Talk Outline ffl Structural Merger Policy ffl Simulation Alternative ffl Differentiated Products ffl Auctions ffl Conclusions/Extensions Damages Compu

Transcription

1 Merger Simulation in the U.S.: A Personal Perspective June 13, 2000 European Commission, Brussels Luke Froeb Owen Graduate School of Management Vanderbilt University luke.froeb@vanderbilt.edu For Papers and Software For on-line simulators 1

2 Talk Outline ffl Structural Merger Policy ffl Simulation Alternative ffl Differentiated Products ffl Auctions ffl Conclusions/Extensions Damages Computation Vertical Restraints Simulation 2

3 Structural Merger Policy ffl What is it? market delineation infer effects of merger from shares ffl Mitigating factors Entry Stiglerian checklist: Is collusion likely? Efficiencies not considered. 3

4 Unilateral Effects Theories ffl : Discrepancy between merger cases and price-fixing cases ffl Merger Price- Fixing Big Firms Intermediate Goods Differenitated Products X 0 Small Firms Govt. Bid Rigging 0 X ffl Discard collusion-facilitation theory or change merger policy? ffl ==> Unilateral effects stories with same old structural analysis 4

5 Critiques of Structural Merger Policy ffl Theoretical Chamberlin: market delineation is a snare and a delusion." Λ Competition does not stop at market boundary Λ Shares may be poor proxies for competitive effects No role for efficiencies ffl Practical Focus on tangential issues, like relevant markets; and ignore relevant issues. Malleable expert opinions 5

6 Simulation as Policy Alternative ffl Implementation Front End: estimate structural oligopoly model Back End: simulate anticompetitive scenario Λ or any "but for" scenario ffl Benefits Focus investigation on merger effects Λ Demand estimation Λ Merger efficiencies Mapping from facts to opinions 6

7 ffl Different standard than structural analysis ffl First cases Interstate Bakeries (1995) Λ would have been difficult to delineate a relevant market. Λ but good demand estimates from scanner data showed big merger effect. L'Oreal/Maybelline (1996) Λ was a relatively easy" structural case to make. Λ but good demand estimates from scanner data showed small merger effect due to small cross-price elasticity of demand between merging products with supporting evidence.

8 Differentiated Products Simulation ffl Front End Estimation Estimate Demand Λ Scanner data (revealed preferences) Λ Survey data (surveyed preferences) q 0 = f(p0) ==> demand constants p i mc i p i = 1 elasticity i ==> mc i Or infer elasticity from margins. 7

9 ffl Back-end simulation of post-merger equilibrium include merger synergies compute compensating MC reductions are divestitures sufficient to raise welfare? is entry sufficient to raise welfare?

10 Parking Lot Merger: Spatial Competition with Capacity Constraints ffl Demand estimates from travel-choice literature Market power derived from walking cost Λ Demand is a logit choice function of price and distance to lot Λ Taxi Cab" distance metric Demand for a given parking lot is sum of all choice probabilities over office building locations 8

11 z > 0.07 < 0.07 < 0.06 < 0.05 < 0.04 < ffl CS=revenue, Merger effect when capacity constraints are NOT binding.

12 10 8 z > < 0.07 < < 0.05 < 0.04 < ffl CS=revenue, Merger effect when one merging lot is capacity constrained. ffl Lesson: Constraints on merging firms matter a lot. ffl Supporting evidence on how firms set price is my lot full by 9am?

