John E. Kwoka

The Price Effect of Eliminating Potential Competition: Evidence from an Airline Merger

This paper analyzes the gain in pricing power that a firm achieves by merging with a potential competitor in its market. Using pricing data for the merger of USAir and Piedmont, empirical analysis finds that prices rose by 5.0 to 6.0 per cent on routes that one carrier served and the other was a potential entrant. This was more than half the increase on routes where the two carriers had been direct competitors. Other important factors included carrier size, market concentration, incumbents identity and the potential entrants presence at one or both endpoints.

Electric power distribution: economies of scale, mergers, and restructuring

Electricity distribution is generally viewed as a natural monopoly and therefore as having the least potential for the kinds of reforms that have swept the electric power sector in many countries. Mergers among distribution companies and efforts at retail competition have nonetheless altered the operation of the distribution stage. This research into US electric utilities uses a much larger and less selective data base than previously available to examine the scale properties of distribution with respect to output, distance, and customer numbers, and for different functions within distribution. It finds significant economies at low output levels, holding system size and customer density constant, but the cost gradient is otherwise modest. It also finds that geographic size and customer numbers are quite important and that economies are significantly stronger for the infrastructure or ‘wires’ business than for the marketing function performed by distribution utilities. These results lend credence to efforts at retail competition that separates these functions, but cast doubt on the benefits of mergers between distribution systems.

THE PRICE EFFECT OF ELIMINATING POTENTIAL COMPETITION: EVIDENCE FROM AN AIRLINE MERGER*: THE PRICE EFFECT OF ELIMINATING POTENTIAL COMPETITION

This paper analyzes the gain in pricing power that a firm achieves by merging with a potential competitor in its market. Using pricing data for the merger of USAir and Piedmont, empirical analysis finds that prices rose by 5.0 to 6.0 per cent on routes that one carrier served and the other was a potential entrant. This was more than half the increase on routes where the two carriers had been direct competitors. Other important factors included carrier size, market concentration, incumbents identity and the potential entrants presence at one or both endpoints.

Does Merger Control Work? A Retrospective on U.S. Enforcement Actions and Merger Outcomes

The accuracy and efficacy of merger control are important questions that have long posed challenges for policy evaluation. The growing number of merger retrospectives provide an opportunity to conduct such an analysis since they measure the outcomes of actual mergers. This paper compiles all available merger retrospectives that meet scholarly criteria, resulting in 48 mergers with measured price outcomes. It supplements this data base with information about the actions taken by U.S. antitrust agencies with respect to those particular mergers - whether they were cleared, or approved with remedies, or opposed. If remedies were imposed, conduct remedies are distinguished from structural remedies, since many observers view the latter as more likely effective. We find that the antitrust agencies cleared the studied mergers about as often as they imposed remedies, although the percent cleared has risen over time. We further find that most transactions resulted in increases in prices post-merger, suggesting a permissive antitrust posture. The price increases were considerably greater for mergers subject to conduct remedies than divestitures, corroborating doubt about the efficacy of conduct approaches. Finally, we find that the agencies cleared mergers without substantial price effects systematically and significantly more often than mergers resulting in large price increases. This suggests that agencies have been able to distinguish, on average, case deserving of approval from those raising the most serious competitive concerns.

Behavioral Merger Remedies: Evaluation and Implications for Antitrust Enforcement

The 2011 revision to the Antitrust Division Policy Guide to Merger Remedies signals a shift in the Department of Justice’s approach to merger remedies. The earlier Remedies Guide, issued in 2004, emphasized structural remedies such as divestitures as the preferred approach to resolving competitive problems with mergers. In contrast, the 2011 revision is considerably more favorably disposed toward the use of behavioral remedies that proscribe specified anticompetitive behaviors of the merged companies. This apparent policy shift is illustrated by the behavioral remedies employed by the DOJ in three recent merger cases – Ticketmaster-Live Nation, Comcast-NBCU, and Google-ITA. These three cases involve the use of multiple behavioral remedies, ranging from access conditions (e.g., licensing and non-discrimination requirements), firewalls, anti-retaliation provisions, to arbitration requirements, and provide for monitoring and compliance enforcement. The expansive new approach to behavioral remedies raises a number of concerns about their likely operation, effectiveness, and requirements for ongoing government monitoring and compliance enforcement. Many of these issues are similar to problems encountered in traditional industry regulation, ranging from countervailing incentives to implementation costs. Behavioral remedies also pose practical problems for antitrust enforcement. This paper identifies a number of issues that warrant attention and prompt some concern. Based on this early analysis, a number of observations and policy recommendations are offered.

