ASU Cournot Duopoly Inverse Demand Function & Nash Equilibrium Economics Question

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includes Cournot duopoly, inverse demand function, nash equilibrium and extensive form game

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Horizontal
Merger
Guidelines
U.S. Department of Justice
and the
Federal Trade Commission
Issued: August 19, 2010
Table of Contents
1.
Overview……………………………………………………………………………………………………………………. 1
2.
Evidence of Adverse Competitive Effects ………………………………………………………………………. 2
2.1
Types of Evidence………………………………………………………………………………………………….. 3
2.1.1
Actual Effects Observed in Consummated Mergers ………………………………………………. 3
2.1.2
Direct Comparisons Based on Experience……………………………………………………………. 3
2.1.3
Market Shares and Concentration in a Relevant Market ………………………………………… 3
2.1.4
Substantial Head-to-Head Competition ……………………………………………………………….. 3
2.1.5
Disruptive Role of a Merging Party…………………………………………………………………….. 3
2.2
Sources of Evidence……………………………………………………………………………………………….. 4
2.2.1
Merging Parties………………………………………………………………………………………………… 4
2.2.2
Customers ……………………………………………………………………………………………………….. 5
2.2.3
Other Industry Participants and Observers …………………………………………………………… 5
3.
Targeted Customers and Price Discrimination ………………………………………………………………… 6
Market Definition………………………………………………………………………………………………………… 7
4.
4.1
Product Market Definition ………………………………………………………………………………………. 8
4.1.1
The Hypothetical Monopolist Test ……………………………………………………………………… 8
4.1.2
Benchmark Prices and SSNIP Size ……………………………………………………………………. 10
4.1.3
Implementing the Hypothetical Monopolist Test ………………………………………………… 11
Product Market Definition with Targeted Customers …………………………………………… 12
4.1.4
4.2
Geographic Market Definition ……………………………………………………………………………….. 13
4.2.1
Geographic Markets Based on the Locations of Suppliers ……………………………………. 13
4.2.2
Geographic Markets Based on the Locations of Customers ………………………………….. 14
5.
5.1
5.2
5.3
Market Participants, Market Shares, and Market Concentration ………………………………………. 15
Market Participants ………………………………………………………………………………………………. 15
Market Shares ……………………………………………………………………………………………………… 16
Market Concentration …………………………………………………………………………………………… 18
6.
6.1
6.2
6.3
6.4
Unilateral Effects ………………………………………………………………………………………………………. 20
Pricing of Differentiated Products ………………………………………………………………………….. 20
Bargaining and Auctions……………………………………………………………………………………….. 22
Capacity and Output for Homogeneous Products……………………………………………………… 22
Innovation and Product Variety ……………………………………………………………………………… 23
7.
7.1
7.2
Coordinated Effects …………………………………………………………………………………………………… 24
Impact of Merger on Coordinated Interaction ………………………………………………………….. 25
Evidence a Market is Vulnerable to Coordinated Conduct ………………………………………… 25
8.
Powerful Buyers………………………………………………………………………………………………………… 27
ii
9.
9.1
9.2
9.3
Entry………………………………………………………………………………………………………………………… 27
Timeliness …………………………………………………………………………………………………………… 29
Likelihood …………………………………………………………………………………………………………… 29
Sufficiency ………………………………………………………………………………………………………….. 29
10.
Efficiencies ………………………………………………………………………………………………………………. 29
11.
Failure and Exiting Assets ………………………………………………………………………………………….. 32
12.
Mergers of Competing Buyers …………………………………………………………………………………….. 32
13.
Partial Acquisitions……………………………………………………………………………………………………. 33
iii
1.
