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Efficiencies/Dynamic Analysis/Integrated Analysis

David Scheffman*

LECG's logo

and

Owen Graduate School of Management

Vanderbilt University

February 2004


How Are the Agencies Doing?

  • Hard to tell given most “tough” efficiency cases do not usually get filed

  • Baby Food was not a “helpful” development

    • FTC should look closely at what has happened post-trial

    • However, the standards should be stringent (but not black letter) in a real 3-to-2 merger

  • Other cases?

    • Tank ammo


How Are the Agencies Doing?

  • But the importance of customer opinions in enforcement decisions is probably at least indirectly important in proper weighing of efficiencies in some investigations

    • For markets with sophisticated, representative customers, efficiencies are generally recognized (but indirectly through impact on customer opinions)

  • The problem is in cases that do not have sophisticated direct customers

    • Oil, Branded Products, Supermarkets, etc.

  • Need retrospectives focusing on efficiencies


How Does FTC Actually Deal With Efficiencies

  • Efficiencies can be important

    • In 2nd Request decision

    • In a “close” case

    • “Implicit” in Customer Opinions with sophisticated representative direct customers.

  • In effect, there is a sort of sliding scale in which the stronger the anticompetitive case the less weight efficiencies receive (but not weighing by magnitude of efficiencies vs. magnitude of anticompetitive effects)

  • In this weighing efficiencies are considered more generally than in Guidelines


How Does FTC Actually Deal With Efficiencies

  • Merger Guidelines Efficiency criteria are generally used as a litigation-oriented check list

    • Is anyone on the matter looking at – but are there real efficiencies here?

    • And if there is and they find some – is anyone listening?

  • One problem is lack of full testing of efficiency claims (parties often do not know what staff are thinking and why)

    • This is an area in which we need more transparency


Efficiencies Roundtable

  • We learned a lot through Efficiencies Roundtable

  • I think that we learned that:

    • Merger “Outcomes” are a mixed record, but to some extent not related to efficiencies

      • Leading reason for financial shortfalls is overpaying

      • Another important reason is unanticipated shortfalls in sales (“Revenue Dissynergies”)

        • Customer Opinions

    • Other things equal, horizontal mergers are more likely to be successful

    • “Straightforward Cost Savings” are generally realized

    • Merger Planning and Implementation is Important

      • Implications for “Gun Jumping”

      • Implications for what agencies should expect to find in investigation


Where/How Do Efficiencies “Fit”?

  • “Ideal Case”

    • Transaction driven by efficiencies


      Example:

      • Plant combinations will lead to higher capacity (e.g., combination of batch and continuous production processes)

      • Economics of production make reduction in capacity utilization not a viable theory

      • Efficiencies à merger is procompetitive

  • Most cases are not “ideal”

    • But efficiencies always belong at the beginning


Integrative Analysis

  • Judgments about market definition, competitive effects, barriers, and efficiencies are generally not certain – in some cases far from certain

  • Decision-making thus necessarily involves a compounding of probabilities

    • For example, if X, Y, & Z are independent, .the probability that they are all “right” = Px*Py*Pz


Integrative Analysis

  • Beyond compounding of probabilities, conclusions on market definition, competitive effects, barriers, and efficiencies are often interrelated

    • In practice, this is often not recognized – in particular once staff “decides” on market definition, that is treated as settled

    • However, the warts in the market definition or barriers evidence may be relevant to assessment of competitive effects

      • This was important in the Cruise Line Mergers – because empirical evidence was brought to bear that (for Staff and 3 Commissioners) rebutted theory


Integrative Analysis

  • Interrelationship between market definition and competitive effects may be particularly important on a specific competitor basis

    • Minimum Viable Cartel analysis
  • Obviously, as in our ideal case (and in Baby Food) the efficiencies are directly relevant to competitive effects analyses


What Efficiencies Should “Count”?

  • Incremental Costs/Pass Through” arguments have largely been sterile/fruitless and/or driven by litigation strategy

  • Fixed costs .(See http://www.ftc.gov/be/rt/presentationpanel4.pdf)

    • Are only fixed in “short” run

    • (Longer run) Fixed Costs clearly impact decisions on new product development, etc.

    • It has long been well known that many if not most companies use some version of “total” average cost (total or operations) in their decision making

      • This behavior is not irrational

      • May be consistent with long run profit maximization

      • Provides right managerial incentives


What Efficiencies Should “Count”?

    • Rather than (simple) economic theory, treatment of costs in actual financial documents (if clear) should be the guide as to how cost changes will impact decision making

      • Subject to inquiry re: how cost effects of merger will be accounted for
    • Internal cash flow is primary source of funds for most companies for investments in new products, technologies, etc.
  • Merger Specificity?

    • How long do we/consumers wait?


How Should Efficiencies “Count”?

  • More attention to where the extra cash flow goes/how cost savings impact decision making in companies’ financial analyses

    • In many markets suppliers make arguments to their customers on pricing based on profitability necessary to provide incentives for new innovations of importance to customers
  • Past track record should be important, including w.r.t. managerial efficiencies

  • Merger Specificity?


How Should Efficiencies “Count”?

  • “Simons Analysis”

    • May look complex but it is simpler than the sorts of analyses many companies actually do these days

      • Scenario and Risk Analyses

  • In any event, although the FTC and DOJ are clearly the experts in this area, their actual decision-making processes are too ad hoc

    • This is a problem that other agencies have confronted (e.g., EPA) and can also be the antitrust agencies.


“Dynamic Competition”

  • In the dot.com implosion there was a lot of consolidation that the agencies were probably too busy to deal with

    • A lot of 3-to-2 and 2-to-1 mergers

    • Many of these presented “true” dynamic competition issues

      • Short run competition impacted prices

      • But issue was how industry would consolidate and what would be effects

      • Apparent benefits to orderly consolidation through mergers

        • Preservation of people, IP, etc.

        • Potential benefits of sharing IP, choosing best features, etc.

        • Ability to fund survival

  • Agencies are not too busy any more ...

    • Monster/Hot Jobs

  • Other industries ...