Understanding Horizontal Mergers and Antitrust Laws

 
Chapter 6
Horizontal Mergers
 
Horizontal merger: when some firms in the same market (that is, competitors)
combine to form one company
 
Vertical merger: when two firms with potential or actual buyer-seller relationships
combine to form one company
 
Conglomerate merger: a merger that is neither horizontal nor vertical
Product extension merger: the combination of firms that sell noncompeting products but use
related marketing channels or production processes
Market extension merger: the joining of two firms selling the same product but in separate
geographic markets
“Pure” merger: merger between firms with no obvious relationships of any kind
 
 
Antitrust Laws and Merger Trends
 
The interdependence between antitrust law and the trend of mergers in the United
States
 
The six U.S. merger waves
1) Merger for monopoly
2) Mergers to oligopoly
3) Conglomerate merger
4) The rise in the annual value of acquisitions
5) The volume of acquisitions in this wave exceeded that of even the first wave
6) International wave that was cut short by the 2008 world financial crisis
 
 
 
Characteristics of the Six U.S. Merger Waves
 
The Effects of Horizontal Mergers
 
It is generally believed that mergers take place because they are profitable
 
Higher profit can come from two general sources: market power and efficiencies
 
 
 
 
 
Why Firms Merge
 
Unilateral effect: when a merged firm, acting on its own, reduces output and raises
price
 
Coordinated effect: when a merged firm raises price in conjunction with rival firms by
engaging in some form of collusion
 
 
 
 
Why Firms Merge
Market power
 
Review the analysis of the unilateral effect of a merger on a price by using the Cournot
model from chapter 4
 
Collusion is intended to raise the price-cost margin above the competitive level
 
Coordination is generally recognized to be easier when fewer firms are involved
 
 
Why Firms Merge
Efficiencies
 
The virtuous side to a merger is that greater efficiencies are reflected in lower costs as
well as better products, more innovation, etc.
 
Two broad categories of cost savings: pecuniary and real
 
A merged firm can coordinate output across plants so as to reduce total cost
 
A more efficient allocation of production cannot lower prices even when the merged
firm optimally adjusts its total quantity, but a merger can have economies of scope by
combining product lines or production processes, which reduces costs and enhances
productivity
 
 
 
Welfare Analysis
 
The merit of a merger depends in part on the welfare criterion that is employed to
evaluate mergers
 
The welfare standard used in the U.S. is consumer surplus
 
A merger for which the decrease in cost is comparable in size to the increase in price
will always raise welfare
 
Can we infer anything about the welfare effect of a proposed merger if competitors
are challenging it?
 
 
 
 
 
 
Merger Law and Enforcement
Merger Evaluation: Activity and Procedures
 
Consider the government’s role in evaluating prospective mergers
 
Discuss the “before” and “after” strategies as to when competition policy with regard
to mergers could be conducted
 
Second Requests and remedies
 
Agencies can approve a merger, or, in rare cases, a merger can be outright prohibited
 
 
 
Development of Merger Law and Policy
Era of structural presumption
 
Review the 1962 case 
Brown Shoe Company v. United States
 
The structural presumption era
 
 
 
 
 
 
 
 
Development of Merger Law and Policy
Rise of the Chicago school of antitrust and the merger guidelines
 
What was so striking about the structural presumption era is not just that mergers
involving relatively low market shares were prohibited but that other evidence
suggesting the market would remain highly competitive could rarely rebut it
 
Consider the Supreme Court’s 1974 decision in the 
United States v. General Dynamics
Corp. 
case
 
 
 
 
 
 
 
Practices for Evaluating a Merger
Market definition and the SSNIP test
 
The 1982 Merger Guidelines
 
The SSNIP test
 
Market power is a continuous variable—there is no magical way to determine a market
without incorporating some standard
 
The ultimate problem with market definition is that it defines a firm as “in” or “out”
when the reality is more subtle
 
 
 
 
 
Practices for Evaluating a Merger
Upward pricing pressure
 
Consider the market competition between Proctor & Gamble’s Crest and Colgate-
Palmolive’s Colgate that has existed since 1953
 
Vocabulary
Diversion ratio
The price-cost margin
The upward pricing pressure (UPP)
 
UPP is part of the 2010 Merger Guidelines and has been used as an initial screen to
assess whether there might be significant unilateral effects
 
 
 
Practices for Evaluating a Merger
Methods for estimating postmerger prices
 
UPP is a useful screen for identifying points of concern warranting a more extensive
analysis
 
The market comparison method uses premerger markets to predict what the
postmerger environment would look like
 
Merger stimulation: the second approach to estimating the impact of a merger on
prices
 
 
 
Practices for Evaluating a Merger
Coordinated effects
 
Coordinated effects can be relevant when a market has conditions conducive to
collusion or has experienced or attempted collusion in the past
 
Consider the first case in which the EC objected to a merger on grounds of coordinated
effects (or “collective dominance”) involving the French bottled water market
 
 
 
 
Practices for Evaluating a Merger
Entry conditions
 
Even when there is the prospect of unilateral or coordinated effects, a merger could be
approved because it is believed that the threat of entry will either deter price
increases, or if it did not, entry would occur to drive price back down
 
Entry considerations can also provide a rationale for prohibiting a merger between
firms that are not competitors, on the grounds that the merger would eliminate a
potential competitor and thereby make the market less competitive
 
 
 
 
 
International Issues
 
One source of differences among many competition authorities that review and
control mergers is the standard used to judge whether a merger ought to be approved
or blocked
 
For global companies, the abundance of competition laws means having to gain the
approval of multiple competition authorities when seeking to merge
 
Consider the proposed purchase of McDonnell Douglas (MD) by Boeing in 1996
 
 
 
 
 
Summary
 
This chapter covered the incentives to merge, how such mergers may impact social
welfare, and the policy challenges faced when analyzing them
 
Also discussed was the evolution of antitrust law and policy, merger policy, and the
economic methods for measuring the unilateral effects of a merger
 
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Explore the concept of horizontal mergers and various types of mergers like vertical and conglomerate with real-world examples. Learn about the impact of mergers on market dynamics, profitability, and reasons why firms merge. Dive into the interplay between antitrust laws and merger trends, uncovering the effects of mergers on market power and efficiencies.