Overview
These Guidelines outline the principal analytical techniques, practices, and the enforcement policy of
the Department of Justice and the Federal Trade Commission (the “Agencies”) with respect to
mergers and acquisitions involving actual or potential competitors (“horizontal mergers”) under the
federal antitrust laws.1 The relevant statutory provisions include Section 7 of the Clayton Act, 15
U.S.C. § 18, Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and Section 5 of the Federal
Trade Commission Act, 15 U.S.C. § 45. Most particularly, Section 7 of the Clayton Act prohibits
mergers if “in any line of commerce or in any activity affecting commerce in any section of the
country, the effect of such acquisition may be substantially to lessen competition, or to tend to create
a monopoly.”
The Agencies seek to identify and challenge competitively harmful mergers while avoiding
unnecessary interference with mergers that are either competitively beneficial or neutral. Most
merger analysis is necessarily predictive, requiring an assessment of what will likely happen if a
merger proceeds as compared to what will likely happen if it does not. Given this inherent need for
prediction, these Guidelines reflect the congressional intent that merger enforcement should interdict
competitive problems in their incipiency and that certainty about anticompetitive effect is seldom
possible and not required for a merger to be illegal.
These Guidelines describe the principal analytical techniques and the main types of evidence on
which the Agencies usually rely to predict whether a horizontal merger may substantially lessen
competition. They are not intended to describe how the Agencies analyze cases other than horizontal
mergers. These Guidelines are intended to assist the business community and antitrust practitioners
by increasing the transparency of the analytical process underlying the Agencies’ enforcement
decisions. They may also assist the courts in developing an appropriate framework for interpreting
and applying the antitrust laws in the horizontal merger context.
These Guidelines should be read with the awareness that merger analysis does not consist of uniform
application of a single methodology. Rather, it is a fact-specific process through which the Agencies,
guided by their extensive experience, apply a range of analytical tools to the reasonably available and
reliable evidence to evaluate competitive concerns in a limited period of time. Where these
Guidelines provide examples, they are illustrative and do not exhaust the applications of the relevant
principle.2
1
These Guidelines replace the Horizontal Merger Guidelines issued in 1992, revised in 1997. They reflect the ongoing
accumulation of experience at the Agencies. The Commentary on the Horizontal Merger Guidelines issued by the
Agencies in 2006 remains a valuable supplement to these Guidelines. These Guidelines may be revised from time to
time as necessary to reflect significant changes in enforcement policy, to clarify existing policy, or to reflect new
learning. These Guidelines do not cover vertical or other types of non-horizontal acquisitions.
2
These Guidelines are not intended to describe how the Agencies will conduct the litigation of cases they decide to
bring. Although relevant in that context, these Guidelines neither dictate nor exhaust the range of evidence the
Agencies may introduce in litigation.
1
The unifying theme of these Guidelines is that mergers should not be permitted to create, enhance, or
entrench market power or to facilitate its exercise. For simplicity of exposition, these Guidelines
generally refer to all of these effects as enhancing market power. A merger enhances market power if
it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or
otherwise harm customers as a result of diminished competitive constraints or incentives. In
evaluating how a merger will likely change a firm’s behavior, the Agencies focus primarily on how
the merger affects conduct that would be most profitable for the firm.
A merger can enhance market power simply by eliminating competition between the merging parties.
This effect can arise even if the merger causes no changes in the way other firms behave. Adverse
competitive effects arising in this manner are referred to as “unilateral effects.” A merger also can
enhance market power by increasing the risk of coordinated, accommodating, or interdependent
behavior among rivals. Adverse competitive effects arising in this manner are referred to as
“coordinated effects.” In any given case, either or both types of effects may be present, and the
distinction between them may be blurred.
These Guidelines principally describe how the Agencies analyze mergers between rival suppliers that
may enhance their market power as sellers. Enhancement of market power by sellers often elevates
the prices charged to customers. For simplicity of exposition, these Guidelines generally discuss the
analysis in terms of such price effects. Enhanced market power can also be manifested in non-price
terms and conditions that adversely affect customers, including reduced product quality, reduced
product variety, reduced service, or diminished innovation. Such non-price effects may coexist with
price effects, or can arise in their absence. When the Agencies investigate whether a merger may lead
to a substantial lessening of non-price competition, they employ an approach analogous to that used
to evaluate price competition. Enhanced market power may also make it more likely that the merged
entity can profitably and effectively engage in exclusionary conduct. Regardless of how enhanced
market power likely would be manifested, the Agencies normally evaluate mergers based on their
impact on customers. The Agencies examine effects on either or both of the direct customers and the
final consumers. The Agencies presume, absent convincing evidence to the contrary, that adverse
effects on direct customers also cause adverse effects on final consumers.
