Efficiencies/Dynamic Analysis/Integrated Analysis

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 2^nd 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” = P_x*P_y*P_z

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 ...