# Presentation: 217767

## Strengthening the Micro Foundations for Coordinated Interaction in Merger Analysis

**Andrew R. Dick**
**Vice President**

## Updated Approach to Coordinated Interaction

**   ****DOJ and FTC initiatives to modernize CI analysis**
**   ****Moving from probabilistic statements to fact-specific inquiries**
**   ****Stylized facts / correlations to micro-economic foundations**
**   ****Theories focused on maverick firms, competitor asymmetries, and opportunities for mavericks to disrupt CI**
**   ****Recent examples: label stock (DOJ), cruise lines (FTC)**

## Two Areas Warranting Further Analysis 

**I.   Should history matter, and if so, how?**
**II.  ****How will a merger affect transparency?**** **

## Three Steps

**Reality check**
- Does the general phenomenon apply in the specific market?
**Micro-economic foundations**
-    How does the merger affect the phenomenon?
**Sensitivity check**
- How big is the effect ?

## I.   Should History Matter, And If So, How?

**  ****In practice, courts have placed substantial weight on history**
-   History of price-fixing (*FTC v. Elders Grain*)
-   History of tacit coordination (*FTC v. Cardinal Health*)
-   History of price leadership (*FTC v. H.J. Heinz*)
-   History of cooperation in general (*Hospital Corp. of America v. FTC*)
**  ****History has shaped how agencies have heard evidence and influenced where they have set the bar**
**  ****These approaches appear to be guided by correlations, rather than micro-economic theory **
**  ****History used as a summary statistic for unobservables**

## Reality Check

**   ****Empirical evidence is very mixed**
**   ****Seemingly low recidivism rates in time series studies (Dick **_***JLE***_** 1996)**
**   ****Recidivists tend to be shorter-lived (Dick **_***JLE***_*** *****1996)**
**   ****But, some case studies do suggest learning by doing (Baker **_***JLE***_** 1989 and Alexander **_***REStat***_*** *****1994)**

## Micro-economic Foundations for History

**    ****Agencies must ask: “Has history mattered in *****this market*****?” and “How will history affect CI after *****this proposed merger*****?”**
**  ****Empirical evidence that history has mattered**
-   E.g., CI continued after the demise of suspect practices
**  ****Incorporation of micro-economics of history into the specific competitive effects theory **
-  History can help build current understandings
-  History can reveal firms’ “types”
-  History can “teach” firms how to coordinate
-  History can improve the accuracy of current and future monitoring

## Sensitivity Check

**Have “salient characteristics of the market changed appreciably” since the historical episode? (HMG ********§****2.1)**
-    Has entry occurred ?
-    Has the geographic market broadened ?
-    Have power buyers emerged ?
-    Have capacity constraints been relaxed ?

## II.  How Will a Merger Affect Transparency?

**   ****Courts give substantial weight to transparency**
- “Secrecy is the antithesis of successful collusion” (*US v. ADM*)
**   ****Agencies also highlight transparency**
- Relevant factors include “the availability of key information concerning market conditions, transactions and individual competitors” (HMG § 2.1)
**   ****Intuition: transparency improves reaching terms of coordination, detecting deviations, and punishing deviations **

## Reality Check

**   ****How accurate is competitor intelligence?  **
-  Compare merging parties’ actual prices against pre-merger intelligence
-  Compare prices against third-party industry intelligence
**  ****Have changes in transparency led to changes in pricing?  **
- Danish antitrust agency published cement transaction prices, leading average prices to rise 15-20% (Albaek, Molgaard & Overgaard _*JIE*_, 1997)
**  ****Have transaction prices closely tracked announced prices?**
- In *US v. ADM*, court noted that while price changes were routinely pre-announced, transaction prices differed substantially.

## Micro-economic Foundations for Transparency

**   ****Explain how *****this merger***** will increase transparency**
-  E.g., *Premdor-Masonite* CIS (DOJ)
**   ****Transparency of *****what***** ?**
-  Direct information: strategy choices (price, output) ?
-  Indirect information: payoffs (profits, market shares) ?
**   ****Discount appropriately for strategic customers and signal jamming incentives**

## Sensitivity Check

**   ****How much better informed will merging parties (or other firms) be after the merger?**
**   ****Can we quantify the merger’s impact on the signal-to-noise ratio? **

## Should History Matter, And If So, How?

**  ****Courts have placed substantial weight on history**
**  ****History shapes how agencies hear evidence and where they set the bar**
**  ****History has been used as a summary statistic for unobservable factors**
**   ****Reality check: empirical evidence is very mixed**
**   ****Goal: incorporate *****micro-foundations for history***** into the competitive effects theory **

## How Will a Merger Affect Transparency?

**   ****Courts and agencies give substantial weight to transparency**
**   ****Intuition: transparency improves reaching terms of coordination, detecting deviations, and punishing deviations **
**   ****Reality check: how good is the evidence in fact?**
**   ****Goal:  explain how *****this merger***** will increase transparency**