Enhancement of market power by buyers, sometimes called “monopsony power,” has adverse effects
comparable to enhancement of market power by sellers. The Agencies employ an analogous
framework to analyze mergers between rival purchasers that may enhance their market power as
buyers. See Section 12.
2.
Evidence of Adverse Competitive Effects
The Agencies consider any reasonably available and reliable evidence to address the central question
of whether a merger may substantially lessen competition. This section discusses several categories
and sources of evidence that the Agencies, in their experience, have found most informative in
predicting the likely competitive effects of mergers. The list provided here is not exhaustive. In any
given case, reliable evidence may be available in only some categories or from some sources. For
each category of evidence, the Agencies consider evidence indicating that the merger may enhance
competition as well as evidence indicating that it may lessen competition.
2
2.1
2.1.1
Types of Evidence
Actual Effects Observed in Consummated Mergers
When evaluating a consummated merger, the ultimate issue is not only whether adverse competitive
effects have already resulted from the merger, but also whether such effects are likely to arise in the
future. Evidence of observed post-merger price increases or other changes adverse to customers is
given substantial weight. The Agencies evaluate whether such changes are anticompetitive effects
resulting from the merger, in which case they can be dispositive. However, a consummated merger
may be anticompetitive even if such effects have not yet been observed, perhaps because the merged
firm may be aware of the possibility of post-merger antitrust review and moderating its conduct.
Consequently, the Agencies also consider the same types of evidence they consider when evaluating
unconsummated mergers.
2.1.2
Direct Comparisons Based on Experience
The Agencies look for historical events, or “natural experiments,” that are informative regarding the
competitive effects of the merger. For example, the Agencies may examine the impact of recent
mergers, entry, expansion, or exit in the relevant market. Effects of analogous events in similar
markets may also be informative.
The Agencies also look for reliable evidence based on variations among similar markets. For
example, if the merging firms compete in some locales but not others, comparisons of prices charged
in regions where they do and do not compete may be informative regarding post-merger prices. In
some cases, however, prices are set on such a broad geographic basis that such comparisons are not
informative. The Agencies also may examine how prices in similar markets vary with the number of
significant competitors in those markets.
2.1.3
Market Shares and Concentration in a Relevant Market
The Agencies give weight to the merging parties’ market shares in a relevant market, the level of
concentration, and the change in concentration caused by the merger. See Sections 4 and 5. Mergers
that cause a significant increase in concentration and result in highly concentrated markets are
presumed to be likely to enhance market power, but this presumption can be rebutted by persuasive
evidence showing that the merger is unlikely to enhance market power.
2.1.4
Substantial Head-to-Head Competition
The Agencies consider whether the merging firms have been, or likely will become absent the
merger, substantial head-to-head competitors. Such evidence can be especially relevant for evaluating
adverse unilateral effects, which result directly from the loss of that competition. See Section 6. This
evidence can also inform market definition. See Section 4.
2.1.5
Disruptive Role of a Merging Party
The Agencies consider whether a merger may lessen competition by eliminating a “maverick” firm,
i.e., a firm that plays a disruptive role in the market to the benefit of customers. For example, if one
of the merging firms has a strong incumbency position and the other merging firm threatens to
3
disrupt market conditions with a new technology or business model, their merger can involve the loss
of actual or potential competition. Likewise, one of the merging firms may have the incentive to take
the lead in price cutting or other competitive conduct or to resist increases in industry prices. A firm
that may discipline prices based on its ability and incentive to expand production rapidly using
available capacity also can be a maverick, as can a firm that has often resisted otherwise prevailing
industry norms to cooperate on price setting or other terms of competition.
