# Presentation: 160406

## Efficiencies/Dynamic Analysis/Integrated Analysis

-  David Scheffman*
- and
- Owen Graduate School of Management
- Vanderbilt University
- February 2004

## How Are the Agencies Doing?

**Hard to tell given most “tough” efficiency cases do not usually get filed**
**Baby Food was not a “helpful” development**
- FTC should look closely at what has happened post-trial
***However***, the standards *should be* stringent (but not black letter)in a ***real***  3-to-2 merger
**Other cases?**
- Tank ammo

## How Are the Agencies Doing?

**But**** the importance of customer opinions in enforcement decisions is probably at least *****indirectly***** important in proper weighing of efficiencies in some investigations**
- For markets with sophisticated, representative **direct** customers, efficiencies are generally recognized (but _indirectly_ through impact on customer opinions)
**The problem is in cases that do not have sophisticated direct customers**
- Oil, Branded Products, Supermarkets, *etc*.
***Need retrospectives focusing on efficiencies***

## Efficiencies can be important
In 2nd Request decision
In a “close” case
“Implicit” in Customer Opinions with sophisticated representative direct customers 
In effect, there is a sort of sliding scale in which the stronger the anticompetitive case the less weight efficiencies receive (but not weighing by magnitude of efficiencies vs. magnitude of anticompetitive effects)
In this weighing efficiencies are considered more generally than in Guidelines

- In 2nd Request decision
- In a “close” case
**“****Implicit” in Customer Opinions with sophisticated representative **_**direct**_** customers**** **
**In effect, there is a sort of sliding scale in which the stronger the anticompetitive case the less weight efficiencies receive (but not weighing by magnitude of efficiencies *****vs*****. magnitude of anticompetitive effects)**
- In this weighing efficiencies are considered more generally than in Guidelines

**How Does FTC Actually Deal With Efficiencies**

## Merger Guidelines Efficiency criteria are generally used as a litigation-oriented check list
Is anyone on the matter looking at – but are there real efficiencies here?
And if there is and they find some – is anyone listening?
One problem is lack of full testing of efficiency claims (parties often do not know what staff are thinking and why)
This is an area in which we need more transparency

- Is anyone on the matter looking at – but are there real efficiencies here?
- And if there is and they find some – is anyone listening?
**One problem is lack of full testing of efficiency claims ****(parties often do not know what staff are thinking and why)**
- This is an area in which we need more transparency

**How Does FTC Actually Deal With Efficiencies**

## Efficiencies Roundtable

**We learned a lot through Efficiencies Roundtable**
**I think that we learned that:**
- Merger “Outcomes” are a mixed record, but to some extent not related to efficiencies
- Leading reason for financial shortfalls is overpaying
- Another important reason is unanticipated shortfalls in sales (“Revenue Dissynergies”)
******Customer Opinions**
- Other things equal, horizontal mergers are more likely to be successful
- “Straightforward Cost Savings” are generally realized
- Merger Planning and Implementation is Important
- Implications for “Gun Jumping”
- Implications for what agencies should expect to find in investigation

## Where/How Do Efficiencies “Fit”?

**“****Ideal Case”**
- Transaction driven by efficiencies_Example_:
- Plant combinations will lead to higher capacity (e.g., combination of batch and continuous production processes)
- Economics of production make reduction in capacity utilization not a viable theory
- Efficiencies  merger is procompetitive
**Most cases are not “ideal”**
- But efficiencies **always** belong at the beginning

## Integrative Analysis

**Judgments about market definition, competitive effects, barriers, and efficiencies are generally not certain – in some cases far from certain**
**Decision-making thus necessarily involves a compounding of probabilities**
- For example, if X, Y, & Z are independent, the probability that they are all “right” = Px*Py*Pz

## Integrative Analysis

**Beyond compounding of probabilities, conclusions on market definition, competitive effects, barriers, and efficiencies are often interrelated**
- In practice, this is often not recognized – in particular once staff “decides” on market definition, that is treated as settled
- However, the warts in the market definition or barriers evidence may be relevant to assessment of competitive effects
- This was important in the Cruise Line Mergers –** because empirical evidence was brought to bear that (for Staff and 3 Commissioners) rebutted *****theory***

## Integrative Analysis

**Interrelationship between market definition and competitive effects may be particularly important on a specific competitor basis**
- Minimum Viable Cartel analysis
**Obviously, as in our ideal case (and in Baby Food) the efficiencies are directly relevant to competitive effects analyses**

## What Efficiencies Should “Count”?

**“*****Incremental Costs/Pass Through*****” arguments have largely been sterile/fruitless and/or driven by litigation strategy**
**Fixed costs ****(*****See *****http://www.ftc.gov/be/rt/presentationpanel4.pdf)**
- Are only fixed in “short” run
- (Longer run) Fixed Costs clearly impact decisions on new product development, *etc.*
- It has long been well known that many if not most companies use some version of “total” average cost (total or operations) in their decision making
- This behavior is not irrational
- May be consistent with long run profit maximization
- Provides right managerial incentives

## What Efficiencies Should “Count”?

**Rather than (simple) economic theory, treatment of costs in actual financial documents (if clear) should be the guide as to how cost changes will impact decision making**
**Subject to inquiry re: how cost effects of merger will be accounted for**
- Internal cash flow is primary source of funds for most companies for investments in new products, technologies, *etc*.
**Merger Specificity?**
- How long do we/consumers wait?

## How Should Efficiencies “Count”?

**More attention to where the extra cash flow goes/how cost savings impact decision making in companies’ financial analyses**
- In many markets suppliers make arguments **to their customers** on pricing based on profitability necessary to provide incentives for new innovations of importance to customers
**Past track record should be important, including w.r.t. managerial efficiencies**
**Merger Specificity?**

## How Should Efficiencies “Count”?

**“****Simons Analysis”**
- May look complex but it is simpler than the sorts of analyses many companies actually do these days
- Scenario and Risk Analyses
**In any event, although the FTC and DOJ are clearly the experts in this area, their actual decision-making processes are too *****ad hoc*****  **
- This is a problem that other agencies have confronted (*e.g.*, EPA) and can also be the antitrust agencies.

## “Dynamic Competition”

**In the dot.com implosion there was a lot of consolidation that the agencies were probably too busy to deal with**
- A lot of 3-to-2 and 2-to-1 mergers
- Many of these presented “true” dynamic competition issues
- Short run competition impacted prices
- But issue was how industry would consolidate and what would be effects
- Apparent benefits to orderly consolidation through mergers
- Preservation of people, IP, etc.
- Potential benefits of sharing IP, choosing best features, *etc*.
- Ability to fund survival
**Agencies are not too busy any more ...**
- Monster/Hot Jobs
**Other industries ...**