1. M. Whinston, UNSW ATE Conference Dec 2014 1 Horizontal Merger Policy: New Approaches and Open Issues Michael Whinston

2. Merger policy is a central pillar of antitrust policy. Going back to Williamson (AER 1968), the traditional approach to the review of horizontal mergers emphasizes a tradeoff between market power and efficiencies 2 M. Whinston, UNSW ATE Conference Dec 2014

3. 3 Williamson diagram: Fancier version: Farrell-Shapiro (AER 1990). Q A B C D E F P p'p' c'c' c M. Whinston, UNSW ATE Conference Dec 2014 Q0Q0 Q1Q1

4. Aside perhaps from collusion, the area of horizontal mergers is the area of antitrust that commentators would regard as the most well understood. Still, on closer examination, there remain many aspects of the horizontal merger problem that we do not understand well. 4M. Whinston, UNSW ATE Conference Dec 2014

5. As a result, the literature has in recent years seen contributions on a number of questions: 1.Prediction of merger effects 2.Measurement of effects of actual mergers 3.Merger effects in producer markets 4.Dynamics 5.Optimal policy 5M. Whinston, UNSW ATE Conference Dec 2014

6. 1. Prediction of merger effects Reduced form “treatment effect” prediction versus structural model? (Angrist-Pischke vs. Nevo-Whinston, JEP 2010) 6M. Whinston, UNSW ATE Conference Dec 2014

7. Structural Methods Simulation methods (Nevo EMA 2001) 1.Estimate demand 2.Estimate or infer marginal cost 3.Predict effect of merger (with and w/o cost reductions) More recently: Upward Pricing Pressure (Farrell-Shapiro BEJ 2010) M. Whinston, UNSW ATE Conference Dec 2014 7

8. 1.Estimate demand –Logit, nested Logit, BLP, etc. 2.Estimate/infer premerger MC Pre-merger: 8M. Whinston, UNSW ATE Conference Dec 2014

9. 3.Post-merger prediction: Rewriting: 9M. Whinston, UNSW ATE Conference Dec 2014 Post-merger costs

10. From this, we can derive: –Price changes absent cost reductions –The post merger efficiency gains that prevent any price increase (solve for c i M and c j M ) –Price changes for any other post-merger marginal costs 10M. Whinston, UNSW ATE Conference Dec 2014

11. Simpler approach: “Upward Pricing Pressure” (Farrell-Shapiro; Werden JIE 1996) Basic idea: evaluate sign of FOC –Still requires demand and cost estimates –Does not give magnitudes –Unclear answer when have positive UPP for some goods and negative for others 11M. Whinston, UNSW ATE Conference Dec 2014

12. Can also use UPP values to derive a first- order approximation of the magnitude of merger-induced price effects based on estimated pass-through rates (Weyl-Jaffe AEJ Micro 2013) –Questions: How good an approximation? Easier than estimating the demand system for simulation? 12M. Whinston, UNSW ATE Conference Dec 2014

13. Reduced Form (“Treatment Effect”) vs. Structural Prediction Methods Key issue: To use treatment effect approach you need there to have been many similar mergers in the past. Structural Methods: Use other “experiments” to identify underlying parameters, and then use theory to predict what those imply for the merger’s likely effects. –Note: Treatment effect approach is distinct from reduced form “concentration” regressions M. Whinston, UNSW ATE Conference Dec 2014 13

14. 2. Measurement of effects of actual mergers Peters (2006), Ashenfelter-Hoskin/Weinberg (2010, 2013, 2014) look at effects on prices Two aims: –Evaluate methods for structural merger prediction –Develop evidence of treatment effects Big under-researched issue: effects on productivity (“efficiencies”) 14M. Whinston, UNSW ATE Conference Dec 2014

15. 3. Mergers in producer markets In producer markets, prices often determined through bargaining, which often involves: –non-linear pricing –externalities across buyers Theory: –Bernheim-Whinston QJE 1986 –Segal QJE 1999; –Horn-Wolinsky RAND 1988; –O’Brien-Shaffer RAND 2005 15M. Whinston, UNSW ATE Conference Dec 2014

16. Non-linear contracts can imply no effect of a merger on aggregate or consumer surplus: 16 Manu 1 Retailer Manu 2 M. Whinston, UNSW ATE Conference Dec 2014

17. But this changes if there is (i) linear pricing, (ii) no bundling, or (iii) multiple distributors 17 Manu 1 Retailer 1 Manu 2 Retailer 2 Consumers M. Whinston, UNSW ATE Conference Dec 2014

18. Empirical: Gowrisankaran et al (forth. AER) on hospital mergers [builds on Crawford-Yurukoglu (AER, 2012)] –Insurer is the “retailer”/Hospitals are “manus” –No modeling of insurer competition –Linear prices under this assumption, develop nice first-order condition for manu prices 18M. Whinston, UNSW ATE Conference Dec 2014

19. 4. Dynamics Two issues: (i)Competition in many industries is dynamic Investment, R&D, entry/exit,… –Theory: Berry-Pakes (1993), Cheong-Judd (2000) –Empirics: Benkard et al (2010), Collard-Wexler (2009), Jerziorski (2009), Stahl (2009) (ii)Mergers are not one-time events –Gowrisankaran (RAND 1999), Nocke-Whinston (JPE 2010), Nilsen-Sorgard (EER 1998), Motta- Vasconceles (IJIO 2005), Jerziorski (2014) 19M. Whinston, UNSW ATE Conference Dec 2014

20. 5. Optimal policy Optimal policy may be more complicated than “approve mergers that increase aggregate or consumer surplus” because of: asymmetric information –Knowledge about proposed mergers: Besanko- Spulber (JLEO 1993) –Knowledge about other possible mergers: Lyons (wp 2002), Armstrong-Vickers (EMA 2010), Nocke- Whinston (AER 2013) dynamics –Nocke-Whinston (JPE 2010), Nilsen-Sorgard (EER 1998), Motta-Vasconceles (IJIO 2005), Jerziorski (wp 2014) 20M. Whinston, UNSW ATE Conference Dec 2014

21. “Internal vs. External Growth in Industries with Scale Economies: A Computational Model of Merger Policy” with Ben Mermelstein, Volker Nocke, Mark Satterthwaite Looks at optimal merger policy in dynamic setting in which mergers can happen over time and investment is a critical feature of competition. 21M. Whinston, UNSW ATE Conference Dec 2014

22. Critical features of model: –Scale economies mean that firms can lower cost by either investing or by merging –Merger policy must weigh any benefit of external vs internal growth (including investment responses of rivals) against market power concern Example: proposed AT&T/T-Mobile merger in U.S. 22M. Whinston, UNSW ATE Conference Dec 2014