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Efficiencies/Dynamic Analysis/Integrated Analysis

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 ...
Updated December 21, 2023