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Economics of Regulation

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Stages of production - raw materials, refining, finished good, wholesale, retail. ... power - merger instead of colluding; vertical mergers can foreclose markets. Ex. ... – PowerPoint PPT presentation

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Title: Economics of Regulation


1
Economics of Regulation
  • Mergers and Acquisitions

2
Definitions
  • Merger - transaction that results in a wholly new
    firm.
  • Acquisition - transaction in which one firm is
    absorbed by another.

3
Horizontal/ Vertical/ Conglomerate Mergers
  • Stages of production - raw materials, refining,
    finished good, wholesale, retail.
  • Horizontal mergers - between two firms in the
    same stage of production.
  • Vertical mergers - between firms in different
    (usually adjacent) stages of production. Backward
    integration when a firm merges with one of its
    suppliers. Forward integration when a firm
    mergers with one of its customers.

4
Conglomerate mergers
  • Between firms that have little or nothing to do
    with each other.
  • A. Product extension merger - acquiring firm is a
    multiple-product firm that fills out its product
    line in a natural way by acquiring an established
    brand of the added commodity.
  • B. Market Extension merger involves firms in the
    same industry but not in the same geographic
    market.
  • C. Pure conglomerate - nothing to do with each
    other.

5
Motives for MA
  • Antiefficiency Motives
  • Acquiring monopoly power - merger instead of
    colluding vertical mergers can foreclose
    markets. Ex. Brown Shoe buying Kinney Shoe
  • Empire building by managers - prestige, job
    security, pay.

6
Motives for MA
  • Avoiding Taxes
  • A. Debt over equity financing. Interest is
    deductible dividends are not.
  • B. Revalue assets and increase depreciation
    allowances
  • Profits to merger promoters (Wall Street Broker
    firms earn lots for advising on mergers)

7
Motives for MA
  • Proefficiency Motives
  • Economies of scale, scope, synergies (Job losses)
  • Disciplining corporate management
  • Diversification and bargain hunting
  • Preventing opportunism involved specialized
    assets. RR to mine

8
Antitrust Laws
  • Section 7 of Clayton Act limits mergers that may
    lessen competition. Loopholes (stock vs. Physical
    assets).
  • Celler-Kefauver Act amended Clayton act to
    include any that would "lessen competition or
    tend to create a monopoly in any line of commerce
    in any section of the country."
  • Hart-Scott-Rodino Act requires FTC and Justice
    Department to review mergers and contest or
    require more information.

9
Horizontal Merger Guidelines
  • 1968 guidelines
  • In markets with four-firm CR gt 75 percent
    challenge if acquiring firm's market share gt 15
    and target is gt 1.
  • In markets with four-firm CR lt 75 challenge if
    acquiring firm's market share is gt 30 and target
    is gt 1.

10
Horizontal Merger Guidelines
  • 1982/84 guidelines (see JEP Fall 1987)
  • Herfindahl index used.
  • Structural factors examined - ease of entry
    turnover rates market growth

11
Horizontal Merger Guidelines
  • Relevant market uses 5 percent test If 5 percent
    price hike causes many buyers to purchase certain
    substitutes, these products are counted in the
    relevant market.
  • Cost saving or efficiencies might be used to
    justify mergers that would otherwise be ruled
    illegal.

12
Horizontal Merger Guidelines
13
Horizontal Merger Guidelines
  • Additional Factors
  • Is entry difficult?
  • Are products homogeneous?
  • Are substitutes inferior?
  • Is there a history of collusion in the market?
  • Is acquired firm a disruptive competitor?
  • Is market noncompetitive?
  • If no, challenge is unlikely.
  • If yes, challenge is likely.
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