Abstract
Fifty years ago, Williamson (Am Econ Rev 58:23, 1968) argued that an efficiency-enhancing merger that reduces production costs but increases market power could be saved from antitrust condemnation if the cost savings created by the merger offset the allocative inefficiency. In this paper, we discuss some extensions of Williamson’s basic welfare tradeoff, and explore the attitudes of several countries around the world toward merger efficiencies. In spite of its economic logic, Williamson’s analysis has not been embraced by most of the antitrust authorities around the world. We explore different reasons why antitrust authorities have failed to adopt an explicit social-welfare standard.
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Notes
Mergers that have already been consummated can, of course, be challenged after the fact. In that event, proof of the cost saving will be possible—at least in principle—but estimating the allocative inefficiency will be no easy task.
Given this, agencies are more likely to accept documents as credible statements about efficiencies, synergies, or economies of scale in the ordinary course of business rather than consulting studies that are created shortly before or after the merger announcement.
Nonparticipant firms are the non-merging firms. The external effect is defined as the change in joint profits of the non-merging firms plus the change in consumer surplus (and is equivalent to the change in total welfare that is associated with a merger minus the change in joint profits of the merging firms).
Farrell and Shapiro (1990) show that this last condition can be weakened at the expense of additional assumptions on the demand and cost sides.
When two former competitors merge—for example, firms A and B—a decrease in the price of the product that is produced by firm A creates extra sales. Some of these additional sales come from product B. Those sales that are lost on product B represent a new marginal cost for the merged entity. The internalization of this effect will cause an upward pricing pressure.
The diversion ratio from product A to product B is the share of the lost sales of product A that are captured by product B when A’s price increases.
We define buyer power as a situation in which a downstream firm can affect the terms of trade with upstream suppliers. This arises when the share of purchases in the upstream input market by the downstream firm is sufficiently large that it can influence the market input price, causing it to fall by purchasing less.
It is possible for the derived demand to shift enough for the post-merger quantity to increase in spite of the buyer power. In this event, producer surplus would increase even though there would be some allocative inefficiency. This is the second possible outcome of a merger that was described earlier.
If the lawfulness of this merger depends solely on its impact on the competitive suppliers, then the merger would be unlawful due to the reduction in producer surplus from the pre-merger area P1eg to the post-merger area P2fg.
Quality is a general term that acquires content from the context. It may refer to fit, finish, durability, color fastness, taste, appearance, and functionality, among other things. In this context, we assume that all consumers agree that more of any attribute is usually desirable and, therefore, enhances the product’s value to the consumer.
Firms compete strategically by choosing both price and quality, in order to maximize profits. In this subsection, we abstract from this problem by making some strong assumptions. The purpose is to focus on the Williamson tradeoff.
This assumption can be relaxed, but doing so adds some complications that are not relevant to the present analysis.
The assumption that all consumers value the quality improvement equally is unimportant to the generality of the welfare results when the supply is perfectly elastic.
For simplicity, we ignore the efficiency gains that are generated by the merger.
Some recent examples are Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd. (St. Luke’s), 778 F.3d 775 (9th Cir. 2015); United States v. Anthem, Inc., 236 F. Supp. 3d 171, 186 (D.D.C.), aff'd, 855 F.3d 345 (D.C. Cir. 2017); or United States v. AT&T Inc., 2018 WL 2930849 (D.D.C. June 12, 2018). See Blair and Sokol (2012) for a summary of cases that involve efficiencies.
In determining merger specificity, the agencies will not require firms to pursue the claimed efficiencies in ways that are not practically available to them.
These jurisdictions include Australia, Chile, Colombia, European Union, Germany, Indonesia, Japan, Korea, Mexico, New Zealand, Russian Federation, South Africa, Sweden, Switzerland, Chinese Taipei, Turkey, and the United Kingdom.
Australia, New Zealand, and South Africa are the only O.E.C.D. countries that allow for a total welfare standard to play a role in merger evaluation.
Exceptions to this are Australia and Switzerland.
More precisely, Canada applied an explicit total welfare standard until the Superior Propane case. Currently, Canada has a “balancing weights” standard, in which the agency applies weights to consumer and producer surplus that reflect the social weight that corresponds to transfers between consumers and shareholders. These weights may be merger specific, in the sense that they may vary from one merger to another. See Ross and Winter (2003, 2005) for a detailed discussion about this and the Superior Propane case.
