Decision-making in Merger Control: Communication between Merging Parties and the Competition Authority An Renckens Amsterdam, 16 March 2007

1 1. Decision-making in merger control when information on efficiencies is crucial Decision-making is difficult when: Information asymmetry Here: merging firms have better information on efficiencies than the CA Difference in interests Here: mergers raise market power => Merging firms always want clearance, CA only wants clearance if efficiency gains are high enough (depending on the height of the welfare standard) Welfare standard: ΔW = ΔCS + βΔPS

2 2. Purpose of the paper 1.Model the strategic interaction between merging parties and the CA during the decision-making process in merger control 2.Define the optimal height of the welfare standard to give firms the right incentives to choose their actions

3 3. Literature 1.Informational lobbying and communication  Grossman & Helpman (2001), Potters & van Winden (1992): informational lobbying = strategic presentation of information  Austin-Smith (1993): lobby to secure the attention of the policymaker  Dewatripont & Tirole (2005), Dessein (2002): costly communication 2.Optimal welfare standard  Besanko & Spulber (1993), Werden (1996), Lyons (2002), Fridolffson (2002), Neven & Röller (2005): consumer surplus standard would perform better

4 4. Timing of the complete game Policy decides on the welfare standard (β ) Investigation stage: Firms exert effort to find efficiency gains Result: Communication stage (simultaneous) Notification: Firms choose communication effort (x) CA investigates information: CA chooses communication effort (y) CA decides on clearance of the merger:

5 5. Communication game

Analysis of the communication game (a) Investigation stage reveals the type of the merger: -Pr(θ i = θ H ) = γ, Pr(θ i = θ L ) = 1-γ -ΔW H = β(θ H + M) – L ≥ 0, ΔW L = β(θ L + M) – L < 0 Communication technology: -x i and y: communication efforts of the merging parties and the CA -p i (x i, y) = probability that CA assimilates the true information (communication success) -High type mergers: p H (x H, y) = x H y communication efforts are strategic complements -Low type mergers: p L (x L, y) = 1 - x L (1-y) communication efforts are strategic substitutes

7 Communication game

Analysis of the communication game (b) Communication costs -C(x i ) and C(y): increasing and convex communication cost functions Actions and payoffs -High type mergers: -Low type mergers: -CA:

Solution of the communication game (a) Prior probability of facing a high type merger for which the CA is indifferent between clearing and rejecting the merger: Posterior probability of facing a high type merger: Compare both: -ρ* = 1 iff -ρ* = 0 iff -0 < ρ*< 1 iff

Solution of the communication game (b) Always clearing the merger can be an equilibrium : -To avoid communication effort of low types: better to have a lower welfare standard Always rejecting the merger can never be an equilibrium Randomization strategy can be an equilibrium : -No general solution for the optimal clearance probability -Therefore: look at extreme values of the communication costs: either β does not influence the communication strategies or it increases the communication effort of the low types (in the latter case: better to have a lower welfare standard)

Conclusion communication game 2 possible equilibria: -Always clear mergers -Randomize between clearing and rejecting When communication is costless for the CA and/or extremely costly for the low types: -Always clearing better than randomization -No impact of the welfare standard on the equilibrium communication efforts In all other cases: -Randomization better than always clearing -Lower welfare standard performs better

12 6. Investigation game

Analysis investigation game Before the merger can be notified (and efficiencies communicated) to the CA, the merging parties have to investigate the height of efficiency gains to be realized This requires investigation effort (e), which involves investigation costs I(e) -the more effort the merging firms exert, the higher the probability to find efficiency gains -Minimal amount of efficiencies required for clearance is given by the threshold Actions and payoffs: -Policy: -Merging firms:

Conclusion investigation game Results: -Optimal investigation effort: => e* is increasing in β -Optimal welfare standard: Conclusion: To give firms incentives to search for efficiency gains, a higher value of the welfare standard would perform better

15 7. General conclusion Conflicting role of the welfare standard in communication and investigation stages: -Communication game: lower welfare standard would perform better -Investigation game: higher welfare standard gives better incentives Two cases in which the welfare standard does not influence the communication game: =>Total welfare standard can be applied when: -CA has enough resources/expertise to investigate cases -the notification process is very transparent