2.2
Sources of Evidence
The Agencies consider many sources of evidence in their merger analysis. The most common sources
of reasonably available and reliable evidence are the merging parties, customers, other industry
participants, and industry observers.
2.2.1
Merging Parties
The Agencies typically obtain substantial information from the merging parties. This information can
take the form of documents, testimony, or data, and can consist of descriptions of competitively
relevant conditions or reflect actual business conduct and decisions. Documents created in the normal
course are more probative than documents created as advocacy materials in merger review.
Documents describing industry conditions can be informative regarding the operation of the market
and how a firm identifies and assesses its rivals, particularly when business decisions are made in
reliance on the accuracy of those descriptions. The business decisions taken by the merging firms
also can be informative about industry conditions. For example, if a firm sets price well above
incremental cost, that normally indicates either that the firm believes its customers are not highly
sensitive to price (not in itself of antitrust concern, see Section 4.1.33) or that the firm and its rivals
are engaged in coordinated interaction (see Section 7). Incremental cost depends on the relevant
increment in output as well as on the time period involved, and in the case of large increments and
sustained changes in output it may include some costs that would be fixed for smaller increments of
output or shorter time periods.
Explicit or implicit evidence that the merging parties intend to raise prices, reduce output or capacity,
reduce product quality or variety, withdraw products or delay their introduction, or curtail research
and development efforts after the merger, or explicit or implicit evidence that the ability to engage in
such conduct motivated the merger, can be highly informative in evaluating the likely effects of a
merger. Likewise, the Agencies look for reliable evidence that the merger is likely to result in
efficiencies. The Agencies give careful consideration to the views of individuals whose
responsibilities, expertise, and experience relating to the issues in question provide particular indicia
of reliability. The financial terms of the transaction may also be informative regarding competitive
effects. For example, a purchase price in excess of the acquired firm’s stand-alone market value may
indicate that the acquiring firm is paying a premium because it expects to be able to reduce
competition or to achieve efficiencies.
3
High margins commonly arise for products that are significantly differentiated. Products involving substantial fixed
costs typically will be developed only if suppliers expect there to be enough differentiation to support margins
sufficient to cover those fixed costs. High margins can be consistent with incumbent firms earning competitive
returns.
4
2.2.2
Customers
Customers can provide a variety of information to the Agencies, ranging from information about their
own purchasing behavior and choices to their views about the effects of the merger itself.
Information from customers about how they would likely respond to a price increase, and the relative
attractiveness of different products or suppliers, may be highly relevant, especially when
corroborated by other evidence such as historical purchasing patterns and practices. Customers also
can provide valuable information about the impact of historical events such as entry by a new
supplier.
The conclusions of well-informed and sophisticated customers on the likely impact of the merger
itself can also help the Agencies investigate competitive effects, because customers typically feel the
consequences of both competitively beneficial and competitively harmful mergers. In evaluating such
evidence, the Agencies are mindful that customers may oppose, or favor, a merger for reasons
unrelated to the antitrust issues raised by that merger.
When some customers express concerns about the competitive effects of a merger while others view
the merger as beneficial or neutral, the Agencies take account of this divergence in using the
information provided by customers and consider the likely reasons for such divergence of views. For
example, if for regulatory reasons some customers cannot buy imported products, while others can, a
merger between domestic suppliers may harm the former customers even if it leaves the more flexible
customers unharmed. See Section 3.
When direct customers of the merging firms compete against one another in a downstream market,
their interests may not be aligned with the interests of final consumers, especially if the direct
customers expect to pass on any anticompetitive price increase. A customer that is protected from
adverse competitive effects by a long-term contract, or otherwise relatively immune from the
merger’s harmful effects, may even welcome an anticompetitive merger that provides that customer
with a competitive advantage over its downstream rivals.
