1. COMPETITION ECONOMICS llc 1 How do Economists use Evidence? Luke Froeb Vanderbilt University luke.froeb@owen.vanderbilt.edu 10:30am, 24 April 2012 NAAG Midwestern Region Meeting Wyndham Hotel 633 N St. Clair St. Chicago, IL 60611

2. COMPETITION ECONOMICS llc Acknowledgements Michael Doane, Competition Economics Forbes Belk, Competition Economics Greg Werden, US Dept of Justice 2

3. COMPETITION ECONOMICS llc OUTLINE (15 minutes) I. What do economists do? II. “Natural” experiments Perch bid rigging Car Rental merger III. Structural Models CRB merger IV. Lessons for NAAG’s 3

4. COMPETITION ECONOMICS llc I. What good are economists, anyway? Antitrust litigation poses “but-for” (counter-factual) questions Did this conspiracy raise price? Will this merger harm consumers? Economists are trained to answer these questions? Econometric comparisons (“natural” experiments) How good is the experiment? Is the experiment a good “metaphor” for effect? Economic models How well does the model fit the evidence? Are the predictions of the model biased?

5. COMPETITION ECONOMICS llc II. Perch Bid-rigging Conspiracy Price collapsed suddenly after DOJ began investigation Use the post-conspiracy period to estimate model of frozen fish prices. Backcast into conspiracy period to determine “but for” prices Froeb, Luke, Robert Koyak & Gregory Werden, What is the Effect of Bid-Rigging on Prices?, Economics Letters, 42 (1993) pp. 419- 423. available at SSRN

6. COMPETITION ECONOMICS llc Conspiracy raised price 23% above “but-for” prices

7. COMPETITION ECONOMICS llc Is Big Bad Again?: Staples-Office Depot Aftermath Staples-Office Depot merger was successfully challenged by FTC using price comparisons Prices 7.5% higher in one-office superstore cities than in two-office superstore cities With a 15% estimated pass-through rate, would imply a 50% mc reduction to offset merger effect. Would you block merger based on these data?

8. COMPETITION ECONOMICS llc What could go wrong? Experiment is “polluted,” i.e., something else accounts for results Spurious correlation Example: movie tickets (Davis, 2005) Finding: Price is $0.90 higher with competitor <.5 mile away  Movie theatres are locating in areas with high demand Experiment might be bad metaphor for merger Merger changes ownership concentration Does data mimic this effect?

9. COMPETITION ECONOMICS llc New Work on Car Rental Mergers Doane, Michael J., Luke M. Froeb, and David Zimmer, and Gregory Werden, Pricing and Ownership Concentration: A New Estimation Strategy (April 4, 2012), available at SSRN.SSRN Dollar-Thrifty rebuffed two suitors Avis-Budget Hertz-Advantage Expedia Price Data from 400 airports in US Compare prices with at airports with same number of brands, but different ownership structures Are prices higher at airports with three 1-brand firms, or one 3-brand firm? Comparison can “predict” effects of ownership change caused by merger.

10. COMPETITION ECONOMICS llc At Which Airports will the Proposed Car Rental Mergers Raise Price? Predicted Market Average Price Increase Acquisition by Avis-Budget Acquisition by Hertz-Advantage.01–.99%02 1.00–1.99%1177 2.00–4.99%10438 5.00–9.99%30 10.00–19.99%20 >19.99%00

11. COMPETITION ECONOMICS llc III. Model Example: US v. Altivity and Graphic (2008) US DOJ challenge Altivity (35%) + Graphic (17%) of North American capacity Market Geographic: North America Product: Coated Recycled Board 11

12. COMPETITION ECONOMICS llc Theory of Harm Nicholas Hill, “Analyzing Mergers with Capacity Closures,” DOJ Working paper, at SSRNSSRN Model: Once built, mills produce at capacity; and merger would increase incentive to close mills Mechanism: mill shutdown  supply decrease  higher price Model tells us What matters: demand elasticity, import supply response Why it matters: increases profitability of shutdown How much it matters: divest 2 plants representing 11% of capacity 12

13. COMPETITION ECONOMICS llc Why Attorneys Should Care About Modeling Models are “blueprints” for enforcement Model guides interpretation of evidence Evidence guides selection of model Agencies do it 2011 DOJ blocked H&R Block/TaxAct proposed merger 2009 FTC blocked CCC Holdings/Aurora proposed merger Other reasons Analysis of models provides a solid foundation for enforcement concerns Analysis of models clarifies the precise nature and determinants of mergers in particular settings. Application of models to cases permits a fact-based, quantitative assessment of merger effects. 13

14. COMPETITION ECONOMICS llc Conclusions Economists are uniquely trained to answer the kind of “but-for” questions that arise in litigation The earlier you get an economist involved, the better off you will be But you have to communicate frequently Tip for communicating: ask three questions 1. How will economist investigate the questions posed by the case? 2. What are the possible outcomes of the investigation? 3. How will the outcomes influence judge or jury? 14