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G406, Regulation,

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Staples-Office Depot Merger (1997) The FTC and Justice were notified ... Staples, Office Depot and Office Max clearly competed. Who else? What is the market? ... – PowerPoint PPT presentation

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Title: G406, Regulation,


1
  • G406, Regulation,
  • Eric Rasmusen, erasmuse_at_indiana.edu
  • 13 Feb. 2007
  • 7-mergers

2
4-Firm Concentration Ratios
  • Cigarettes
  • Concrete
  • Flat glass
  • Womens and girls cut-and-sew dresses
  • Audio and video equipment
  • Iron and steel mills
  • Petroleum refineries
  • Breweries
  • Turbines
  • Cereal
  • Pharmaceuticals
  • Farm machinery
  • Gasoline engines

3
(No Transcript)
4
1992 HORIZONTAL MERGER GUIDELINES a)
Post-Merger HHI Below 1000. OK. b)
Post-Merger HHI Between 1000 and 1800. An
increase in the HHI of less than 100 points is
OK. A bigger increase needs analysis. c)
Post-Merger HHI Above 1800. An increase in the
HHI of less than 50 points is OK. An increase
of more than 100 is presumed to be likely to
create or enhance market power or facilitate its
exercise, but the presumption may be
overcome by showingthat competition would be
vigorous anyway.
5
1992 HORIZONTAL MERGER GUIDELINES Two firms
have market shares of 10 and 15, and all other
firms are tiny. Can the two firms merge?
  • a) Post-Merger HHI Below 1000. OK.

6
MERGER GUIDELINES EXAMPLE II Two of the
firms in this industry have market shares of 5
each. Can they merge? b) Post-Merger HHI
Between 1000 and 1800. An increase in the HHI
of less than 100 points is OK. A bigger increase
needs analysis.
7
MERGER GUIDELINES EXAMPLE III c)
Post-Merger HHI Above 1800. An increase in the
HHI of less than 50 points is OK. An increase
of more than 100 is presumed to be likely to
create or enhance market power or facilitate its
exercise, but the presumption may be
overcome by showingthat competition would be
vigorous anyway. Two firms in the industry
have market shares of 10 each. Can they merge?
8
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9
Mittal-Arcelor (2007 merger)

A global steel giant that will be almost 3 times
bigger than the nearest rival, Nippon Steel
Parameters Unit Mittal Arcelor Capacity m
MT 63.0 46.7 Revenues US bn 28.1 39.1
US 32 bn takeover bid . 10 share of the global
steel capacity of 1,132 m tonnes (MT) per year.
(1997 world capacity 800, 2005 1132 MT The
Mittal family will hold a 43.4, Arcelor
shareholders will own 50.5 stake.
10
(1) As part of Mittal's bid an agreement
to sell Dofasco , to ThyssenKrupp. Arcelor
put Dofasco, its recently acquired Canadian
subsidiary, into a Netherlands trust to keep
Dofasco out of Mittal's grasp and make the whole
acquisition of Arcelor more difficult. The
United States government ordered Arcelor Mittal
to sell Dofasco. If it cannot do that because of
the trust structure, the company must divest
either Mittals Sparrows Point mill near
Baltimore or its mill in Weirton, W.Va. Also,
Dofasco must operate like a stand-alone company.
It cannot disclose any substantive information
about operations to Arcelor Mittal the six
directors the European company appointed to
Dofasco no longer attend board meetings, which
are now conducted by the Dofascos six
independent directors and Arcelor Mittal only
receives very limited information about the
Canadian companys financial performance. (2) -
Steel giant Arcelor Mittal said Friday thatit was
selling its Polish steel mill Huta Bankowa to
Alchemia SA as part of its compliance with EU
antitrust . It had 81 million euros (104.7
million) in turnover in 2005 and employs about
700 workers.

11
Case 1 Merger Raises Price and Cost
  • Each of the two firms in the industry has TC
    2 QQ/10, so MC
  • Q/5 and FC 2. Each produces 10 units, so TC
    2 1010/10 12
  • for each. Average cost is 1.2 and marginal cost
    is 2. The price is
  • 3.
  • Industry profit is 320 - 22 1010/10
    60 - 2 (12) 36.
  • After the merger, there is just one firm, with
    TC 2 QQ/10.
  • Suppose it produces 15 units, which makes so
    the price goes up to 5.
  • TC 2 1515/10 2 225/10 24.5. Average
    cost is 24.5/15 1.6
  • and marginal cost is 15/53.
  • So total cost has risen, but output has fallen.
  • Industry profit is 515 - 24.5 75-24.5
    50.5. So the merger did
  • raise profits, even though it reduced welfare.

12
Case 2 Merger Reduces Cost and Price
  • Each of the two firms in the industry has TC
    2 3Q, so MC3
  • and FC 2. Each produces 10 units, so TC 2
    310 32 for each
  • firm. Average cost is 3.2 and marginal cost is
    3. The price is 4.
  • Industry profit is 420 - 2(2 310) 80 -
    232 16.
  • The merger allows the firms to share
    complementary technologies and reduce marginal
    cost. Therefore, after the merger, there is just
    one firm, with TC 2 .5Q.
  • The firm could reduce output from 20 to 15 and
    the price would rise
  • to 5. Its profit would be 155 - 2 .5(15)
    75- 9.5 65.5.
  • But the firm prefers to increase output from
    20 to 30, which
  • drives down the price to 3. Its profit is 303
    - 2 .5(30) 90 -
  • 17 73.

