
firms from the market and recalculate p and q (the
simulated merger equilibrium)
Compare p in 3. v p in 2
Oracle acquires PeopleSoft
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The judge’s decision:
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Concentration (HHI) calculations were unreliable:
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Testimony for high-functioning products as the relevant product
market was unconvincing
LIFO and LOFI tests were more reliable (i.e. geographic market
was not only US).
DOJ failed to provide reliable evidence of
unilateral effects
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Failed to show that Oracle and Psoft were “closest”
competitors and that other competitors were poor
substitutes
Failed to show that product repositioning by other
competitors was not feasible
Merger Law
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Important part of antitrust
3 types of mergers:
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Horizontal
Vertical
Conglomerate
Vertical and Conglomerate Mergers
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Recall concerns:
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Vertical Mergers: Foreclosure and increased
barriers to entry
Conglomerate Mergers: entrenchment and
elimination of potential rivals
Based on DOJ’s Non-Horizontal Merger
Guidelines (last updated in 1987)
The most critical burden of proof here is
lessening of competition.
Vertical and Conglomerate Mergers
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Typical approach:
Is there market power at one level? Will market
power translate/increase in the integrated market?
Example:
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Lockheed-Martin proposed merger with Northrop
Grumman (1998, failed)
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$11.6 Billion, both aerospace companies
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Lockheed: military aircraft
Northrop: radars and electronics used in aircraft
Department of Defense main customer for both firms
DOJ challenges: Substantial lessening of
competition, in both upstream and downstream
mkts
Lockheed Northrop Merger
Northrop
4th largest defense contractor
In the world
Lockheed Martin
Largest defense contractor in the world
95% revenue from Department of
Defense
Northrop’s
Competitors
Lockheed’s
Competitors
Radars,
electronics
Military
Aircraft
Lockheed Northrop Merger
Northrop
Northrop’s
Competitors
Lockheed’s
Competitors
Lockheed Martin
Radars,
electronics
Military
Aircraft
Concerns:
1. New conglomerate will have a disproportionate % of contract $’s with government
2. Increased barriers to entry & possibility of foreclosure upstream and downstream
Non-Horizontal Merger Guidelines
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Set-up is fairly tolerant of vertical mergers
DOJ unlikely to challenge, unless HHI in the
acquired firm’s market is > 1,800
Less likely to challenge if:
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Entry into acquiring firm’ market is easy
3 or more firms in the acquiring firm’s market would
have equal advantage of entering the acquired
firm’s market
Acquired firm has small mkt share (< 5%)
Efficiencies from merger
Non-Horizontal Mergers
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Procter & Gamble – Clorox merger (1967)
Product extension merger, PG (54% of soaps
and detergents mkt), Clorox (49% of bleach
mkt)
Anticompetitive effects in liquid bleach mkt:
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Diminishing of potential competition (PG likely
entrant)
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Even if did not enter it limited Clorox’s behavior
Entrenchment: Adding PG’s size and marketing to
Clorox’s already powerful position may make any
future challenge very difficult
Non-Horizontal Mergers
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FTC challenges merger (ex-post)
District Court rules in favor of FTC
Court of Appeals reverses ruling
Supreme Court agrees with FTC’s opinion
and orders divestiture of Clorox
Non-Horizontal Mergers
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1980’s and 1990’s: large product extension
and pure conglomerate mergers:
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Nestle (large processed food manufacturer) Carnation (“cooking milk”)
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RJ Reynolds (tobacco) – Nabisco (snacks)
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Philip Morris (cigarettes/food) - General Foods
(cereals)
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Philip Morris-Kraft (food and beverages)
Non-Horizontal Mergers
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Example: Philip Morris-Kraft (1988)
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Total Sales after merger: $37.6 B; $11.5 B bid
Mostly product extension, with some overlap (frozen
foods)
PM: unrivaled position in dry and frozen food lines
Arguments for challenge:
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PM’s dominated shelf space, advertising, rebates,
promotional allowances; dominance into new market may
reduce competition
Lessening of competition: not as strong an argument as
Kraft was one of many competitors
Counterargument: economies of scale/efficiencies
Outcome: no challenge
Non-Horizontal Mergers
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More recently: Philip Morris-Nabisco (1999)
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Combined sales: $35 B
Mostly product extension merger (some horizontal)
Contentious issue.
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Horizontal segments in “individual” foods: crackers,
pudding, etc.
Merger allowed with divestiture of Nabisco brands:
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Dry mix gelatin: PM (86%), Nab (6%)
Dry mix pudding: PM (82%), Nab (9%)
No-bake desserts: PM (90%), Nab (6%)
Baking powder: PM (27%), Nab (17%)
Non-Horizontal Mergers
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1980’s and 1990’s: large market extension
mergers:
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Kroger-Dillon, 1983
American Stores-Jewel, 1984
American Stores-Lucky, 1988
All retailing/supermarket mergers
Agencies felt:
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Big enough queue of potential competitors
Little or no BTE
Non-Horizontal Mergers
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Main Points:
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Not all mergers are equal
Some mergers can have components of each of
the 3 types
Main concern for antitrust authorities is lessening
of competition
In general, non-horizontal mergers are frowned
upon less frequently than horizontal mergers
Grades
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Mean: 70
Median: 69
Max: 97.5
Min: 41.5
Answer key: posted. Please take a close look
at it. Assess whether grading was fair; only
then make a decision of whether re-grading is
a reasonable request.
Questions 1 and 3: partial credit for
seemingly “ambiguous” answers
Distribution
Clicker participation and HW pay off
75
40