This conference summary was written by Matias Escudero and Matthew Leisten.
On September 21-22, 2018, the Searle Center at Northwestern hosted its Eleventh Annual Conference on Antitrust Economics and Competition Policy. The conference brought together a diverse range of participants including academics, government officials, industry economists, and legal professionals. The topics covered included the effect of acquisitions on startup projects, tractable analysis of mergers in multiproduct oligopoly, the potential for coordination after mergers, common ownership by institutional investors, antitrust remedies for monopsony power, competition policy and innovation, and product repositioning after mergers.
Florian Ederer (Yale University School of Management, Killer Acquisitions) presented an empirical study of acquisitions in the pharmaceutical industry. The authors develop a model in which an incumbent firm may acquire a startup firm in order to preempt future competition by discontinuing the startup’s projects. The incumbent has stronger incentives to terminate the project it acquires when it faces weaker current or expected future competition in that particular market. The authors then corroborate this prediction using data from the pharmaceutical industry. Pharmaceutical projects are more likely to be discontinued after being acquired if the acquiring firm already offers substitute products, and this effect is stronger in markets deemed less competitive because they have fewer incumbent products. The authors conclude that 6.4 percent of acquisitions in their data are motivated by the incentive to kill future competition.
Volker Nocke (University of California, Los Angeles, An Aggregative Games Approach to Merger Analysis in Multiproduct Oligopoly) presented a theoretical framework to evaluate horizontal mergers between oligopolistic multiproduct firms. Under certain assumptions on product substitution and ownership patterns, a firm’s markup and share can be expressed as simple formulas of two variables: an aggregate statistic of all other firms’ prices, and the firm’s own “type,” a single index that summarizes information about that firm’s product portfolio. In this setting, the welfare effects of mergers without synergies is approximately proportional to the induced changes in the Herfindahl index. This approximation holds best for mergers involving small firms. The authors show that in order for a merger to be welfare-improving, the merged firm must attain sufficient synergies to increase its “type” beyond a particular threshold. This threshold becomes harder to attain as the pre-merger Herfindahl index increases, and as the merging parties grow larger.
Simon Loertscher (University of Melbourne, Coordinated Effects) presented a theoretical analysis of coordinated effects in procurement auctions. Coordinated effects occur when a merger between two bidders facilitates coordination amongst a subset of the bidders. A group of coordinating suppliers selects, with some probability, a single supplier from the group to submit a bid. Each coordinating supplier is only willing to participate in the coordination scheme if its probability of being selected to bid is above some threshold. If these probabilities sum to less than one, the auction is at risk of coordination by this group of suppliers. Decreasing the number of bidders or making coordinating bidders more similar to one another generally increases the risk of coordination. The authors discuss “maverick” suppliers, defined as suppliers who are not part of the coordinating group of bidders, but whose elimination puts the auction at risk of coordination. Acquisition of a maverick by a coordinating firm need not put an auction at greater risk of coordination.
Luke Froeb (Vanderbilt University) delivered the keynote luncheon address on Models are to Economics as Economics are to Antitrust. Dr. Froeb discussed his recent tenure as chief economist of the Antitrust Division at the U.S. Department of Justice and his previous tenure as chief economist at the Federal Trade Commission. There is an appetite at antitrust authorities for more sophisticated yet still tractable economic models. He demonstrated the Competition Toolbox, an online interface where users may input market data to simulate the effects of a merger. Finally, he discussed models of bilateral bargaining between upstream and downstream firms, particularly the implications of the common “Nash-in-Nash” modelling assumption. This assumption places severe limitations on what parties to a particular agreement believe will happen if negotiations break down.
Michael Sinkinson (Yale University School of Management, Common Ownership and Competition in the Ready-to-Eat Cereals Industry) presented an investigation of the potential impact of common ownership of firms by large institutional investors. Under the “standard hypothesis” regarding firms’ objectives, each firm attempts to maximize its own profits. Under the “common ownership hypothesis” regarding firms’ objectives, corporations maximize returns to their investors, taking account of the fact that their investors may own shares of the corporation’s competitors. This may induce the corporation to avoid competing against these competitors. The authors document that common ownership of firms by large institutional investors has grown significantly over time. The authors then estimate demand and supply in the ready-to-eat cereals industry and show that the standard hypothesis appears to be more consistent with observed data than the common ownership hypothesis. However, they also show that if firms in this industry behaved according to the common ownership hypothesis, then this would increase equilibrium prices by more than a merger between any two of the four main firms in the cereals market. Thus whether or not firms behave according to the common ownership hypothesis is an important subject for additional research.
