From Research on Mergers to Merger Policy

ABSTRACT

Since at least the early 1990s, researchers have criticized the antitrust authorities’ method for assessing the possible anticompetitive effects of mergers. Despite this, only recently, a method with a more sound economic foundation was included in the merger guidelines. We discuss how a sound economic foundation was developed and finally applied to merger control.

Key Words:

• Merger Control
• Upward Pricing Pressure
• Diversion Ratio.

• JEL classifications:
• K21
• L13.

Notes

1. See US Horizontal Merger Guidelines, page 21. At the same time, merger guidelines were also published in the UK, and they also pointed out that margins and diversion ratios were the two most important factors when considering the unilateral effects. See Merger Assessment Guidelines published jointly by Competition Commission and Office of Fair Trading in September 2010, and in particular Section 5.4.9.

2. See also Katz and Shapiro (2003), who at the same time introduced an analogous approach. Similar ideas, in particular concerning the role of margins, are also discussed in Danger and Frech III (2001) and Langenfeldt and Li (2001).

3. Other formulas are, for example, GUPPI (Gross Upward Price Pressure Index) and IPR (Illustrative Price Rise). For an explanation of these formulas and references, see Shapiro (2011), Sørgard (2012), or Oldale and Padilla (2013).

4. The European Commission, however, has used merger simulations in several of their merger decisions. Oldale and Padilla (2013) claim that the Commission appears to regard the UPP or other analogous approaches as a shortcut for fuller merger simulations. For example, in the recent Unilever/Sara Lee merger, they did a merger simulation.

5. See Shapiro (2011) for a description of the use of diversion ratios and margins in US merger control already in the 1990s, and how the 2010 US merger guidelines “moved beyond diversion ratios, directing attention to the value of diverted sales” (725). In Farrell and Shapiro (2010), they briefly refer to the Thoratec/Heartware merger, and by applying the new approach, they find that the merger would reduce the incentive to introduce a new product.

6. See Somerfield acquisition of 115 Safeway grocery stores from Morrison. For a description of this and later merger cases in the UK, see OFT (2011) and Sørgard (2012).

7. For calculating the illustrative price rise (IPR), they applied the formulas in Shapiro (1996).

8. See Oldale and Padilla (2013) for a description of the use of the new method in recent merger cases in EU. They argue that although the European Commission has employed those tools, they did it “perhaps less enthusiastically than in the USA and the UK where that path was initiated” (375).

9. At the UPP Conference in Stockholm on June 4, 2013, there was discussion of 12 cases in Norway, Sweden, and Denmark where diversion ratios and/or the UPP approach were applied in the last two years.

10. Note that O’Brien, Farrell, and Shapiro have all been chief economists for competition authorities in the United States. For example, when the revised US Horizontal Merger Guidelines were published in August 2010, Farrell was the chief economist at FTC while Shapiro was the chief economist at DoJ Antitrust Division.