13 Charlotte, NC Grocery Stores ffl Survey Density in Charlotte: What are your alternatives, at what price vector?" Estimate gravity" demand model. 9

14 BEFORE MERGER Share > 0.8 < 0.8 < 0.7 < 0.6 < 0.5 < 0.4 < ffl Hypothetical merger: pre-merger Share of Kroger + Winn Dixie

15 AFTER MERGER Share > 0.8 < 0.8 < 0.7 < 0.6 < 0.5 < 0.4 < 0.3 ffl Hypothetical merger: post-merger Share of Kroger + Winn Dixie

16 PROBLEMS WITH DIFFERENTIATED PRODUCTS SIMULATION ffl Can we estimate demand first derivatives? own-price elasticities are relatively easy. cross-price elasticities are much more difficult. ffl Alternative: use margins" to infer ownprice elasticity and use logit functional form where cross-price elasticities are proportional to shares. ffl Can we estimate demand second derivatives (curvature)? 10

17 8 P 7 6 AIDS Logit Linear Log-Linear Q ffl Merger effect depends on demand second derivatives (curvature), as well as on first derivatives (elasticities).

18 P AIDS Logit Linear Log-Linear ε ffl Curvature change is related to elasticity change.

19 Mergers in Auction Markets ffl Second-price, private-values framework (tractability). ffl Merger effects depend on Frequency of one-two finish Λ Proportional to shares Λ Caveat: is a subset of bidders closer to one another than to other bidders? Price change to third-highest value Λ Dependent on variance Example: values=($1; $2; $3; $4; $5) Λ If two highest merge, price goes from $4 to $3 11

20 Power-related Value or Cost Distribution ffl Assume draws from independent power-related private values + common shock: ffl implies price/share relationship, i.e. winning bid (price) is a function of the probability of winning (share p i ). bigger firms win at better prices. ffl Implies that post-merger price is function of sum of pre-merger shares. Herfindahl-like formula, E(price) = h(p i + p j ) h(p i ) h(p j ): e.g. Logit model, h(x) = log(1 x) μ ; V ar(v i ) = ß2 6μ 2 12

21 Uniform Family: Value Density Functions DENSITY 1, SHARE= 0.5 2, SHARE= 0.3 3, SHARE= , SHARE= VALUE ffl Power-related value distributions from same Uniform(5; 10) family. 13

22 Uniform Family: Price Density Functions DENSITY 1, SHARE= 0.5 2, SHARE= 0.3 3, SHARE= , SHARE= PRICE ffl Resulting price distributions. ffl Bigger firms win at better (lower) prices. 14

23 Uniform Family: Price vs: Share PRICE PRE MERGER POST MERGER SHARE ffl Price/share relationship and simulated merger effect. 15

24 Extreme-value Densities DENSITY Type I Type II Type III VALUE ffl Same mean and variance, different curvature". 16

25 Extreme-value Family: Price vs: Share PRICE Type I Type II PRE MERGER POST MERGER 5 Type III SHARE ffl Merger Effect depends on curvature" of value distribution. 17

26 Estimating the Value Distribution ffl Specify distribution of maximum value (or minimum cost), F max (x) ffl F i (x) = F p i max(x) 1st step: estimate p i from data on who wins each auction 2nd step: estimate F max (x) ffl Within-auction estimation: eliminate common shock by differencing bids Use profit margins, or b1 b2 (Vickrey) b2 b3 (English) 18

27 Estimated Extreme-Value Distribution For Forest Service Timber in Oregon (1977) Variable Coefficient Std. Error Hauling Miles 2:08 0:48 SBA Dummy 71:63 16:90 1=μ 39:66 4:86 PRICE PRE MERGER POST MERGER SHARE 19

28 Localized" Merger GLOBAL COMPETITION: MU=0.5 6 MERGING SHARE 6 REV LOSS= LOCAL COMPETITION: MU=2 6 MERGING SHARE 6 REV LOSS=

29 Global" Merger GLOBAL COMPETITION: MU=0.5 6 MERGING SHARE 6 REV LOSS= LOCAL COMPETITION: MU=2 6 MERGING SHARE 6 REV LOSS=

30 PROBLEMS WITH DIFFERENTIATED PRODUCTS SIMULATION ffl Can we estimate value distribution variance? ffl Alternative: use engineering estimates to estimate variance. ffl Can we value distribution curvature?" ffl Data for estimating more complex models 22