The problem does not seem to rely uniquely on the language of the law. During the last few years, the powers to enforce the AML were divided between different units: the Anti-monopoly and Anti-unfair Competition Enforcement Bureau of the State Administration for Industry and Commerce (SAIC), the Price Supervision and Anti-monopoly Bureau of the National Development and Reform Commission, the Anti-monopoly Bureau of the Ministry of Commerce (MOFCOM), and the Anti-monopoly Commission of the State Council. These antitrust enforcement units issued substantive rules that implement the AML that were not entirely consistent and released procedural rules that were similar but not identical and that were characterized by different cultures and enforcement styles. Recently, China’s government agencies have been reorganized. As part of the restructuring, China has established a State Market Regulatory Administration (SMRA), which will merge and undertake the responsibilities that were previously held by the SAIC, the General Administration of Quality Supervision, the Inspection and Quarantine Administration (AQSIQ), the Certification and Accreditation Administration (CAC), the Standardization Administration of China (SAC), and the China Food and Drug Administration (CFDA). In addition, the SMRA will govern a newly formed State Intellectual Property Office (SIPO) to regulate intellectual property rights. This reorganization could have a profound impact on antitrust enforcement in the country, since it integrates into one single authority the antitrust and price supervision functions of the aforementioned antitrust enforcement units. In this sense, the merger of the previous antitrust enforcement units is expected to enhance enforcement efficiency and consistency, and to reduce the uncertainties that were related to the different applicable rules and enforcement styles that were present in the previous regime.
Shan et al. (2012) study the welfare standard that is applied by the Chinese AML by examining seven recently challenged mergers. The conclusion that they draw is that the primary weight is placed on consumer surplus.
The assumption that the profitability of the merger is positively correlated with the extent of costs savings due to merger specific efficiencies implies that both producer and consumer surplus are positively related to the efficiencies created by the merger. Therefore, the most profitable merger is also the most favorable to consumers in terms of changes in consumer surplus. This rules out situations in which the profitability of the merger arises due to increased market power effects, lowering consumer surplus by more than the change in producer surplus. There are some other caveats in the analysis conducted by Besanko and Spulber (1993). See Farrell and Katz (2006) for a formal discussion of the paper.
Neven and Roller (2005) focus on how merger reviews at the agencies work, and analyze how lobbying can influence the choice of a welfare standard. Their argument to favor a consumer welfare standard relies on the assumption that firms can influence the antitrust authority, but consumers are unable to do so. Therefore, a consumer welfare standard should be biased towards the interests of consumers in order to counteract the bias that can arise from asymmetric lobbying. Lyons (2002) and Fridolfsson (2007) note that when firms are expected to propose the most profitable merger among those that will be allowed, then the use of a consumer surplus standard (which restricts the set of mergers that can be proposed) can in some cases lead to proposed mergers that increase social welfare. See Farrell and Katz (2006) for an excellent discussion of these papers.
A type-I error, in this case, would be the prohibition of a pro-competitive merger. A type-II error, on the other hand, would be permitting an anticompetitive merger.
Since most jurisdictions appear to favor a consumer welfare standard, it seems that they care more about avoiding type-II errors. Even though we do not attempt to shed light here on the different political reasons for this choice, a plausible explanation may be related to the visibility of the two different types of errors: The economic consequences of a type-II error are more visible than are the forgone benefits that result from a type-I error. Type II errors are apt to lead to price increases, quality degradation, quantity reductions, and limitations on product choice.
Farrell and Katz (2006) discuss how the motivation and compensation of agency staff and management may affect what standard the agencies and agencies’ staff should use. They also discuss how merger policy may also be affected by the passive or reactive role of the courts in adjudicating agency challenges but not themselves initiating challenges. Pittman (2007) argues that the structure of the U.S. Antitrust Division and FTC are biased against merger challenges. He argues that under these circumstances, an attempt by the agencies to maximize total welfare will lead to the challenge of too few mergers. On the other hand, a decision rule that is based on consumer surplus would help to counteract this bias.
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Acknowledgements
We thank Jessica Haynes, the late David Kaserman, and D. Daniel Sokol for past collaboration. We also thank Tirza Angerhofer for her research assistance, Stephen Martin, David Sappington, and Larry White for helpful comments and suggestions, and D. Daniel Sokol for some much needed advice.
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Bet, G., Blair, R.D. Williamson’s Welfare Trade-Off Around the World. Rev Ind Organ 55, 515–533 (2019). https://doi.org/10.1007/s11151-019-09708-3
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DOI: https://doi.org/10.1007/s11151-019-09708-3