Entry and expansion in UK merger cases: An ex-post evaluation Elena Argentesi University of Bologna 2017 ACE Conference Madrid, 16 November 2017

Outline Entry in ex-post evaluations The role of entry in mergers Theory Empirical evidence The KPMG study Methodological issues Data issues Conclusions

The KPMG study Ex-post evaluation of eight merger cases where entry or expansion was an important factor in the clearance Occurrence of predicted entry and/or expansion Timing of entry Effectiveness of entry (on a subset of cases): price effect Consistent with the CMA’s merger guidelines: consider whether entry and expansion would be likely, timely and sufficient

Retrospective merger studies Most quantitative studies focus on price effects [Reviews: Duso, 2012; Kwoka, 2013; Ashenfelter et al., 2015] DiD Merger simulations Some qualitative studies on: [Review: Ormosi et al., 2015] Entry (mainly UK cases) Market structure (market shares, concentration etc.) Innovation [Ormosi et al., 2017] Efficiencies Service quality Buyer power

Entry & mergers: Economic literature Theory: Werden and Froeb (1998) Cabral (2003) Spector (2003) Marino and Zabojnik (2006) Davidson and Mukherjee (2007)  Link between entry and efficiencies Empirical: Bougette et al. (2013) – Airlines Ciliberto et al. (2016) – Airlines (merger simulation) Bauner and Wang (2017) – Grocery: important to consider non-price effects of entry (assortment and product positioning)

The KPMG study: Methodological issues (I) Two-step procedure on the selected cases: Analysis of occurrences and timing of entry/expansion Assessment of price effects (Cineworld/ City Screen, NBTY/ Julian Graves, WRI/ Hostelbookers, Zipcar/Streetcar) However, looking at price effects on such a large number of cases is difficult: Data are often not disaggregated enough (CooperVision/ Sauflon) Limited info on pre-merger prices (Phase I vs Phase II cases) Available data do not allow for a full econometric analysis Need for full ex-post evaluation on more problematic cases? Alternative two-step procedure [Ormosi et al., 2015] quantitative ex-post study on price effects qualitative investigation to identify if the predictions regarding entry were correct

The KPMG study: Methodological issues (II) Timing: most effects take time to realize (more than 5 years), both for entry and for price effects [Ormosi et al., 2015] Entry/expansion with innovative products (Sheffield City Taxis/ Mercury Taxis, Cartonplast/ Demes, Zipcar/ Streetcar) Difficult to predict entry  see recent EC study on ex-post evaluation on mergers & innovation [Ormosi et al., 2017] Formalize the process of assessing the potential for innovation Importance of regulatory barriers (Sheffield City Taxis/ Mercury Taxis) and contractual obligations (Zipcar/ Streetcar) More general: GSK/ AstraZeneca [Björnerstedt and Verboven, 2016] Measuring non-price effects can also be important (2010 US Merger Guidelines) Impact of entry on non-price dimensions such as variety and quality of service [Bauner and Wang, 2017] Swedish competition authority got a wrong decision on the merger between GSK and AstraZeneca because it was expecting entry in the market as a result of the deregulation of the pharmacy monopoly; such entry did not occur A good example is the merger between GSK and Astro Zeneca. According to the authors of the ex-post study a post-merger price increase was due to errors in the analysis of the CA. The authors – who were involved in the investigation as experts – estimated at the time of the investigation that the merger would significantly increase prices. Yet, the CA decided to unconditionally clear the merger, based on its assessment that sufficient competition from other main market segments would prevent any such price increase. In this case the CA was also optimistic that the coming deregulation of the pharmaceutical industry would encourage new entry and competition, which did not happen.

The KPMG study: Methodological issues (III) Causal interpretation of the price effects: The fact that there is no price increase does not necessarily imply that entry was effective  other countervailing factors may play a role Entry often associated with higher prices [Ormosi et al. 2015] : entry insufficient to prevent SLC or entry attracted by higher prices? Predicted vs unpredicted entry relevant Even if entry did not materialize, low barriers to entry may keep prices low (NBTY/ Julian Graves) Entry and efficiencies (theoretical models) Importance of market definition and entry in local markets [Coate, 2014] Assessment of tipping point and switching costs (WRI/ Hostelbookers): Important in other cases? Merger simulations can account for entry and provide welfare estimations

The KPMG study: Data issues Qualitative evidence is suitable to assess occurrences of entry/expansion Role of uncertainty Gather further evidence on regulatory changes (Sheffield City Taxis/ Mercury Taxis) or contractual obligations (Zipcar/ Streetcar) Phase 2 mergers vs Phase 1: More data available make it possible to better evaluate the effect of a merger in a causal way (DiD): Cineworld/ City Screen Evidence on entry at the time of the decision often comes from the merging parties or from entrants Incentive to overestimate the likelihood of entry

Conclusions Very comprehensive study on the realization of predictions of entry in merger decisions Feasible to assess occurrences and timing of entry/expansion with qualitative data… …more difficult to assess price outcomes Non-price effects of entry may be relevant in some markets Importance of considering other factors such as innovation and efficiencies Issue of availability of reliable data and information at the time of the investigation

https://sites.google.com/site/elenaargentesi/ Elena Argentesi elena.argentesi@unibo.it https://sites.google.com/site/elenaargentesi/