Mergers Flashcards
(25 cards)
Tiiming of authority intervention for mergers compared to collusion
Authority intervenes after collusion
Whereas with mergers, they intervent ex-ante, to predict the evolution of industry if merger occurs
Risks of mergers
New merged entity can exercise market power, leading to favourable conditions for collusion to emerge (however can also create conditions that offset collusion)
But in general assume it can facilitate collusion
So in general we assume collusion is made easier by mergers
What factors influence collusion (11)
Number of participants: If merger eliminates a significant competitor, makes collusion more sustainable (recall last topic: collusion easier when n low)
Entry barriers: merger can raise barriers e.g uniting technologies, making it harder for new entrants to compete, faciliating collusion.
Frequency of interaction: (more interaction, collusion easier. Less directly affected by a merger but still important)
Market transparency - when price & quantities of rivals are observable, collusion easier.
Growing markets=easier (δ>=1/2g)
Innovation: collusion harder to sustain in innovation-driven markets (recall collusion easier when homogenous)
Symmetry: if firms of equal cost/size etc.
Homogeneity:
Multi-market contact - same firms in several markets
Elasticity - more inelastic (collusion easier)
Buying power: Large buyer - less likely to collude since want full profits themselves
So important thing is we want to know how mergers tie into those factors
e.g number of participants - mergers reduce that number
Entry barriers: mergers can unite tech to increase barriers to entry
Frequency of interaction: less directly affected by mergers
What about market transparency and mergers
Merger if vertical e.g between manufacturer and distributor, can allow manufacturer to better know rivals’ marketing strategies i.e improves market transparency
What about innovation and mergers
Meger can enhance R&D synergy (knowledge transfer), making collusion harder
What about symmetry and mergers
If mergers restore symmetry can faciliate collusion, if increase asymmetry then opposite
Multi-market contact and mergers
Mergers can increase amount of firms present in different markets. possibility of collusion easier
Merger v acquisition
Merger - agreement to join to form single larger firm
Acquisition - firm takes control of another
(In terms of our analysis, they are equal i.e number of firms in market falls by 1)
3 categories of merger
Horizontal - competitors merge
Vertical - different levels of supply chain
Diversifying - firms in unrelated markets merge
Why does horizontal tend to be anti-competitive
Since increase market share and concentration of the new single entity
Why is vertical good
B) why potentially bad
Removes double marginalisation: the markup charged between stages of supply chain, lower costs can benefit prod and consumers
B)
Can have bad intent - to prevent rivals access to input (if the firm buys the key supplier)
Diversifying mergers main pro
Risk reduction and brand recognition (people see oh i know virgin, theyre doing … now? Wow)
2 effects of mergers
Unilateral effects: merger uses increased market power
Favourable conditions for collusion (as mentioned in the factors e.g reduces number of competitors)
Market power: ability to set P>MC
Consider small amount of shops competing in prices, thus charging p=MC
What happens if 2 or more sellers merge
Combine to reduce costs, now have costs lower than competitors so can price lower to gain all sales
Factors affecting market power (3)
Concentration/market share (positive rel)
Potential entrants (if more likely entrants, less market power)
Demand variables e.g switching cost
Recall market power from collusion part 1:
If we assume no efficiency gains (no cost reduction from rent-seeking), what happens to welfare?
B) what if we allow for efficiency gains (cost-reduction)
They extract rents and instead focus on maintaining market power in order to increase price
Thus consumer welfare falls. While PS increases, it does not fully compensate the loss in CS, thus a fall in total welfare (can draw the welfare loss understated diagram)
B)
If we allow for effiency gains, reverses negative effect of the merger (welfare loss)
How can efficiency gains (cost reduction) be made from mergers: 4 examples
E.o.S
Better DoL
Synergy in R&D (knowledge transfer)
Managment
Efficiency costs: what if it reduces fixed cost vs variable cost
Fixed cost reduction will have little effect; recall maximisation problem, FOC eliminates fixed cost
So efficiency gains lower unit costs for the new merged firm. (Cost advantage)
What do they do now? 2 options
Either maintain prices and increase profit margins
Or lower prices to increase market share
If efficiency gain is large, which of the 2 options are they more likely to do
B) does the anti-trust authority intervene?
If efficiency gains are large, more likely to lower prices to increase market share. (Given they have capacity to supply the market)
B) No, as lower prices are good for consumer welfare as well as the producers!
However may intervene if the merger does not have capacity to supply the market
So why are mergers complex to investigate
As considering current and predicting future states of variables between the merging companies, and the efficiency gain/losses.
(Will they show unilateral effect and exercise market power, or show efficiency gains n lower cost and prices?
Would insiders (the merging firms) have incentive to overestimatte or underestimate efficiency gains (cost-reduction, lower prices etc)
What about outsiders (their rivals
Overestimate (to allow merger to go ahead)
Outsiders underestimate (to protect themselves)
Thus AA needs 3rd party impartial auditors to create unbiased estimates to future efficiency gains
So how are outsiders (rivals) affected by mergers
Key: If efficiency gains from merger- outsiders become at a cost disadvantage. So fall in profits, thus incentive to block merger
If no efficiency gains - less impact
Eckbo: how can efficiency gains of merger be anticipated ex-ante, before the merger even occurs
Tracked share prices of rivals (of the merging firms) falling following merger announcement , found if they fall, efficiency gains anticipated. (Perhaps lose faith in the competitors now have to compete with a larger entity)