31 OTHER APPLICATIONS OF `BUT FOR' SIMULATION ffl What is the effect of Price Discrimination by Postal Zone? 5 One Price: Share of Chain 1 4 Share 1 > < 0.3 < <

32 ffl Single Price: Market Share of Kroger is concentrated around stores 5 Discrimination: Share of Chain 1 4 Share 1 3 > 0.3 < 0.3 < ffl Discrimination: Market Share of Kroger is more spread out

33 Lessons of Simulation Approach ffl Merger effects depend on demand (Bertrand) or cost distributions (auctions) Λ closeness" of merging products Λ positions" of non-merging products efficiencies ffl Use for Damage Computation ffl Or Any but for" analysis, e.g. Cases Vertical 24

34 Alternative: Empirical Merger Policy ffl Cross-sectional regression, e.g. Office Depot; Newspaper JOA's. Staples- data rare endogeneity of concentration are mergers exogenous events? confidence intervals around points ffl Event" studies, e.g. time series data even rarer Λ Selection bias: no bad mergers are observed are mergers exogenous events? confidence intervals around points 25

35 REFERENCES ffl POLICY AND USE (articles for attorneys) Shapiro, Carl (1996) Mergers with Differentiated Products," Antitrust, Spring, pp Werden, Gregory J. (1997a) Simulating the Effects of Mergers in Differentiated Products Industries: A Practical Alternative to Structural Merger Policy," George Mason Law Review, 5, pp Werden, Gregory, "Expert Report in United States v. Interstate Bakeries Corp. and Continental Baking Co.," International Journal of the Economics of Business, 8 (2000). Werden, Geregory J. (1997b) Simulating Unilateral Competitive Effects from Differentiated Products Mergers," Antitrust, Spring, pp Werden, Gregory J., and Froeb, Luke M. (1996) Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries," in Malcolm Coate and Andrew Kleit, eds., The Economics of the Antitrust Process. New York: Kluwer. Werden, Gregory J., Luke M. Froeb, and Lucian Wayne Beavers, "Economic Analysis of Lost 26

36 Profits from Patent Infringement With and Without Noninfringing Substitutes," American Intellectual Property Law Association Quarterly Journal, pdf file, 27 (1999) pp ffl SIMULATING MERGER EFFECTS IN DIFFER- ENTIATED PRODUCTS INDUSTRIES Crooke, Philip, Luke Froeb, Steven Tschantz, and Gregory Werden "The Effects of Assumed Demand Form on Simulated Post-Merger Equilibria," Review of Industrial Organization, 15(3), (November, 1999) pp Froeb, Luke and Gregory J. Werden, Simulating the Effects of Mergers among Noncooperative Oligopolists," in Hal Varian, ed., Computational Economics and Finance: Modeling and Analysis with Mathematica. New York: Springer-Verlag/Telos, Froeb, Luke, and Gregory Werden, "Introduction to the Special Issue on the Use of Simulation in Applied Industrial Organization," International Journal of the Economics of Business, 8 (2000). Werden, Gregory J. (1997c) A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products," Journal of Industrial Economics, 44, pp (1997).

37 Werden, Gregory J. (1997d) Simulating the Effects of Differentiated Products Mergers: A Practitioners' Guide," in Julie A. Caswell and Ronald W. Cotterill, eds., Strategy and Policy in the Food System: Emerging Issues. Storrs, Conn.: Food Marketing Policy Center. Froeb, Luke, Steven Tschantz, "A Homotopy Method for Merger Analysis in Bertrand Industries" pdf file, Owen Working paper (May, 2000). AIDS (Almost Ideal Demand System) Demand Λ Hausman, Jerry A. and Gregory K. Leonard (1997) Economic Analysis of Differentiated Products Mergers Using Real World Data," George Mason Law Review, 5, pp Λ Hausman, Jerry, Leonard, Gregory, and Zona, J. Douglas (1994) Competitive Analysis with Differentiated Products," Annales d'economie et Statistique, 34, pp Λ Weiskopf, David, The Impact of Omitting Promotion Variables on Simulation Experiments",International Journal of the Economics of Business, 8 (2000). (Nested) Logit Demand Λ Werden, Gregory J., and Froeb, Luke M. (1994) The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger

38 Policy," Journal of Law, Economics, and Organization, 10, pp Λ Werden, Gregory J., Froeb, Luke M., and Tardiff, Timothy J. (1996) The Use of the Logit Model in Applied Industrial Organization," International Journal of the Economics of Business, 3, pp Λ Simulating Entry Jayaratne, Jith and Carl Shapiro, "Simulating Partial Asset Divestitures to 'Fix' Mergers," International Journal of the Economics of Business, 8 (2000). Werden, Gregory, and Luke Froeb, "The Entry-Inducing Effects of Horizontal Mergers," Journal of Industrial Economics, 46 (4), (1998) pp Probit Demand Λ Hausman, Jerry, Affidavit in WorldCom Acquisition of Sprint, FCC Hearings, (April, 2000) Λ Critique of Hausman by Stan Besen and Steven Brenner, FCC Hearings, (April, 2000) ffl SIMULATING MERGER EFFECTS IN AUCTIONS Brannman, Lance, and Luke Froeb, "Mergers, Cartels, Set-Asides and Bidding Preferences in Asymmetric Second-price Auctions," pdf file,

39 Review of Economics and Statistics, 82(1) (May, 2000). Dalkir, Serdar, John Logan, and Robert Masson, Mergers in Noncooperative Auction Markets: The Effects of Mergers on Prices and Efficiency," International Journal of Industrial Organization, forthcoming. Froeb, Luke, Steven Tschantz, and Philip Crooke, Second-price Auctions with Power-related Distributions: Predicting Merger Effects," working paper Vanderbilt University. Steven Tschantz, Philip Crooke and Luke Froeb, "Mergers in Sealed vs. Oral Auctions,"International Journal of the Economics of Business, 8 (2000). Waehrer, Keith, and Martin K. Perry, The Effects of Mergers in Open Auction Markets," working paper, ffl MERGER SIMULATION WITH HOMOGENEOUS PRODUCTS Froeb, Luke and Gregory Werden, "A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of a Homogeneous Product," Economics Letters, 58 (1998) pp ffl SIMULATING DAMAGES

40 Werden, Gregory J., Luke M. Froeb, and James Langenfeld, "Lost Profits from Patent Infringement: The Simulation Approach", International Journal of the Economics of Business, 8 (2000). Werden, Gregory J., Lucian Wayne Beavers, and Luke M. Froeb, "Quantity Accretion The Mirror Image of Price Erosion from Patent Infringement," Journal of the Patent and Trademark Office Society, forthcoming. ffl EMPIRICAL MERGER MODELS Staples Acquisition of Office Depot Λ Ashenfelter, Orley, David Ashmore, Jonathan B. Baker and Signe-Mary McKernan, Identifying the Firm-Specific Cost Pass-Through Rate," FTC Working Paper No. 217, (January 1998). Λ Baker, Jonathan B., Econometric Analysis in FTC v. Staples," Journal of Public Policy & Marketing, vol. 18(1) (Spring,1999), pp Λ Hausman, Jerry and Gregory Leonard, Documents Versus Econometrics in Staples," working paper, Evans, William, Luke Froeb, and Gregory Werden, Endogeneity in the Concentration/Price Relationship: Causes, Consequences, and Cures,"

41 Journal of Industrial Economics, September, 1993, 41, 1-8. Froeb, Luke, Robert Koyak and Gregory Werden, "What is the Effect of Bid-Rigging on Prices," Economics Letters, 42 (1993) pp