Example 1: As a result of the merger, Customer C will experience a price increase for an input used in producing
its final product, raising its costs. Customer C’s rivals use this input more intensively than Customer C, and the
same price increase applied to them will raise their costs more than it raises Customer C’s costs. On balance,
Customer C may benefit from the merger even though the merger involves a substantial lessening of
competition.
2.2.3
Other Industry Participants and Observers
Suppliers, indirect customers, distributors, other industry participants, and industry analysts can also
provide information helpful to a merger inquiry. The interests of firms selling products
complementary to those offered by the merging firms often are well aligned with those of customers,
making their informed views valuable.
Information from firms that are rivals to the merging parties can help illuminate how the market
operates. The interests of rival firms often diverge from the interests of customers, since customers
normally lose, but rival firms gain, if the merged entity raises its prices. For that reason, the Agencies
do not routinely rely on the overall views of rival firms regarding the competitive effects of the
5
merger. However, rival firms may provide relevant facts, and even their overall views may be
instructive, especially in cases where the Agencies are concerned that the merged entity may engage
in exclusionary conduct.
Example 2: Merging Firms A and B operate in a market in which network effects are significant, implying that
any firm’s product is significantly more valuable if it commands a large market share or if it is interconnected
with others that in aggregate command such a share. Prior to the merger, they and their rivals voluntarily
interconnect with one another. The merger would create an entity with a large enough share that a strategy of
ending voluntary interconnection would have a dangerous probability of creating monopoly power in this
market. The interests of rivals and of consumers would be broadly aligned in preventing such a merger.
3.
Targeted Customers and Price Discrimination
When examining possible adverse competitive effects from a merger, the Agencies consider whether
those effects vary significantly for different customers purchasing the same or similar products. Such
differential impacts are possible when sellers can discriminate, e.g., by profitably raising price to
certain targeted customers but not to others. The possibility of price discrimination influences market
definition (see Section 4), the measurement of market shares (see Section 5), and the evaluation of
competitive effects (see Sections 6 and 7).
When price discrimination is feasible, adverse competitive effects on targeted customers can arise,
even if such effects will not arise for other customers. A price increase for targeted customers may be
profitable even if a price increase for all customers would not be profitable because too many other
customers would substitute away. When discrimination is reasonably likely, the Agencies may
evaluate competitive effects separately by type of customer. The Agencies may have access to
information unavailable to customers that is relevant to evaluating whether discrimination is
reasonably likely.
For price discrimination to be feasible, two conditions typically must be met: differential pricing and
limited arbitrage.
First, the suppliers engaging in price discrimination must be able to price differently to targeted
customers than to other customers. This may involve identification of individual customers to which
different prices are offered or offering different prices to different types of customers based on
observable characteristics.
Example 3: Suppliers can distinguish large buyers from small buyers. Large buyers are more likely than small
buyers to self-supply in response to a significant price increase. The merger may lead to price discrimination
against small buyers, harming them, even if large buyers are not harmed. Such discrimination can occur even if
there is no discrete gap in size between the classes of large and small buyers.
In other cases, suppliers may be unable to distinguish among different types of customers but can
offer multiple products that sort customers based on their purchase decisions.
Second, the targeted customers must not be able to defeat the price increase of concern by arbitrage,
e.g., by purchasing indirectly from or through other customers. Arbitrage may be difficult if it would
void warranties or make service more difficult or costly for customers. Arbitrage is inherently
impossible for many services. Arbitrage between customers at different geographic locations may be
6
impractical due to transportation costs. Arbitrage on a modest scale may be possible but sufficiently
costly or limited that it would not deter or defeat a discriminatory pricing strategy.
4.
Market Definition
When the Agencies identify a potential competitive concern with a horizontal merger, market
definition plays two roles. First, market definition helps specify the line of commerce and section of
the country in which the competitive concern arises. In any merger enforcement action, the Agencies
will normally identify one or more relevant markets in which the merger may substantially lessen
competition. Second, market definition allows the Agencies to identify market participants and
measure market shares and market concentration. See Section 5. The measurement of market shares
and market concentration is not an end in itself, but is useful to the extent it illuminates the merger’s
likely competitive effects.
