Duarte Brito

Preemptive mergers under spatial competition

Abstract Mergers for market power generally benefit outsider firms more than participating firms. Hence, outsiders should welcome such mergers between their competitors but, frequently, this is not the case. Under spatial competition some outsiders gain more than the participating firms but others might benefit less. Thus, if the number of admissible mergers is limited, firms may decide to merge to preempt rival mergers. This paper studies the incentives for preemptive merger by firms engaged in spatial competition.

Incentives to invest and to give access to non-regulated new technologies

We analyze the incentives of a vertically integrated firm, which is a regulated monopolist in the wholesale market and competes with an entrant in the retail market, to invest and to give access to a new wholesale technology. The new technology represents a non-drastic innovation that produces retail services of a higher quality than the old technology, and is left unregulated. We show that for intermediate values of the access price for the old technology, the vertically integrated firm may decide not to invest. When investment occurs, the vertically integrated firm may be induced to give access to the entrant for a low access price for the old technology. Furthermore, when both firms can invest, investment occurs under a larger set of circumstances, and it is the entrant the firm that invests in more cases. We also discuss the implications for the regulation of the old technology.

Interfirm Bundling and Vertical Product Differentiation

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no-bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high-quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.

Incentives to Invest and to Give Access to Non-Regulated Next Generation Networks

We analyze the incentives of a telecommunications incumbent to invest and give access to a downstream entrant to a next generation network, NGN. We model the industry as a duopoly, where a vertically integrated incumbent and a downstream entrant, that requires access to the incumbents network, compete on Hotellings line. The incumbent can invest in the deployment of a NGN that improves the quality of the retail services. Access to the old network is regulated, but access to the NGN is not. If the innovation is drastic, the incumbent always invests in the NGN, but does not give access to the entrant. If the innovation is non-drastic and if the access price to the old network is low, the incumbent voluntarily gives access to the NGN. If the innovation is non-drastic, there is no monotonic relation between the access price to the old network and the incumbents incentives to invest. A regulatory moratorium emerges as socially optimal, if the innovation is large but non-drastic. We also analyze the case where both firms can invest in the deployment of a NGN.

Mergers of Producers of Complements: How Autonomous Markets Change the Price Effects

We analyze the price effects of mergers to monopoly between producers of complementary goods when there exists a fraction of consumers that value only one of the components. We show that customers are more likely to face a price decrease for the composite good under this setting than when such consumers do not exist.

Quantifying the Coordinated Effects of Partial Horizontal Acquisitions

Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose an empirical structural methodology, which can deal with settings involving all types of owners and ownership rights, to quantify the coordinated effects of partial horizontal acquisitions on differentiated products industries, by evaluating the impact of such acquisitions on the minimum discount factors for which coordination can be sustained. We also provide an empirical application of the methodology to several acquisitions in the wet shaving industry that give rise to cross- and common-ownership structures. The results are as follows (i) the incentives to coordinate of the firms that the acquiring party is - pre-acquisition - able to influence are non-decreasing with any acquisition; (ii) the incentives to coordinate of the acquired firm are non-decreasing with acquisitions involving full or partial both financial and corporate control rights, but non-increasing with acquisitions involving full or partial solely financial rights; and (iii) the incentives to coordinate of the remaining firms in the industry are non-increasing with any acquisition. This implies that the coordinated effects of partial horizontal acquisitions are, in general, ambiguous, which illustrates the importance of an empirical structural methodology.

Does Vertical Separation Necessarily Reduce Quality Discrimination and Increase Welfare

Abstract We investigate whether vertical separation reduces quality discrimination and increases welfare. Consider an industry consisting of a vertically integrated firm, the incumbent, and an independent retailer, the entrant, which requires access to the services of the incumbents wholesaler. The wholesaler can discriminate against either of the retailers by supplying it an input of lower quality than its rival. We show that, in our setting, vertical separation of the incumbent reduces discrimination against the entrants retailer, although it does not guarantee non-discrimination. Furthermore, with vertical separation, the wholesaler may discriminate against the incumbents retailer. Vertical separation impacts social welfare through two effects. First, through the double-marginalization effect, which is negative. Second, through the quality degradation effect, which can be positive or negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous.

Access regulation and the entrant's mode of entry under multi-product competition in telecoms

We study the optimal access regulation during the transition from copper to fiber access networks in telecoms when each competitor provides broadband services that are both horizontally and vertically differentiated. We consider a setting in which there is a vertically integrated incumbent that controls a network required for the supply of the final services and an entrant that undertakes a “build-or-buy” decision. In this multi-product framework, where the quality of the services is endogenously determined, we show that the entrant always prefers service-based to facilities-based entry, provided that this option is available. Hence, the regulator sets the welfare-maximizing access charges whenever this socially optimal access pricing policy leads to higher welfare than facilities-based entry. Otherwise, a sufficient access policy that ensures facilities-based competition is to ban access to the incumbents upstream facilities. We present the conditions under which each of these instruments should be implemented and conclude that the optimal access rules depend on the characterization of consumers according to their tendency to be “firm-oriented” or “technology-oriented” since this discrimination determines whether intra-firm or, respectively, inter-firm competition prevails in the market.

Setting Upper Limits on Merger Related Efficiencies

The purpose of this paper is to show that a complementary entry analysis could be performed by the authorities when assessing the welfare impacts of a merger. In addition to analyzing the likelihood and impact of post-merger entry by other firms, the authorities could also study pre-merger alternatives for the insiders, that is, to study wether other concentration operations were available but not chosen by the merging or acquiring firms. This may be particularly useful when the authorities are faced with a concentration operation that raises anti-competitive concerns. Insiders will argue that cost reductions are likely to compensate these negative effects. However, if the cost reductions are not firm specific it is possible, in some circumstances, to establish an upper limit on the extent of cost reductions when there are other mergers available. If these mergers were admissible but were dominated by the present one, information is revealed about the extent of cost reductions. This information may lead to the authorities updating their beliefs on efficiencies. Such updates may lead to the modification of the decision to approve or reject the merger.

Unilateral Effects Screens for Partial Horizontal Acquisitions: The Generalized HHI and GUPPI

Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose a generalization of the two most traditional indicators used to screen unilateral anti-competitive effects - the Herfindahl-Hirschman Index and the Gross Upward Price Pressure Index - to partial horizontal acquisition settings. The proposed generalized indicators are endogenously derived under a probabilistic voting model in which the manager of each firm is elected in a shareholder assembly between two potential candidates who seek to obtain utility from an exogenous rent associated with corporate office. The model (i) can cope with settings involving all types of owners and rights: owners that can be internal to the industry (rival firms) and external to the industry; and rights that can capture financial and corporate control interests, can be direct and indirect, can be partial or full, (ii) yields an endogenous measure of the owners ultimate corporate control rights, and (iii) can also be used - in case the potential acquisition is inferred to likely enhance market power - to devise divestiture structural remedies. We also provide an empirical application of the two proposed generalized indicators to several acquisitions in the wet shaving industry, with the objective of providing practitioners with a step-by-step illustration of how to compute them in antitrust cases.