Minjae Song (Bates White Economic Consulting, The Competitive Effects of Common Ownership: Economic Foundations and Empirical Evidence) presented an analysis of common ownership in the airline industry. The authors conducted a theoretical analysis that yields a “reduced-form” equation explicitly relating prices to measures of common ownership between firms. Because there is a different measure of common ownership for every pair of firms, it becomes intractable to estimate this equation as the number of firms increases. The authors instead estimate several different specifications that aggregate the common ownership measures in a tractable way and find no evidence that common ownership increases prices. They then use a “structural” approach that explicitly estimates demand and marginal costs for different flights, as well as a parameter that scales markups between competitive pricing and pricing under common ownership. The authors cannot reject the hypothesis that firms price competitively in this model; they again find no evidence that common ownership affects prices.
A panel session moderated by Rich Gilbert (University of California, Berkeley) discussed the links between competition policy and innovation. Giulio Federico (Directorate General for Competition, European Commission), Howard Shelanski (Georgetown Law), Michael Vita (U.S. Federal Trade Commission), and Michael Whinston (MIT Sloan School of Management and Department of Economics), addressed practical, technical, and legal considerations regarding the role of innovation concerns in the evaluation of mergers. From a practical point of view, Federico and Vita provided an assessment of the relative importance the antitrust enforcement agencies in Europe and the U.S. place on innovation concerns when assessing the effects of mergers. The panelists discussed which specific types of damages to innovation and which stages of the innovation process should be analyzed by the agencies when evaluating mergers. Finally, discussants provided their point of view regarding legal considerations such as which side of the legal dispute should bear the burden of proof regarding the consequences of a merger on innovation, and what are the antitrust agencies’ chances to win cases purely on the basis of innovation concerns.
Michael Katz (UC Berkeley) delivered the dinner keynote address on Are “Users” More Deserving than Suppliers”? Bargaining, Two-Sided Platforms and Harm to Competition. Katz argued that although traditional antitrust analysis tends to place more weight on harm to users than suppliers, the issue of which actors in a market should be thought of as “users” and which should be thought of as “suppliers” grows very blurred in the case of multi-sided markets, and that, in many cases, the distinction between users and suppliers becomes meaningless or arbitrary. He also described how the analysis of effects of competition on users and suppliers changes for the case when users and suppliers are both large entities that engage in bilateral bargaining compared to the case when suppliers are large firms that set prices and “users” are atomistic consumers.
Suresh Naidu (Columbia University, Antitrust Remedies for Labor Market Power) argued that the tools of antitrust economics, traditionally applied to product markets, are also useful to measure the effects of hiring firms’ market power (monopsony power) on wages in labor markets. Certain features of labor markets effectively strengthen monopsony power, such as search costs workers face in finding employment, and the two-sided nature of the match between worker and firm. The authors summarize a body of evidence that firms exercise considerable monopsony power in labor markets, and they argue that monopsony power has grown recently as hiring firms have grown in size and as no-poaching and non-compete clauses have become more prevalent. They propose three different ways to evaluate the effect of a merger on monopsony power. The simplest approach is to define the relevant labor market and measure the concentration of hiring firms through a Herfindahl index. A more sophisticated approach involves measuring “downward wage pressure” as a function of diversion ratios. Diversion ratios measure of how substitutable workers see employment at one firm versus another. The most sophisticated, but costliest, approach uses structural estimates of labor supply and demand to simulate the effects of a merger on wages and employment.
TAP Note: TAP scholars Eric Posner and Glen Weyl co-authored Antitrust Remedies for Labor Market Power with Professor Naidu.
Andrew Sweeting (University of Maryland, Repositioning and Market Power After Airline Mergers) presented an empirical analysis of horizontal mergers when firms are able to change their product offerings in response to the merger. A common rationale for allowing a merger is that new entrants after the merger will lower prices toward pre-merger levels. However, this rationale does not account for selection: firms who enter the market after the merger are less likely to be competitive than the merged firm, because otherwise these firms would have already joined the market. Furthermore, because these firms know they are less competitive, they are generally unlikely to enter the market, even after the merger. The authors develop and estimate an empirical model that assumes firms know how competitive they will be in a given market, and they make entry decisions accordingly. Using data from the airline industry, they find that allowing for entry after a merger in this industry is generally insufficient to remedy the market power effects of the merger.
Justin Johnson (Cornell University, Multiproduct Mergers and Quality Competition) presented a theoretical model for the evaluation of mergers in competitive environments characterized by vertically differentiated products and multiproduct firms that compete in quantities. In a setting in which firms are able to produce low and/or high quality products, the authors show that under some observable conditions on the cost structure and product-mix offered by firms, it is possible for mergers without cost synergies to increase consumer surplus and the profits of both merging and non-merging parties. When present in this setup, synergies might even reduce consumer surplus due to their effect on the equilibrium mix of qualities in the market. The impact of mergers on the profits of non-merging firms is also analyzed, highlighting the possibility of qualitatively heterogeneous effects, a result that contrasts with the single-product environment. Finally, the authors derive and propose the Quality-adjusted Herfindahl-Hirschman Index (QHHI), a new measure of industry concentration tailored to markets in which quality differences across products are important.
Matias Escudero and Matthew Leisten are PhD students in economics at Northwestern University.