EXERCISE 1
Theoretically, horizontal merger models with no efficiencies predict that these will generally lead to higher prices and lower consumer surplus, may benefit the inside firms (i.e. the merging parties), and will always benefit the outside firms (i.e. the non-merging parties).
Discuss.
EXERCISE 2
Based on Motta Exercise 5.1
In the model of Salant, Switzer and Reynolds (1983), n firms produce a homogenous good and compete in quantities, the authors show that mergers where there are no efficiency gains are almost always unprofitable for the insiders, and are always profitable for outsiders
Give the intuition for the result obtained by these authors. Under what conditions would such a merger be profitable for insiders?
Tip: see lecture slides on merger paradox….. and in your answer, don’t just state outcomes – provide explanations
EXERCISE 3
In models of mergers between firms producing substitute (not identical) goods where price is the strategic variable, and assuming no efficiency gains, the merger is predicted to lead to unilateral market power effects (higher prices) and to benefit both insiders and outsiders.
Explain clearly the mechanisms that drive these outcomes, and the role played by the degree of substitutability between goods in generating such effects.
Exercise 4
In determining whether or not a horizontal merger between two firms producing substitute goods should be allowed, competition authorities must consider the potential unilateral market power effects and potential efficiency gains of the merger.
(i) Generally, merger models assuming no efficiencies, predict that the merger increases prices and decreases consumer surplus, benefits insiders and outsiders, and likely reduce welfare. Outline the roles that concentration and market share might play in the first instance in predicting the unilateral effects of the merger, and the factors that might mitigate the ability of firms to raise market power post-merger.
(ii) Discuss how the presence of efficiency gains might affect the decision competition authorities to allow the merger (tip – clearly explain the potential outcome post-merger in the presence of efficiency gains from the merger)
(iii) Given the above, outline the steps that anti-trust authorities may take in investigating the likely effects of a proposed merger.
(iv) Anti-trust authorities can allow a merger, prohibit it, or allow the merger if certain remedies are adopted. Outline the different types of remedies that may be used.
Exercise 5
Motta exercise 5.9 - something to think about….
There are three sellers F1, F2 and F3 in an industry. They have comparable capacities, technologies and market share. One Friday evening, firms F1 and F2 announce a merger. The next Monday, which is the first trading day after the announcement, the share price of firm F3 falls by 15%.
Explain (a) Is this consistent with what economic theory would predict, and if so, under which circumstances? (b) Can information about this drop in shares prices be of any relevance at all to the competition authorities?
Exercise 6
Based on Motta exercise 5.12 - something to think about….
In a small European country there are several newspapers, but only two newspapers that are specialised in international news and comments (they contain very little information about local events or national news, and even their coverage of sports and financial news is mainly international in scope). Since the country is bilingual, both newspapers are bilingual: the same articles are published in both German and French.
Now the two newspapers announce that they plan to merge. The national competition authority argues that the merger is giving rise to a monopoly position in the relevant market, and proposes to block it. Under the country’s competition law, though, the anti-trust authority has only an advisory role, and it is the Minister for Competition Affairs who has to decide. You are the Minister: What would you do?
Tip: think about the steps in assessing a merger…… market definition – unilateral effects – and cost efficiency effects…… what kind of factors might you take into account here?
Recall – we did the first part of this exercise in-class earlier on in the term when discussing definition of the relevant market (narrow? Broad?). Given the definition of the relevant market (important this is correct when following traditional approach…..), consider now what are the likely unilateral effects without cost efficiencies – what indicators might be used? How might cost efficiencies influence outcomes? Also….. potential for co-ordinated effects post-merger?