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fusions
BarcelonaGraduate School of Economics
We are always too soft with mergers
Massimo Motta
ICREA-Universitat Pompeu Fabra Barcelona Graduate School of Economics
Milano, 28 February 2019
BarcelonaGraduate School of Economics
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Increasingconcentrationandprofitability
• Firms’profitabilityhasincreasedanditsdistributionismoreunequal(andbigbusinessisgettingbigger?)
• Sectoralconcentrationhasincreased
• Mark-upshavebeenrisingconsiderablyinthelastdecades
• Commonownershipmayhavereducedtheincentivesforrivalfirmstocompeteaggressively
- CouncilofEconomicAdvisors(2016),McKinsey,TheEconomist,McKinseyGlobalInstituteCompetitionReport(2015)
- DeLoeckerandEeckhout(WP,2017),Traina(WP,2017)- Azar,Schmalz,&Tecu(J.Finance2017)...
BarcelonaGraduate School of Economics
DeLoecker&Eeckhout(2017):Theriseofmarketpower
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Evolution of Weighted Average Markups, US, 1950 - 2014. Compustat (publicly traded firms, firm-level balance sheet data), US
BarcelonaGraduate School of EconomicsDeLoecker&Eeckhout2018:Globalmark-ups
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BarcelonaGraduate School of Economics Whyshouldwecare?
• Profitabilityisnotbadperse:theexpectationofprofits(i.e.,appropriability)isoneofthefactorswhichpushesfirmstoinvestandinnovate
• Butcompetition(i.e.contestability)islikelythesinglemostimportantfactorinproductivitygrowth,and..
• …higherconcentrationandincreasedprofitabilitymaysignalthatfirmsarenotcompetingasfiercelyastheyshould…
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BarcelonaGraduate School of Economics
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TheEconomist,Nov.16,2017
“Businessislesscut-throatthanit
usedtobe.”
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Risingconcentrationandprofitability:whatreasons?
– Globalisation:successfulfirmsgainmore
– Technologicalprogress:IPRsandnetworkeffectsmattermoreèconcentrationrises
– Fiscalpolicy:firmshavebenefitedoflowercorporatetaxes,andmultinationalsoffiscaladvantages
– Tooweakcompetitionenforcement?
• Hasmergercontrolbeentoolenient?
• RareabuseofdominanceenforcementintheEU(completelynon-existentintheUS)
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Someempiricalevidence
– Kwoka(2012):“meta-study”ofUSmergerretrospectives.76%anti-competitive;remedieswereinadequate.
– FTC:4outof5hospitalmergerspriceincreases:evennon-profitorganisationsraiseprices.
– Evenexpostassessmentofsomemergers(e.g.S-PVC,mobile)byECandNationalAgenciespointstopricerises…
(!)Notrepresentativesamples!
- Eventstudies:Dusoetal.(2013)findunconditionalapprovalofanti-competitivemergersin2/3ofthesample(anditmaybeanunder-estimation,seealsoKwokaandGu,2015)
Takewithpinchofsalt,butstillpictureofunder-enforcement…11
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Whatdoweknowfromtheory?
• Verticalandconglomeratemergersareperhapslesslikelytoharmcompetition,but…
• Horizontalmergershaveadetrimentaleffectonprices,exceptifefficiencygainsarelargeenough(andthehigherthemergingparties’marketpowerthelargerthecostsavingsneedednottohaveanticompetitiveeffects)– Doweexpecthighefficiencygainsforthemergersthatcompetitionagenciestypicallyworryabout?
• Yet,itisCompetitionAgencieswhichhavetoshowamerger“substantiallylessenscompetition”,anditisoftenexpectedthatmergersbeprohibitedonlyrarely
BarcelonaGraduate School of Economics Mergerunder-enforcement,I
• ECandNCAsareunder-staffed• StronginterestsatstakeàhugepressuresonCAs• Prohibitionperceivedasexceptional,andlast-resort…
àincreasinglycomplexremedies(seebelow)• CAsneedtoproveanticompetitiveeffects:
-Theoriesofharmneedtobesubstantiatedandstandardofproofmaybeveryhigh(seebelow)-Theydependonparties’data/information/internaldocuments-whichmayoftenbe‘strategic’aboutit
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BarcelonaGraduate School of Economics Mergerunder-enforcement,II
• Over-relianceonentryasamechanismwhichwillredresscompetition
• Theremaybeareasonwhypotentialentrantshavenotenteredtheindustryyet
• Evenifbarrierstoentryarelow,entrantsknowthatpost-entrytheincumbentswilldecreaseprices
• Someanecdotalevidence(expostdonebytheCMA;someECcases)
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Mergerunder-enforcement,III
• Concernsevenifparties’marketsharesbarelyoverlap:– Potentialcompetition:iffirmswanttogrow,likelytheywillentereachothermarket.Butneedforinternaldocuments…Mayeconomicshelpestablishthecounter-factual?
– Technology:alargefirmswallowslotsofminnowswithgoodideabutlittlemoney/production/marketingcapacity:synergiesorgettingridofapossiblyfuturerival?
– [Cunninghametal.(2018):“Killeracquisitions”]– Innovationmarkets:sometimesbylookingatthefinalmarketwegetthewrongpicture.E.g.,pharma:FirmsA,BdoR&Dinmarkets1,2,3,4.FirmAsuccessfulin1,2;Bin3,4.ByallowingamergerbetweenAandB,lesscompetitionininnovation(andinthefuturealsointheproductmarket)
BarcelonaGraduate School of Economics Mergerunder-enforcement,IV
• RarecoordinatedeffectscasesintheEUaftertheAirtoursjudgment(à“Overshooting”bytheEC)
• Recently,almostexclusivelycaseswheretherewaspasthistoryofattemptedorsuccessfulcollusionintheindustry
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• "Complex interventions”: "creative" solutions, e.g. carve-outs within
assets (or staff, contracts) of parties (e.g. multi product plants);
access remedies.
• Need to assess not only scope (full overlap 60% of cases,
2011-13), but also viability/competitiveness of purchaser;
innovation and product portfolio matter; also, parties have incentive
to select a weak buyer.
• CAs redesign industries with remedies: But, are they good at it?
• More generally, why should competition (and consumers) bear the
risk that remedies are insufficient?
Under-enforcement,V:remedies
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• Inmostcases,AAsandcourtsdonotreasonintermsofexpectedvalues
• SupposethemergerremedywouldleaveuswithΔCS=0,but the remedyworks with probability 51%. If it doesnot work, then ΔCS=-10%. In expected terms,E(ΔCS)=-5%,butapreponderanceofevidencestandardwouldleadtheAA/judgetoallowthemerger
• Similar reasoning for the impact of potentialcompetition,likelyentryetc..
Under-enforcement,VI:expectedvalues
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Summary,andimplications
Theory:horizontalmergersunlikelytobepro-competitiveEmpiricalevidenceconsistentwithmergerunder-
enforcementAmoresensibleapproachwouldbe:
-deminimisruleformergersinvolvingsmallfirms-Reversalofburdenofproofforanyotherhorizontalmerger(includingcaseswheremarketsharesbarelyoverlapbutpartiesareabovecertainthresholds)-Moreworkisneededonverticalandconglomeratemergers
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