13
Case 3 Merger Reduces Costs but Raises Price
  • Each of the two firms in the industry has TC
    3Q, so MC3 and FC
  • 0. Each produces 10 units, so TC 310 30
    for each firm.
  • Average cost is 3 and marginal cost is 3. The
    price is 4.
  • Industry profit is 420 - 320 80-60
    20.
  • The merger allows the firms to share
    complementary technologies and
  • reduce marginal cost. Therefore, after the
    merger, there is just one
  • firm, with TC 2Q.
  • The firm could increase output from 20 to
    30, which drives down
  • the price to 3. Its profit would be 303 - 302
    90-60 30.
  • But the firm prefers to reduce output from 20
    to 15 so the price
  • will rise to 5. Its profit would be 155 - 152
    75 - 30 45.

14
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15
Table 7.1 Minimum cost reduction to make a
merger raise PSCS
  • Price Elasticity of demand
  • Increase 3 2 1 .5
  • 5 .43 .28 .13 .06
  • 10 2.00 1.21 .55 .26
  • 20 10.37 5.76 2.40 1.10

16
Staples-Office Depot Merger (1997)
  • The FTC and Justice were notified
    (Hart-Scott-Rodino Act)
  • What is the concentration ratio?
  • Staples, Office Depot and Office Max clearly
    competed. Who else? What is the market?

17
Price and Cost Effects
  • Assume no cost change. The FTC said the merger
    would raise prices 7.3. Staples said 2.4.
  • What are cost savings? The FTC said 1.4 of
    sales, passed along to consumers. Staples said
    more, and being passed along was irrelevant.
  • What is the ultimate price effect? The FTC said
    a 7.3 increase. Staples said a 2.2 decrease.

18
An Efficient Merger?
  • Use the FTC numbers Costs fall by 1.4 of sales,
    prices rise by 7.3.
  • Suppose the elasticity of demand is 1, which is
    average loosely speaking.
  • Table 7.1 says a merger is OK if costs fall by
    .55 or more, prices rise by 10, and the
    elasticity is 1.
  • Even if the elasticity is 2, if costs fall by
    1.21 or more, the merger is OK.
  • But the FTC and the Court said the efficiency
    analysis wasnt going to decide the case.

19
Evanston Northwestern Healthcare
  • The FTC challenged the 2000 takeover of
    Highland Park Hospital by Evanston Northwestern
    Healthcare Corp., Northwestern U's nonprofit
    hospital.
  • (1) FTC administrative law judge.
  • (2) Any appeal of his ruling goes to the full
    five-member FTC
  • (3) Further appeals by either side go to the
    federal appeals court.
  • In 2000 the hospital system raised United
    Healthcare's HMO rates by 52 at its Evanston and
    Glenbrook hospitals and by 38 at Highland Park.
  • "Evanston Northwestern says it rescued the
    once-struggling community hospital in Highland
    Park and improved the quality of care. The
    hospital system has said that a forced
    divestiture, as demanded by the FTC, would
    "disrupt the lives of patients, doctors,
    employees" and others.""
  • In 2004, 130 hospitals were acquired or merged
    in the U.S. in transactions valued at a total of
    9.07 billion.

20
Nonprofit Status
  • In some previous mergers, courts have pointed to
    hospitals' nonprofit status as a reason to let
    mergers go through.
  • In the mid-1990s the FTC fought unsuccessfully
    to block a Grand Rapids, Mich., merger. A federal
    court allowed it to proceed, based on economic
    analysis that nonprofit mergers tended to reduce
    costs and prices.
  • The court also ruled that nonprofit hospital
    boards, as community leaders, had an incentive to
    restrain prices. A federal appeals court upheld
    that ruling in 1997.
  • Nonprofit hospitals, the FTC argues, do have an
    incentive to maintain a "surplus" of revenue over
    expenses, and while they don't distribute these
    "profits" to shareholders, they can use them for
    salaries, equipment or expansion.
  • Evanston Northwestern 850 beds in three
    hospitals, about 7,600 employees and annual
    revenue of 1.8 billion. 239-bed Highland Park
    has 239 beds.

21
Two Charges
  • The FTC alleges it imposed big price increases
    on insurers such as Aetna Inc., Humana Inc. Cigna
    Corp., United Healthcare ... Several of the
    insurance companies, unhappy with the price
    increases, are expected to be called as witnesses
    by the FTC at the trial.
  • In 2000 the hospital system raised United
    Healthcare's HMO rates by 52 at its Evanston
    and Glenbrook hospitals and by 38 at Highland
    Park.
  • The hospital raised its preferred-provider rates
    by 190 at Evanston and Glenbrook hospitals and
    by 20 at Highland Park.
  • The FTC also has accused Evanston Northwestern of
    price-fixing of physician fees, after combining
    two large groups of physicians following the
    merger.
  • The FTC is taking a highly unusual step in
    seeking to undo a merger.
  • Dec. 2005 FTC wins with the administrative law
    judge.
  • Feb. 2007 The case is currently on de novo
    review before the FTC on appeal from an
    Administrative Law Judge determination.
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