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Unilateral Effects

Federal Trade Commission and Justice Department
Merger Workshop
February 18, 2004

Joseph Kattan
Gibson, Dunn & Crutcher LLP
Washington, DC


The Insight of the 1992 Guidelines

  • New insight of 1992 guidelines is that unilateral effects can arise outside monopoly context
    • Daimler-Chrysler not the same as Daimler-BMW
    • Return to sub-markets?
  • Most important change in merger law since 1982 Merger Guidelines
  • Synthesis of economic theory and practical judgment about merger investigations
  • Profound impact on merger enforcement


What the Guidelines Say

  • Focus is on localized competition where “individual sellers compete more directly with those rivals selling closer substitutes”
  • Requires “a significant share of sales” to “consumers who regard the products of the merging firms as their first and second choices”
  • 35% screen for merged entity’s market share
  • Pragmatic tests reflecting quality of analytical tools available in merger investigations


The Lawyer’s Approach

  • The lawyer’s approach focuses on defining markets and identifying next best substitutes
  • Why? That’s what the Guidelines say
  • Analysis driven by interviews and documents
    • Too many documents
  • The economist’s critique: Lawyers use models but don’t articulate them sufficiently
  • 35% share screen and next-best substitutes analysis embody assumptions about the effects of cannibalization on merged firm’s incentives


The Economist’s Alternative

  • Economists are less tethered to the Guidelines
    • Institutional bias against the market definition-driven approach of the Merger Guidelines and case law
  • Attempt to get closer to the “real answer” through econometrics or merger simulations
    • Models with well-articulated specifications
  • Data is to economists what documents are to lawyers
    • Both want too much
  • The jargon of dead Frenchmen


The Role of Simulations

  • Modeling and simulations can be useful if sufficiently attuned to market realities and based on defensible assumptions
  • Small differences in assumptions can often make big differences in results
  • What are we trying to show?
    • Magnitude of price increase?
    • Whether to get to next step of analysis?
  • The risk of false empiricism


Some Issues With Simulations

  • Merger simulations are likely to find more problematic mergers than the lawyer’s approach
  • Models are designed to predict a price increase
    • How does the plaintiff’s expert defend a model that predicts a price increase for safe harbor mergers?
  • Economist’s retort: “But this is before entry, repositioning, and efficiencies are considered”
    • That still means shifting the burden of proof to the merging parties


More Issues With Simulations

  • What happens to next-best substitutes in a world of logit models?
    • IIA assumption of identical cross-elasticities of all products with respect to a given product
  • More complex models impose great costs and have insatiable appetite for data
    • Issues with retail-level data as proxy for wholesale competition
    • Assumptions regarding elasticities over relevant range
  • Do models follow the Guidelines?
    • Source of anticompetitive unilateral effects
    • Burden of proof


Another Burden of Merger Review

  • Even proponents concede that modeling can be very expensive but may yield little of value
    • Costly for parties to get data, clean it up for economists, and analyze it
  • Scheffman critique raises valid implementation and theoretical issues
  • Reassuring to read Froeb critique of $100,000 rebuttal report
  • Merger proponents forced to perform defensive modeling