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Strengthening the Micro Foundations for Coordinated Interaction in Merger Analysis




Charles River Associates' logo Andrew R. Dick
Vice President


Updated Approach to Coordinated Interaction

  • DOJ and FTC initiatives to modernize CI analysis

  • Moving from probabilistic statements to fact-specific inquiries

  • Stylized facts / correlations to micro-economic foundations

  • Theories focused on maverick firms, competitor asymmetries, and opportunities for mavericks to disrupt CI

  • Recent examples: label stock (DOJ), cruise lines (FTC)


Two Areas Warranting Further Analysis

I. Should history matter, and if so, how?

II. How will a merger affect transparency?


Three Steps

Reality check

  • Does the general phenomenon apply in the specific market?

Micro-economic foundations

  • How does the merger affect the phenomenon?

Sensitivity check

  • How big is the effect ?


I. Should History Matter, And If So, How?

  • In practice, courts have placed substantial weight on history
    • History of price-fixing (FTC v. Elders Grain)
    • History of tacit coordination (FTC v. Cardinal Health)
    • History of price leadership (FTC v. H.J. Heinz)
    • History of cooperation in general (Hospital Corp. of America v. FTC)

  • History has shaped how agencies have heard evidence and influenced where they have set the bar

  • These approaches appear to be guided by correlations, rather than micro-economic theory

  • History used as a summary statistic for unobservables


Reality Check

  • Empirical evidence is very mixed

  • Seemingly low recidivism rates in time series studies (Dick JLE 1996)

  • Recidivists tend to be shorter-lived (Dick JLE 1996)

  • But, some case studies do suggest learning by doing (Baker JLE 1989 and Alexander REStat 1994)


Micro-economic Foundations for History

  • Agencies must ask: “Has history mattered in this market?” and “How will history affect CI after this proposed merger?”

  • Empirical evidence that history has mattered
    • E.g., CI continued after the demise of suspect practices

  • Incorporation of micro-economics of history into the specific competitive effects theory
    • History can help build current understandings
    • History can reveal firms’ “types”
    • History can “teach” firms how to coordinate
    • History can improve the accuracy of current and future monitoring


Sensitivity Check

  • Have “salient characteristics of the market changed appreciably” since the historical episode? (HMG §2.1)
    • Has entry occurred ?
    • Has the geographic market broadened ?
    • Have power buyers emerged ?
    • Have capacity constraints been relaxed ?


II. How Will a Merger Affect Transparency?

  • Courts give substantial weight to transparency
    • “Secrecy is the antithesis of successful collusion” (US v. ADM)

  • Agencies also highlight transparency
    • Relevant factors include “the availability of key information concerning market conditions, transactions and individual competitors” (HMG § 2.1)

  • Intuition: transparency improves reaching terms of coordination, detecting deviations, and punishing deviations


Reality Check

  • How accurate is competitor intelligence?
    • Compare merging parties’ actual prices against pre-merger intelligence
    • Compare prices against third-party industry intelligence

  • Have changes in transparency led to changes in pricing?
    • Danish antitrust agency published cement transaction prices, leading average prices to rise 15-20% (Albaek, Molgaard & Overgaard JIE, 1997)

  • Have transaction prices closely tracked announced prices?
    • In US v. ADM, court noted that while price changes were routinely pre-announced, transaction prices differed substantially.


Micro-economic Foundations for Transparency

  • Explain how this merger will increase transparency
    • E.g., Premdor-Masonite CIS (DOJ)

  • Transparency of what ?
    • Direct information: strategy choices (price, output) ?
    • Indirect information: payoffs (profits, market shares) ?

  • Discount appropriately for strategic customers and signal jamming incentives


Sensitivity Check

  • How much better informed will merging parties (or other firms) be after the merger?

  • Can we quantify the merger’s impact on the signal-to-noise ratio?


Should History Matter, And If So, How?

  • Courts have placed substantial weight on history

  • History shapes how agencies hear evidence and where they set the bar

  • History has been used as a summary statistic for unobservable factors

  • Reality check: empirical evidence is very mixed

  • Goal: incorporate micro-foundations for history into the competitive effects theory


How Will a Merger Affect Transparency?

  • Courts and agencies give substantial weight to transparency

  • Intuition: transparency improves reaching terms of coordination, detecting deviations, and punishing deviations

  • Reality check: how good is the evidence in fact?

  • Goal: explain how this merger will increase transparency