Economic Analysis: Mergers That Increase Bargaining Leverage
Dr. Aviv Nevo
The Division is exploring the antitrust concerns that may be present when an industry is driven by negotiations over what is included in a bundle for sale. Deputy Assistant Attorney General for Economic Analysis Dr. Aviv Nevo discussed these issues in more detail in a January speech at the Stanford Institute for Economic Policy Research Conference on Antitrust in Highly Innovative Industries.
Many industries are characterized by bargaining between providers, who produce content or provide services, and distributors, who sell the products or services to final consumers as part of a bundle. Smartphones, for example, are a bundle of features made possible by agreements with numerous intellectual property (IP) holders. Health insurance plans typically bundle hospitals and physicians into a network. And cable companies bundle the content of different providers into a subscription service. The negotiations between providers and distributors that create these bundles are an increasingly important element of commerce. But, how well do economic models of these negotiations match up with some of the rules of thumb implicit in antitrust case law?
In the “typical” industry envisioned by most antitrust case law, a customer chooses to buy a product from one company or another. If one of those companies offers a better price, they might get the customer to substitute their product for a rival product. This leads to a straightforward notion of substitution, and implied competition, between rivals. But that is not the only form competitive rivalry can take. A customer who wants to assemble a bundle of products can also benefit from competition.
There are numerous examples of would-be participants in a bundle competing not to be left out. Some features may be fundamental to a smartphone, but some have to be considered more marginal. Each one would be nice to have, but eventually additional features do not make the smartphone more attractive to consumers. In that setting, economic theory suggests that there should be competition between feature providers driven by the threat that, if any one of them demands too much, the smartphone would license the IP to some other combination of features, which would yield the same likelihood of selling the smartphone. Just as in the “typical” industry there is a competitive rivalry, but here it is the competition not to be left out of the bundle.
Another interesting wrinkle in these bundle negotiations is that pieces of the bundle may be more substitutable for the distributor than they appear to be for end customers. For example, some features on a smartphone might appeal to teenagers while their parents value other features. If the IP to include one of these features were too expensive, the smartphone might end up targeted at one demographic or another. Economic theory suggests that the substitution of one group for another that the smartphone maker is considering in that situation might discipline prices of the IP even though the two sets of features conceivably do not have any users in common.
So, how then should we measure substitution and what does share mean when every bundler may be dealing with every provider? And when might a merger’s elimination of competition not to be excluded pose a significant problem? In technical terms, the effect of a merger in this situation depends on the curvature of the net gain from an agreement. If this function is concave—the incremental gain from adding a provider decreases—then a merger will increase price. That suggests we focus on a measure of incremental gains in the underlying negotiations. But, whether and how such a measure can be implemented effectively for merger review is worth further discussion.