Behavioral and Structural Remedies in Merger Control Anastasiya Redkina Higher School of Economics, Perm 27 June 2011

Merger control Part of antitrust regulation Regulation principle – “rule of reason” Consequences of the merger Positive Negative

Consequences of the merger Negative Positive = efficiency gains economy of scale; economy of scope; decrease of transport and transaction costs; etc. increase of the remaining firms’ market power leading (absent any efficiency gains) to higher prices and lower output arrangement of conditions for tacit or explicit collusion

Merger control - 3 Complexity of consequences estimation Possible decisions of Competition Agency: Prohibition – rarely now! Unconditional approval Approval with Remedies

Remedy can be defined as commitments, required by the Competition Agency, which address the competitive concern raised by the merger, and are destined to restore market competition and prevent the merger’s negative impact

Classification of Remedies Structural change the allocation of property rights require to divest assets to restore competition before merger Behavioral represent limitations of property rights regulate behavior of merged firms after merger

Remedies Structural Remedies Divestiture Behavioral Remedies Facilitating horizontal rivalry Modifying relationship with end-customers Changing buyers’ behaviour Restricting effects of vertical relationships Controlling outcomes

Remedies in Merger Control EC & USA Structural remedies are preferred Russia relies on behavioral remedies legislative framework for application of structural remedies was established in 2006

Disadvantages of the Behavioral Remedies Conflict of interests : Firms have potential opportunity to use increasing market power, but are prohibited to use it, that creates the prerequisites for opportunism from firms. Operating cost Monitoring; Enforcement Indirect cost Distortion of competition; Evading the spirit of the remedy – crawling compliance

Previous research Medvedev, 2004, Cosnita, Tropeano, 2005, Vasconcelos, 2007 Rey, 2000, Farrell, 2003, Werden, Froeb, Tschantz, 2005 Neven, Roller, 2005

Main idea of our model The idea of this model came from the fact that Russian competition agency suggested the choice between structural and behavioral remedies in one case Institutional Environment: transparency; enforcement & monitoring ability bargaining power of Competition Agency etc

Model Prerequisites will consider only horizontal merger with as positive, as negative expected consequences = need the remedy assume that an antitrust agency applies a consumer surplus standard = wants to approve mergers that decrease prices, while rejecting those that increase prices firms have to make an effort to transfer part of efficiency gains to consumer behavioral remedy – monitoring cost – after merger; structural remedy – cost to design and implementation – before merger

Structure of the Game Firms Competition Agency e Behavioral Remedy Structural Remedy Firms Accept Reject Firms Accept Reject (0, 0) ((  ) e,  e-c) (0, -c)

Behavioral Remedy Simultaneous-move game Competition Agency ControlNot control FirmsFirms Try (1-  )e;  e-m e-F; F-m Not try (1-  )e;  e e; 0

Parameters of the model e – level of efficiency, which is achieved by the merged entity; e=  CS+  PS Behavioral Remedy  part of e, which can be transfer to consumer CA receives F - penalty for failure to fulfill reqirements – firms pay ; m – monitoring costs - CA pays Structural Remedy  part of e, which can be transfer to consumer,  - CA receives c- implementation costs - CA pays

The findings Case I: e – observable for all players and firms knows decision of CA analysis of game - 3 different type of equilibrium (depend e,  m, f, c); derived the conditions on parametres under which sets the preferable equlibrium from economical point of view Case II: e – observable only to merging firms => arising of II type errors. Case III: e – observable for all players, but merging firms don’t know type of remedy