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MERGERS Clayton 7 as amended by the Celler-Kefauver Act: “No corporation engaged in commerce shall acquire… the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of 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. NOTE: -”in any line of commerce” refers to the market for a product (prosecution can use ANY market) -”in any section of the country” refers to the geographic extent of the market -”substantially” implies that a rule of reason should be used -”may be to” and “tend” suggest that a lessening of competition need not have occurred but that a reasonable probability must exist that competition will be lessened in the future. Types of Mergers 1. Horizontal Mergers: mergers between competitors 2. Vertical Mergers: mergers between buyers and sellers of the same good 3. Conglomerate Mergers a. Market extension: merging with a firm producing the same product in a different (geographic) market b. Product extension: merging with a firm producing a product in the same product line within the same market c. Pure Conglomerate merger: merging with a firm producing an entirely different, unrelated product Economically Valuable Effects of Mergers Economies of Scale Economies of Scope Pecuniary efficiencies (eg. quantity discounts) Diversification (elimination of risk) Stimulating Management to be more efficient (with the threat of takeover) Eliminating dynamic inefficiencies (eg. vertical mergers eliminate cycles) Salvaging failing firms with more efficient managements or greater economic viability Efficiencies: Dept. of Justice Viewpoint Efficiencies generated through merger can enhance the merged firm's ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products. For example, merger-generated efficiencies may enhance competition by permitting two ineffective (e.g., high cost) competitors to become one effective (e.g., lower cost) competitor. In a coordinated interaction context (see Section 2.1), marginal cost reductions may make coordination less likely or effective by enhancing the incentive of a maverick to lower price or by creating a new maverick firm. In a unilateral effects context (see Section 2.2), marginal cost reductions may reduce the merged firm's incentive to elevate price. Efficiencies also may result in benefits in the form of new or improved products, and efficiencies may result in benefits even when price is not immediately and directly affected. http://www.usdoj.gov/atr/public/guidelines/hmg.htm#11 Weighing Efficiencies Against Competitive Effects: Dept. of Justice Viewpoint …the Agency considers whether cognizable efficiencies likely would be sufficient to reverse the merger's potential to harm consumers in the relevant market, e.g., by preventing price increases in that market. … The greater the potential adverse competitive effect of a merger--as indicated by the increase in the HHI and post-merger HHI …, the analysis of potential adverse competitive effects…, and the timeliness, likelihood, and sufficiency of entry …-the greater must be cognizable efficiencies in order for the Agency to conclude that the merger will not have an anticompetitive effect in the relevant market. Procedure for Bringing an Antitrust Case 1. Defining the product market and any appropriate submarket 2. Defining the geographic extent of the market 3. Showing the probability of lessening competition 4. Determining whether a failing firm, de minimis or other defense might apply Horizontal Mergers Legal: A quantitative basis is used to determine the probability of lessening competition: “trend to monopoly” can be shown by changes in Herfindahl index (HHI) in an industry HHI is used to determine whether a merger has anticompetitive potential Philadelphia National Bank was a key case where application of above criteria resulted in a nearly per se proscription of horizontal mergers Economies of scale is not a defense Economic: Horizontal mergers lessen the number of firms, increase market power, and may make conspiracy easier. DOJ General Standards for Horizontal Mergers "In evaluating horizontal mergers, the Agency will consider both the post-merger market concentration and the increase in concentration resulting from the merger. a) Post-Merger HHI Below 1000. "unconcentrated" •"require no further analysis." b) Post-Merger HHI Between 1000 and 1800. "moderately concentrated." •" Mergers producing an increase in the HHI of more than 100 points in moderately concentrated markets post-merger potentially raise significant competitive concerns". .. c) Post-Merger HHI Above 1800. "highly concentrated." •"Mergers producing an increase in the HHI of more than 50 points in highly concentrated markets • post-merger potentially raise significant competitive concerns…." •"Where the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise." •"The presumption may be overcome by a showing that factors …make it unlikely that the merger will create or enhance market power or facilitate its exercise, in light of market concentration and market shares“ http://www.usdoj.gov/atr/public/guidelines/hmg.htm#11 Vertical Mergers Legal: Cases can be brought if there exists: a trend to vertical integration, substantial foreclosure of a market, or increasing barriers to entry after the merger Brown Shoe is the first and they key case for proscribing such mergers. Economic: Vertical mergers are likely to increase minimum efficient Scale and other barriers to entry. It thins markets (forecloses markets). It may also trigger a merger wave in an industry Example: oil companies, media companies, drug companies Conglomerate Mergers Legal: Cases may be brought against mergers by large (top 200) firms, by dominant firms where there are clear reciprocity effects, and where there is elimination of a potential entrant. Economic: Conglomerate mergers o may open up reciprocity possibilities between firms, o may cause forbearance from competition between conglomerates (Consolidated Food), o may allow a firm to cross subsidize its operations to protect it from competition, o reap advantages of size (eg. advertising discounts), o entrench the firm, and o may eliminate a potential entrant into an industry