Predicting Merger Outcomes: The Accuracy of Stock Market Event Studies, Market Structure Characteristics, and Agency Decisions

Merger analysis is an exercise in prediction. This paper analyzes the accuracy of two leading methods of predicting merger outcomes—stock market event studies and an approach using market structure criteria—as well as the accuracy of antitrust agencies’ decisions about challenging mergers. The basis for these evaluations is a database of price effects of 41 mergers compiled from published retrospective studies of mergers. This paper finds that event studies systematically underpredict the incidence of anticompetitive outcomes, while market structure criteria overpredict competitive problems. Agency decisions correct much of that overprediction, however, which suggests that structural criteria may serve as an appropriate first screen.

The Federal Trace Commission and the Professions: A Quarter Century of Accomplishment and Some New Challenges

Over the past 25 years, the Federal Trade Commission has consistently challenged price and nonprice horizontal restraints in the professions. Beginning with its case against the American Medical Association and extending through the Cal Dental proceeding, the FTC has significantly extended the reach of competition policy, transformed the way that professional services are supplied, and conferred sweeping benefits to consumers. After reviewing the major actions of the FTC, this paper (presented at the FTCs 25th Anniversary Symposium) focuses on the economics of the professions-the case for intervention, the case made by the professions in response to FTC challenges, and the new considerations raised by the Supreme Court in its Cal Dental ruling. We conclude that the major economic issues are now settled: There are no good reasons, either from a theoretical or an empirical vantage point, for concern about the effects of competition in the professions. To the contrary, the evidence supports the conclusion that competition yields major benefits to consumers in the form of lower prices, without adverse effects on quality. The concerns articulated by the Supreme Court are not supported by current economic understanding.

Manifest Destiny? The Union Pacific-Southern Pacific Merger

The merger of the Union Pacific and Southern Pacific Railroads was proposed in August 1995 and received regulatory approval in July 1996. From its proposal onward, the merger has sparked considerable controversy. This paper reviews the background to the merger, the arguments that were set forth by the merger?s proponents and opponents, the eventual decision by the U.S. Surface Transportation Board, and the difficulties that have beset the merged firm since 1996.

Mergers, Merger Control, and Remedies: A Response to the FTC Critique

It has now been two years since publication of my research monograph Mergers, Merger Control, and Remedies: A Retrospective Analysis of U.S. Policy (MIT Press, 2015; hereafter MMCR). During this time, the book has received attention from economists and lawyers, from policymakers in the U.S. and elsewhere, from think tanks and consultants, from reporters and others. This has been due in part to the fact that the focus of the research – mergers, their effects, and their control – have become matters of wider public concern in the U.S. economy. MMCR also received attention since its methodology – distilling the results of careful studies of mergers – was relatively novel and also since its findings included a number of conclusions that ran counter to some strongly held opinions. I therefore expected it to be challenged, and that challenge has now come from the Federal Trade Commission. In this review and update, I will first provide a brief overview of what my book in fact says, and then respond to the FTC’s various criticisms of its methodology and conclusions. I acknowledge an oversight that affects the strength of one conclusion, but otherwise, as I will show, there is nothing in the FTC critique that undermines the methodology or alters the conclusions of the book. Indeed, that critique makes clear the fundamental objectivity and strength of the underlying research.

The Changing Nature of Efficiencies in Mergers and in Merger Analysis

Efficiencies have long been an important aspect of the antitrust analysis of mergers, but in recent years there have been certain noteworthy changes in the nature and analysis of efficiencies. One change appears to be the greater ability of the antitrust agencies to evaluate conventional efficiencies carefully and critically. This is demonstrated by the analysis of efficiencies associated with a number of recent proposed mergers before the antitrust and regulatory agencies. The second important change concerns the types of efficiencies typically claimed by merging firms. Whereas in earlier years these largely involved scale economies, they now more often focus on dynamic efficiencies, quality benefits, and vertical economies. This article discusses each of these in turn and argues that these newer types of efficiencies pose new and greater challenges for analysis.