Review: Lectures 11.1, 11.2 and 12.1 market definition and horizontal mergers

1. Antitrust Economics 2013 Alexis G. Pirchio CPI Elisa Mariscal CIDE, Global Economics Group Review: Lectures 11.1, 11.2 and 12.1 market definition and horizontal mergers Review 17 October 2013 Date

2. Overview

3. Role of Market Definition

4. Market Definition and Market Power

5. Market Definition and Context F G Firms in the market A, B, C, D, E H Firms outside of the market: F, G, H, …

6. Hypothetical Monopolist Test

7. How to Proceed? Demand-side then supply-side Potential substitute products Candidate Market 1 A B  C  2 Demand-side A+B+C D X A+B+C 3 S1  Supply-side A+B+C+S1 S2 X

8. Critical Loss Analysis is a Method for Implementing SSNIP Test in Practice Price Profit = ($20 - $10) x 100 = $1,000 $20 $10 MC Quantity 100

9. Critical Loss Analysis is a Method for Implementing SSNIP Test in Practice Price Profit = ($20 - $10) x 100 = $1,000 $22 Profit = ($22 - $10) x 83.33 = $999.96 $20 $10 MC Quantity 100 83.33 If fewer than 16.7 units of sales switch than a 10% price increase is profitable

10. Critical Loss Analysis Depends on Customer Switching—an Example of a Calculation

11. Comparison of Actual Versus Critical Loss Determines if Market is Large Enough to be Monopolized. Actual loss greater than critical loss Implies price increase is unprofitable so assumed “market” can’t be profitably Monopolized and is therefore too small. Actual loss less than Critical Loss implies that price increase is profitable so assumed “market” can be profitably monopolized. Market is therefore at least this narrow. Critical Loss

12. Competitive Constraints and Two-Sided Market Definition

13. The “Other” Side Acts as a Price Constraint

14. Avoid Excluding One Side of the Platform From Analysis

15. Single-Sided Market Definition Tools Don’t Apply

16. Key Lesson: Avoid Approaches that Result in the Exclusion of a Customer Side from the Analysis

17. Legal and Economic Background on Mergers

18. Horizontal vs. Vertical Mergers Horizontal merger of B and C in market of A, B, and C which have substitutable products C A B f e Vertical merger of A and f where f supplies a downstream service to A.

19. Possible Benefits of Mergers

20. Possible Harm from Mergers

21. Example of Calculating HHI and Change in HHI • HHI (Pre) = 502 + 252 + 152 + 102 = 3450 • HHI (Post) = 502 + 352+ 152= 3950 • Change in HHI = 500

22. HHI Investigate? < 1,000 NO > 1,000 and <1,800 YES IF  HHI > 100 NO OTHERWISE > 1,800 YES IF  HHI > 50 NO OTHERWISE OFT’s Merger Guidelines HHI and Change in HHI Serve as Screening Devices

23. Unilateral vs. Coordinated Effects

24. Mergers are presumed to be pro-competitive

25. Merger of Firms in an Oligopoly Industrywith Homogeneous Demand P D(P) MONOPOLY PM COURNOT PCOURNOT COMPETITION MC Q qMA,B Q COURNOT qC

26. Consequences of a Reduction in the Number of Firms with Homogeneous Products Basic economic theory shows that reducing the number of firms results in higher prices (Cournot Model) P D(P) PM MONOPOLY N = 2 N = 3 MC N = 4 COMPETITION Q qM qC

27. Efficiencies and Merger to Monopoly Surplus transferred from consumers to producers Consider also when marginal cost decreases from $3.00 to $2.50 Surplus from cost savings Dead Weight Loss PPost Pre-merger Marginal Cost PPre Post-merger Marginal Cost Demand QPost QPre MR In this example price to consumers increases and social welfare declines less than consumer welfare because of efficiencies.

28. Efficiencies and Merger to Monopoly Surplus transferred from consumers to producers Consider also when marginal cost decreases from $3.00 to $1.50 Surplus from cost savings Dead Weight Loss PPost Pre-merger Marginal Cost PPre Post-merger Marginal Cost Demand QPost QPre MR

29. End of Review, Next Class Topic 12.2