Silviase/jgov_v1.4_full_ann huggingface dataset:
decision, to better assess the impact of the proposed transaction, the Commission “conducted a series of econometric analyses and has examined econometric studies provided by a third party and the parties.” $ ^{184} $ For instance, with respect to perioperative patient monitors, the price impact of the acquisition was estimated using an econometric model that was capable of identifying the degree to which GE’s percentage price discounts to customers were higher (i.e., prices were lower) when Instrumentarium was competing for the bid, and the degree to which Instrumentarium’s percentage price discounts to customers were higher when GE was competing for the bid. In recognition that there was a high degree of differentiation among the competing product offerings (due to differences in product specifications, equipment packages, and accessories), the EC compared the percentage discount on the price, rather than the price level.

In an analysis based on tenders in France, the EC found that the average percentage discount offered by Draeger Medical Systems Inc., who was GE's distributor of patient monitors sold to the perioperative area in the period for which data were available, was generally 5 to 10 percent higher when Instrumentarium was present in the bid than when Instrumentarium was not present in the bid. $ ^{185} $ Similarly, an analysis of GE's bidding data demonstrated that, on average, GE's discounts were 10 to 20 percent higher when Instrumentarium was present than when Instrumentarium was not present in the bid. $ ^{186} $

Based in part on the empirical analyses described above, the EC concluded that GE and Instrumentarium exerted strong competitive constraints on each other's pricing of perioperative patient monitors and that this direct competition would be lost as a result of the acquisition. In its final decision, the EC cleared the acquisition subject to commitments intended to preserve competition in the market for perioperative patient monitors and ensure the interoperability that currently exists between anesthesia machines, patient monitors, and clinical information systems. $ ^{187} $

The econometric analysis that was conducted in the EC’s investigation of GE’s
proposed acquisition of Instrumentarium was not a substitute for the EC's analysis of market shares and other "qualitative" factors that may affect the competitive analysis (e.g., countervailing buyer power and barriers to entry and expansion). However, the use of these empirical methods is an indication of the great weight that is given to analyses that can quantify the likely price effects of a proposed transaction.

### D. Critical Loss Analyses

### 1. Methodology

Critical loss analyses have become a common tool in empirical merger analysis. They have been used to assist in defining the relevant market and in examining the profitability of a price increase by a hypothetical group of sellers. The theory behind the analysis is straightforward: it is a comparison of the actual loss in sales that might result from an increase in price against the amount of lost sales that would make such a price increase unprofitable. The latter is the “critical loss,” or the threshold against which the actual loss in sales is compared. The actual loss—which reflects the elasticity of demand for the products at issue—can be estimated using econometric techniques. A critical loss analysis is therefore useful in defining relevant markets using the construct defined in the U.S. Merger Guidelines, which defines markets based on the profitability of a price increase by a hypothetical monopolist of a candidate group of products. $ ^{188} $ In addition, it can be used to assess the potential competitive effects of a proposed merger by providing a framework to assess the profitability of a price increase by a group of competitors.

##### 2. Case Study: The R.R. Donnelley/Meredith Burda Acquisition

In early 1990, R.R. Donnelley & Sons Co. (R.R. Donnelley), a commercial printing business, announced its intention to acquire Meredith/Burda Company L.P (Meredith/Burda). After issuing a Second Request and conducting its review, the U.S.
FTC went before a U.S. District Court judge in July 1990 seeking a preliminary injunction to stop the acquisition. $ ^{189} $ The judge held an evidentiary hearing, and based on the evidence presented in the hearing denied the FTC's motion. The parties were free to complete the transaction and did so on September 4, 1990.

Under the Clayton Act, the FTC has the power to challenge a consummated merger by holding an internal administrative hearing presided over by an FTC administrative law judge (ALJ). Based on its belief that the District Court judge's hearing had been of insufficient length to fully address the issues, the FTC issued an administrative complaint challenging the acquisition. After discovery, an administrative hearing was held between January and June 1993. In December 1993, the ALJ issued a decision finding that the acquisition would substantially lessen competition. The ALJ required R.R. Donnelley to divest the Meredith/Burda business as a remedy. R.R. Donnelley appealed the ALJ's decision to the FTC Commissioners. After a de novo review, the Commissioners voted unanimously to reverse the ALJ's initial decision and dismiss the Complaint. Specifically, in its order, the Commissioners stated that, "the Complaint is dismissed for failure to prove that the acquisition is likely substantially to reduce competition in a relevant market." $ ^{190} $

### a. The Commercial Printing Industry

Commercial printers produce and sell customized printed material (“publications”) to business customers. Examples of publications are catalogs, newspaper advertising inserts, magazines, and telephone books. Printing jobs involving these types of publications are called “high volume” jobs because they typically require a large number of copies be produced.

