Abstract
This special issue is occasioned by the 50th anniversary of the publication of Williamson’s (Am Econ Rev 58:18–36, 1968a) seminal analysis of the impact of mergers on market performance. The Introduction reviews Williamson’s work on the topic, and introduces the seven contributions to the special issue. Four are empirical; two are theoretical; and one focuses on policy.
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Notes
In Williamson (1968a), the price increase and the cost reduction are parametric. Neither the nature of oligopolistic interaction in the post-merger market nor the basis for the cost reduction are explicitly modelled. Williamson (1977, p. 706) sketches a model of incumbent duopolists that face the possibility of entry.
The proportionality is of course exact if market demand is linear.
Williamson examines alternative values of constant-elasticity market demand. His numerical examples are extended by John Kasden in an appendix to Liebeler (1978).
In his introduction, Williamson (1968a, b) refers to Donald Dewey’s remark that (1961, p. 257) “Most mergers, of course, have virtually nothing to do with either the creation of market power or the realization of scale economies. They are merely a civilized alternative to bankruptcy or the voluntary liquidation that transfers assets from falling to rising firms.” This aspect of mergers should not be considered a limitation of the welfare-tradeoff analysis. Mergers that can be shown not to involve the creation of market power will not long absorb the attention of antitrust authorities.
Baker (2003, p. 41) estimates that “The direct governmental cost of antitrust enforcement in the United States (mostly outlays for federal enforcement) is roughly $150 million per year.” This estimate covers more than merger policy, but is sufficient to make the point.
Williamson (1969a, p. 109) reaches the same conclusion—efficiencies should exceed deadweight loss by a positive amount—as “a crude adjustment ...[that] would tend to assure that potentially unfavorable distributional consequences would not easily be sacrificed for only modest efficiency gains.” On the same page, he suggests that demoralization costs, which might include social discontent that arises from the exercise of market power, also be treated under such a “middle-range” welfare tradeoff approach.
But see Stigler (1950, p. 23, footnote omitted): “There are no large American companies that have not grown somewhat by merger, and probably very few that have grown much by the alternative method of internal expansion.”
Of course, internal expansion may lead to market power as well as cost savings.
Brown Shoe, 370 U.S. 294 (1962), fn. 32, quoting the final House and Senate reports: “Acquisitions of stock or assets have a cumulative effect, and control of the market ...may be achieved not in a single acquisition but as the result of a series of acquisitions. The bill is intended to permit intervention in such a cumulative process when the effect of an acquisition may be a significant reduction in the vigor of competition.” and “The intent here ...is to cope with monopolistic tendencies in their incipiency and well before they have attained such effects as would justify a Sherman Act proceeding.”
Here Williamson anticipates the theoretical analysis of markets in which price-setting firms produce differentiated goods (Davidson and Deneckere 1985).
On this point, Williamson cites Hadley (1897, p. 383): “Wherever competition is absent, there is a disposition to rest content with old methods, not to say slack ones. In spite of notable exceptions this is clearly the rule”. The correctness of the proposition has been debated since Schumpeter, and this debate seems unlikely to end anytime soon. See among many others Villard (1958) and more recently Aghion et al. (2005).
There are parts of Senate debate over the Celler–Kefauver Act that suggest that congressional intent to address incipient lessenings of competition was motivated by concern with political considerations of this sort. For a formal model of such political concerns as an objective of antitrust policy, see Martin (2018).
Kolasky and Dick (2003) trace the treatment of efficiencies in earlier editions of the merger guidelines.
In terms of Fig. 1a, if \(p_{2}<p_{1}\), consumers are not made worse off by the merger, even though \(p_{2}-c_{2}>0\).
Williamson discusses the impact of the threat of entry on post-merger price (1969b) and on the extent of pre-merger market power (1972, 1977, p. 706).
I describe results for the case that merger does not change the entry decisions of firms that are not involved in the merger. See the paper for complete statements of assumptions and results for other cases.
Williamson (1968a) does not consider asymmetric information. Of course, asymmetric information is a fundamental element in Williamson’s transaction cost analysis of governance institutions.
See, for example, the remarks of Senator Edmunds during debate on the Sherman Act (21 Cong. Rec. 3148 (1890)): “[The Committee on the Judiciary] thought that if we were really in earnest in wishing to strike at these evils broadly, in the first instance, as a new line of legislation, we would frame a bill that should be clearly within our constitutional power, that we should make its definition out of terms that were well known to the law already, and would leave it to the courts in the first instance to say how far they could carry it or its definitions as applicable to each particular case as it might arise.” The Supreme Court has acknowledged this characteristic of antitrust legislation (Appalachian Coals, Inc. v. U.S. (288 U.S. 344 (1933) at 359-360)): “As a charter of freedom, the Act has a generality and adaptability comparable to that found to be desirable in constitutional provisions.”
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Acknowledgements
I am grateful to the authors of papers in the special issue and to Larry White for comments on this introduction. Responsibility for errors is my own.
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Martin, S. Economies as an Antitrust Defense: The Welfare Tradeoffs—Introduction to the Special Issue. Rev Ind Organ 55, 327–338 (2019). https://doi.org/10.1007/s11151-019-09715-4
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DOI: https://doi.org/10.1007/s11151-019-09715-4