Roger Sherman

The Price and Profit Effects of Horizontal Merger: A Case Study

THE economic rationale behind antitrust concern for horizontal mergers rests primarily on the familiar structure-performance paradigm that links market concentration with supra-competitive profits and, implicitly, with higher prices. A vast empirical literature has demonstrated a positive statistical relationship between measures of industry structure, such as entry barriers and concentration, and average industry profit using cross section data. A small number of cross section studies, most dealing with banking services, have claimed to find a positive relationship between concentrated market structure and price measures (Aspinwall [1970], Bell and Murphy [I969], Heggestak and Mingo [1976], Hester [I979], Lamm [I98I], Landon [I97I], Marion et al. [1979] and Marvel [1978]), but we are unaware of any study that traces the effect of an actual change in market structure on prices or profits. In this paper we exploit an unusual opportunity to test for price effects and estimate profit consequences of two acquisitions that resulted in substantial increases in the market share of the acquiring firm. The evidence we examine arises from a recent Federal Trade Commission antitrust suit against Xidex corporation, the worlds largest producer of duplicating microfilm. The Xidex case is unusual in three respects. (I) Although the size of the market is small (sales under

Collusion in Oligopoly: An Experiment on the Effect of Numbers and Information

ioo million), the acquisitions involved greater changes in market shares than are usual in antitrust actions. (2) The suit was brought five years after the first acquisition and two years after the second; so a post-acquisition record of price behavior exists for this example. Furthermore, the price data used in this study are actual transaction prices. (3) Special characteristics of the products allow a relatively straightforward test for price effects of the acquisitions. The next section provides background information concerning the firms and products involved. Following that, we describe the data and methodology used to estimate the price effects of the acquisitions, and present results which indicate significant price increases traceable to the acquisitions. We then offer estimates of the incremental profits attributable to those price increases. A final section provides a summary. * The analysis and conclusions set forth in this study are those of the authors and do not necessarily reflect the views of Federal Trade Commission Staff or the Commission itself. All data and other information used in the study are in the public domain This includes information obtained by the Commission which has become part of the public record. For helpful comments we thank Allan Fisher, Ron Lafferty, Paul Pautler and Rich Sciacca of the Bureau of Economics, Federal Trade Commission.

The Psychological Difference Between Ambiguity and Risk

I. Introduction, 240. — II. Price variations models of oligopoly, 241. — III. An experimental oligopoly market, 242. — IV. Hypotheses, 248. — V. Procedure, 249. — VI. Results, 251. — VII. Discussion, 257. — VIII. Summary and conclusions, 259.

Capital Waste in the Rate-of-Return Regulated Firm

I. Ambiguity and risk in an urn problem, 166. — II. Tolerance for ambiguity and choice in the urn problem, 167. — III. Conclusion, 169.

Rate-of-Return Regulation and Two-Part Tariffs

Here it is shown how capital waste can be motivated under rate-of-return regulation, even when the marginal product of capital is positive. This result means that the sign of the marginal product of capital is not adequate as a basis for defining waste. The wasteful use of capital is motivated to avoid an inelastic region of demand, and involves pricing as well as technical input decisions of the firm.

Congestion Interdependence and Urban Transit Fares

In choosing a two-part tariff, a monopoly subject to rate-of-return regulation will rely more on demand elasticities and less on marginal costs than would a welfare-maximizing firm. The rate-of-return regulated firm also will reduce its access fee or its marginal usage fee more, depending on whether adding consumers or increasing output requires marginally the most capital. In the typical case these effects will favor declining-block rate structures, which helps to explain their widespread use by rate-of-return regulated firms.

The averch and Johnson analysis of public utility regulation twenty years later

IF EACH AUTOMOBILE PAYS AVERAGE RATHER THAN MARGINAL SOCIAL COST OF A HIGHWAY TRIP, THERE WILL BE TOO MUCH AUTO TRAVEL DURING PERIODS OF CONGESTION. BY USING ONLY INPUTS TAXES, ADJUSTMENTS IN FARES ON ALTERNATIVE TRANSIT MODES, AND INCOME REDISTRIBUTION, RESOLVE THIS PROBLEM IN TWO WAYS: COMPLETE (FIRST-BEST) OPTIMALITY IN PEAK PERIODS AND SECOND-BEST OPTIMALITY IN OFF-PEAK PERIODS; OR FIRST-BEST OPTIMALITY IN OFF-PEAK PERIODS AND SECOND-BEST OPTIMALITY AT THE PEAK. IT IS SHOWN THAT WITH CONGESTION INTERDEPENDENCE, AS WHEN AUTOMOBILES AND BUSES CONTRIBUTE TO ONE ANOTHERS CONGESTION, THE SECOND-BEST PEAK SOLUTION CAN WARRANT AN URBAN BUS TRANSIT FARE BELOW AVERAGE COST CALLING FOR A SUBSIDY. AND UNDER A FIRST-BEST PEAK SOLUTION, INVOLVING BOTH AN INPUTS TAX AND A TRANSIT FARE ADJUSTMENT, A COMPANION SECOND-BEST OFF-PEAK TRANSIT FARE IS SHOWN THAT WILL MITIGATE THE (THEN INAPPROPRIATE BUT STILL EFFECTIVE) INPUTS TAX. /AUTHOR/

Advertising and Profitability

The Averch and Johnson model of a rate-of-return regulated firm seems to have captivated economists and focused their attention on modest technical inefficiency. Pricing distortions, which were revealed by Welliscz, and the incentive for more extreme technical distortions, which was described by Westfield, are not as widely considered or even understood twenty years after the articles appeared. Analysis using uncertainty and dynamic methods has also failed to treat the full range of rate-of-return implications. To do justice to these original contributions more effort is called for in designing new institutions of public utility regulation.

Risk Aversion and the Winner's Curse

unemployment rates quoted in table 1; however, a fuller statement is available on request from the author. The United Kingdom figures for 1960 onward are based on a letter to the author (dated 28/1/71) revising [7]. For earlier years the official statistics have been raised by a percentage based on the revised BLS information. Percentage adjustments have also been made to the French (Institut National de la Statistique et des Etudes Economiques) and German (registration series from the ILO Yearbook of Labour Statistics) figures in similar fashion, except that the 1958 German figure was supplied by the BLS. The Swedish figures for 1953-1961 come from [3]. The Italian figures for 1954-1958 are based on the irregular ISTAT surveys adjusted for seasonality and for comparability with United States definitions (the latter on an absolute basis) on the basis of experience since 1959. The 1953 figure, for reasons described in the supplementary statement, is the average for 1954-1956. The Australian unemployment rates for 1964 and 1965 are those of the Commonwealth Statistician, while those for 1958-1963 are based on an upward percentage adjustment of the Department of Labour and National Services registration series. The Belgian figures throughout are based on the percentage reductions indicated by [10] and [11]. The Dutch rates are those contained in the ILO Yearbook, since [10] and [11] indicated slight adjustments in conflicting directions.

Technology, Profit Risk, and Assessments of Market Performance

This article analyzes an auction in which bidders see independent components of a common prize value. The Nash equilibrium for two rational bidders is shown to be independent of risk attitudes. The information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize, contingent on winning, and thus they suffer the winners curse. Subjects in a laboratory experiment clearly fall prey to the winners curse; the data conform most closely to the predictions of the naive model. Moreover, the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate (private value) bidding exercise.