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  1. Chapter 6 Horizontal Mergers

  2. Horizontal merger: when some firms in the same market (that is, competitors) combine to form one company Vertical merger: when two firms with potential or actual buyer-seller relationships combine to form one company Conglomerate merger: a merger that is neither horizontal nor vertical Product extension merger: the combination of firms that sell noncompeting products but use related marketing channels or production processes Market extension merger: the joining of two firms selling the same product but in separate geographic markets Pure merger: merger between firms with no obvious relationships of any kind

  3. Antitrust Laws and Merger Trends The interdependence between antitrust law and the trend of mergers in the United States The six U.S. merger waves 1) Merger for monopoly 2) Mergers to oligopoly 3) Conglomerate merger 4) The rise in the annual value of acquisitions 5) The volume of acquisitions in this wave exceeded that of even the first wave 6) International wave that was cut short by the 2008 world financial crisis

  4. Characteristics of the Six U.S. Merger Waves

  5. The Effects of Horizontal Mergers It is generally believed that mergers take place because they are profitable Higher profit can come from two general sources: market power and efficiencies

  6. Why Firms Merge Unilateral effect: when a merged firm, acting on its own, reduces output and raises price Coordinated effect: when a merged firm raises price in conjunction with rival firms by engaging in some form of collusion

  7. Why Firms Merge Market power Review the analysis of the unilateral effect of a merger on a price by using the Cournot model from chapter 4 Collusion is intended to raise the price-cost margin above the competitive level Coordination is generally recognized to be easier when fewer firms are involved

  8. Why Firms Merge Efficiencies The virtuous side to a merger is that greater efficiencies are reflected in lower costs as well as better products, more innovation, etc. Two broad categories of cost savings: pecuniary and real A merged firm can coordinate output across plants so as to reduce total cost A more efficient allocation of production cannot lower prices even when the merged firm optimally adjusts its total quantity, but a merger can have economies of scope by combining product lines or production processes, which reduces costs and enhances productivity

  9. Welfare Analysis The merit of a merger depends in part on the welfare criterion that is employed to evaluate mergers The welfare standard used in the U.S. is consumer surplus A merger for which the decrease in cost is comparable in size to the increase in price will always raise welfare Can we infer anything about the welfare effect of a proposed merger if competitors are challenging it?

  10. Merger Law and Enforcement Merger Evaluation: Activity and Procedures Consider the government s role in evaluating prospective mergers Discuss the before and after strategies as to when competition policy with regard to mergers could be conducted Second Requests and remedies Agencies can approve a merger, or, in rare cases, a merger can be outright prohibited

  11. Development of Merger Law and Policy Era of structural presumption Review the 1962 case Brown Shoe Company v. United States The structural presumption era

  12. Development of Merger Law and Policy Rise of the Chicago school of antitrust and the merger guidelines What was so striking about the structural presumption era is not just that mergers involving relatively low market shares were prohibited but that other evidence suggesting the market would remain highly competitive could rarely rebut it Consider the Supreme Court s 1974 decision in the United States v. General Dynamics Corp. case

  13. Practices for Evaluating a Merger Market definition and the SSNIP test The 1982 Merger Guidelines The SSNIP test Market power is a continuous variable there is no magical way to determine a market without incorporating some standard The ultimate problem with market definition is that it defines a firm as in or out when the reality is more subtle

  14. Practices for Evaluating a Merger Upward pricing pressure Consider the market competition between Proctor & Gamble s Crest and Colgate- Palmolive s Colgate that has existed since 1953 Vocabulary Diversion ratio The price-cost margin The upward pricing pressure (UPP) UPP is part of the 2010 Merger Guidelines and has been used as an initial screen to assess whether there might be significant unilateral effects

  15. Practices for Evaluating a Merger Methods for estimating postmerger prices UPP is a useful screen for identifying points of concern warranting a more extensive analysis The market comparison method uses premerger markets to predict what the postmerger environment would look like Merger stimulation: the second approach to estimating the impact of a merger on prices

  16. Practices for Evaluating a Merger Coordinated effects Coordinated effects can be relevant when a market has conditions conducive to collusion or has experienced or attempted collusion in the past Consider the first case in which the EC objected to a merger on grounds of coordinated effects (or collective dominance ) involving the French bottled water market

  17. Practices for Evaluating a Merger Entry conditions Even when there is the prospect of unilateral or coordinated effects, a merger could be approved because it is believed that the threat of entry will either deter price increases, or if it did not, entry would occur to drive price back down Entry considerations can also provide a rationale for prohibiting a merger between firms that are not competitors, on the grounds that the merger would eliminate a potential competitor and thereby make the market less competitive

  18. International Issues One source of differences among many competition authorities that review and control mergers is the standard used to judge whether a merger ought to be approved or blocked For global companies, the abundance of competition laws means having to gain the approval of multiple competition authorities when seeking to merge Consider the proposed purchase of McDonnell Douglas (MD) by Boeing in 1996

  19. Summary This chapter covered the incentives to merge, how such mergers may impact social welfare, and the policy challenges faced when analyzing them Also discussed was the evolution of antitrust law and policy, merger policy, and the economic methods for measuring the unilateral effects of a merger

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