Spotlight on Division Economists

Spotlight on Division Economists

Division Update Spring 2015

Economists from the Antitrust Division’s Economic Analysis Group (EAG) partner with lawyers on every civil investigation and litigation matter, and also assist on many Division prosecutions. EAG’s economists have made important contributions to many matters over the last year, and will be well-positioned to continue to do so as they will be joined by four new hires this summer. Division economists are serving more often as testifying experts in cases like U.S. and State of New York v. Twin America, LLC, et al. But, as always, EAG’s greatest contributions often occur behind the scenes—helping legal staff apply economics theory, develop economic evidence and testimony, and evaluate the economic logic of arguments made by outside parties. The following examples turn the spotlight, for the moment, on a few Division economists to illustrate what EAG routinely does behind the scenes.

Craig Peters—Learning from Past Airline Mergers

Dr. Craig Peters photo

Dr. Craig Peters

Before joining the Antitrust Division, Craig Peters had already done extensive scholarly work on airline mergers. His 2006 article Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry examined five mergers from the 1980s. Dr. Peters tested how price changes observed after those mergers compared to the effects that would have been predicted using various merger simulation techniques.

Since 2005, the airline industry has experienced another wave of consolidation and the Division has benefited from Dr. Peters’ expertise and knowledge of the industry. By studying the relationship between predictions and outcomes in recent mergers, Dr. Peters and other Division economists were able to help assess the likely effects of the 2013 US Airways-American Airlines merger. Dr. Peters was a key part of the team that challenged that merger.

That challenge ultimately led to a settlement that included significant divestitures of slots and gates to low cost carriers at key capacity-constrained airports across the country. Since those divestitures, Dr. Peters has worked with other Division economists to monitor the effect of those divestitures to better inform the Division’s enforcement efforts in this industry.

Robin Allen—Modeling Competition in Electricity Markets

Dr. Robin Allen photo

Dr. Robin Allen

One of the most prominent features of electricity deregulation in the 1990s was the shift to relying on market-style transactions between power generators and the companies delivering electricity to homes and businesses. Since the beginning of deregulation, the Antitrust Division has been analyzing these markets, led by Robin Allen’s work examining auctions for electric power. Energy auctions, which set prices that balance the expected demand for electricity against the costs of generating additional power, are common features of electricity markets. Because demand for electricity varies over time, some power plants—called “base load” capacity—run continuously, while others—known as “peak” capacity—are designed to turn on and off to accommodate demand spikes. While energy auctions are designed to set prices that encourage an appropriate balance between base-load and peak capacity, a merger between a firm with significant peak capacity and a firm with significant base-load capacity may distort the merged firm’s bidding behavior, leading to higher prices.

Dr. Allen has worked with her colleagues at the Division to develop methods to evaluate mergers in light of these concerns, and has mentored other economists to expand the Division’s expertise. This cooperative effort has enabled the Division to stay at the cutting edge of new developments in electricity markets and assess their implications for proposed mergers.

Gopal Das Varma—Identifying Competitive Effects in Forest Products

Dr. Gopal Das Varma photo

Dr. Gopal Das Varma

Over the years, the Antitrust Division has investigated numerous mergers affecting a wide range of products made from wood fiber, including oriented-strand board and fiberboard. These wood fiber products tend to share similar characteristics: Each tends to be made in geographically dispersed mills, subject to transportation costs that may be high relative to the value of the product, and priced according to individual contracts. Those contracts often are linked to industry publications that provide information about local prices, and sometimes future prices or capacity plans. But the relative importance of these factors depends on the products and merger in question.

In Flakeboard’s proposed acquisition of SierraPine, the Division turned to Gopal Das Varma to help sort out what factors were important to competition between the merging companies and what the merger might mean for consumers of medium-density fiberboard. Dr. Das Varma helped establish that transportation costs—especially the difference in transportation costs between a firm and the next closest competitor to the customer—played a significant role in the delivered price of MDF. Because Flakeboard and Sierra Pine produced MDF out of mills that were very close together in Oregon, and the next nearest mill was hundreds of miles away, this acquisition was particularly likely to increase prices for West Coast customers. Ultimately, in the face of the evidence that Dr. Das Varma and his colleagues assembled, the parties abandoned their plan to combine these mills.