The Agencies’ analysis need not start with market definition. Some of the analytical tools used by the
Agencies to assess competitive effects do not rely on market definition, although evaluation of
competitive alternatives available to customers is always necessary at some point in the analysis.
Evidence of competitive effects can inform market definition, just as market definition can be
informative regarding competitive effects. For example, evidence that a reduction in the number of
significant rivals offering a group of products causes prices for those products to rise significantly can
itself establish that those products form a relevant market. Such evidence also may more directly
predict the competitive effects of a merger, reducing the role of inferences from market definition and
market shares.
Where analysis suggests alternative and reasonably plausible candidate markets, and where the
resulting market shares lead to very different inferences regarding competitive effects, it is
particularly valuable to examine more direct forms of evidence concerning those effects.
Market definition focuses solely on demand substitution factors, i.e., on customers’ ability and
willingness to substitute away from one product to another in response to a price increase or a
corresponding non-price change such as a reduction in product quality or service. The responsive
actions of suppliers are also important in competitive analysis. They are considered in these
Guidelines in the sections addressing the identification of market participants, the measurement of
market shares, the analysis of competitive effects, and entry.
Customers often confront a range of possible substitutes for the products of the merging firms. Some
substitutes may be closer, and others more distant, either geographically or in terms of product
attributes and perceptions. Additionally, customers may assess the proximity of different products
differently. When products or suppliers in different geographic areas are substitutes for one another to
varying degrees, defining a market to include some substitutes and exclude others is inevitably a
simplification that cannot capture the full variation in the extent to which different products compete
against each other. The principles of market definition outlined below seek to make this inevitable
simplification as useful and informative as is practically possible. Relevant markets need not have
precise metes and bounds.
7
Defining a market broadly to include relatively distant product or geographic substitutes can lead to
misleading market shares. This is because the competitive significance of distant substitutes is
unlikely to be commensurate with their shares in a broad market. Although excluding more distant
substitutes from the market inevitably understates their competitive significance to some degree,
doing so often provides a more accurate indicator of the competitive effects of the merger than would
the alternative of including them and overstating their competitive significance as proportional to
their shares in an expanded market.
Example 4: Firms A and B, sellers of two leading brands of motorcycles, propose to merge. If Brand A
motorcycle prices were to rise, some buyers would substitute to Brand B, and some others would substitute to
cars. However, motorcycle buyers see Brand B motorcycles as much more similar to Brand A motorcycles than
are cars. Far more cars are sold than motorcycles. Evaluating shares in a market that includes cars would greatly
underestimate the competitive significance of Brand B motorcycles in constraining Brand A’s prices and greatly
overestimate the significance of cars.
Market shares of different products in narrowly defined markets are more likely to capture the
relative competitive significance of these products, and often more accurately reflect competition
between close substitutes. As a result, properly defined antitrust markets often exclude some
substitutes to which some customers might turn in the face of a price increase even if such substitutes
provide alternatives for those customers. However, a group of products is too narrow to constitute a
relevant market if competition from products outside that group is so ample that even the complete
elimination of competition within the group would not significantly harm either direct customers or
downstream consumers. The hypothetical monopolist test (see Section 4.1.1) is designed to ensure
that candidate markets are not overly narrow in this respect.
The Agencies implement these principles of market definition flexibly when evaluating different
possible candidate markets. Relevant antitrust markets defined according to the hypothetical
monopolist test are not always intuitive and may not align with how industry members use the term
“market.”
Section 4.1 describes the principles that apply to product market definition, and gives guidance on
how the Agencies most often apply those principles. Section 4.2 describes how the same principles
apply to geographic market definition. Although discussed separately for simplicity of exposition, the
principles described in Sections 4.1 and 4.2 are combined to define a relev