At the time of the proposed transaction, two different types of printing processes were employed by printers to perform high volume printing: “gravure” and “offset.” The gravure process had a higher setup cost than the offset process, but a lower cost per copy. Consequently, as the run length of a printing job (i.e., number of copies of the publication) increased, the cost of doing the job using gravure improved relative to the cost of doing the job using offset, all else equal. However,
characteristics of the job other than number of copies might give offset a relative cost advantage even for jobs with a high number of copies. For example, the larger the number of versions (e.g., a catalog retailer might want to send different versions of its catalog to different sets of customers), the lower was the cost of offset relative to gravure. This was because each version required new setup costs. However, in the end, the cost advantages that one process had over the other were relatively small: over a wide range of job parameters, the costs of the two printing processes were within 5 percent. Thus, for many jobs, printers could and did compete using either offset or gravure.

Prior to the acquisition, Donnelley had a 29 percent share of the high volume printing market and Meredith/Burda had a 15 percent share. $ ^{[191]} $ They were the first and third largest firms in the industry, respectively. In terms of gravure printing alone, their shares were somewhat higher: 36 percent and 18 percent. Their gravure shares were higher than their overall shares in part because some printers had only offset printing capabilities.

### b. Market Definition

In its Complaint, the FTC staff contended that although offset and gravure competed over a wide range of printing jobs, there were certain types of jobs for which gravure had a significant cost advantage: namely, jobs with a large number of copies (at least ten million), a large number of pages (at least 32), and fewer than four versions. $ ^{192} $ As a result, these jobs constituted a separate relevant market according to the FTC staff under a “price discrimination” theory. Specifically, the FTC maintained that a hypothetical monopolist of the gravure printing process would be able to profitably raise price on these jobs because the cost of offset would be at least 5 percent higher than the cost of gravure.

In its decision, the FTC Commissioners rejected this argument for several reasons. $ ^{193} $ First, the number of copies that defines the “crossover point” when gravure becomes less costly than offset (and thus the number of copies defining the 5 percent gravure cost advantage) is not known with certainty and varies with all of the other characteristics of the job. Second, offset technology had been improving
historically and was expected to continue improving in the future. As a result, the crossover point was increasing over time, meaning that offset was becoming increasingly competitive with gravure even at high numbers of copies. Third, some of the job characteristics the FTC used to define the proposed market (e.g., versioning) were not fixed characteristics of the job, but instead were competitive choice variables. For example, while a given job with three versions and fifteen million copies might be more expensive with offset than gravure, the number of versions could be changed to five instead of three, at which point it would be less expensive to do the job with offset and the customer would have a more flexible publication. In this case, the right analysis is not to compare offset versus gravure assuming three versions, but to compare offset with five versions versus gravure with three versions. Finally, substantial evidence existed that current customers falling within the FTC's proposed relevant market had in fact switched some of their work from gravure to offset, contrary to the implications of the FTC's proposed market definition.

All of this evidence suggested that the job characteristics that supposedly delineated the market did not perfectly identify the set of customers who would accept a 5 percent discriminatory price increase from a hypothetical gravure monopolist. When the customers subject to price discrimination cannot be identified with certainty, only a relatively small number of “mistakes” (i.e., attempting to charge the higher price to a customer who is in fact willing to switch to a product outside the proposed market) can render the price discrimination attempt unprofitable. $ ^{194} $ The FTC Commissioners concluded that the FTC staff’s proposed market definition was not correct and that the proper market definition should include both gravure and offset. $ ^{195} $

### c. Competitive Effects Analysis: Critical Loss Analysis and Capacity Diversion

The FTC staff argued that the acquisition would lead to a substantial lessening of competition through coordinated interaction focused on raising price to the market segment comprised of gravure jobs with over 10 million copies, at least 32 pages, and less than four versions. The FTC Commissioners rejected this argument on the basis that “diversion of capacity” from outside the segment to inside the
segment would defeat any attempted coordinated price increase within the segment. $ ^{196} $ Capacity diversion calculations, such as this, represent one type of critical loss analysis.

The FTC Commissioners noted that coordinated price discrimination against a market segment is less likely to succeed than coordination aimed at the entire market precisely because rival firms will have the incentive to divert their capacity from outside the segment (where it is earning a competitive margin) to inside the segment (where the capacity could earn a supra-competitive margin). $ ^{197} $ But, the additional capacity devoted to the segment will drive prices back toward the competitive level and defeat the coordinated discriminatory price increase.

To judge whether the required amount of capacity diversion is “small” or “large,” it is useful to calculate the ratio of (1) the amount of capacity needed to defeat the discriminatory price increase in the segment to (2) the amount of capacity outside the segment. A small value of this ratio would indicate that only a small percentage of available capacity would have to be switched into the segment to defeat a discriminatory price increase.

The capacity diversion calculation was as follows. $ ^{198} $ The segment own elasticity of demand was assumed to be -1, a frequently made assumption. $ ^{199} $ In this case, to achieve a 5 percent price increase in the segment, the coordinating suppliers would have had to decrease their supply to the segment by 5 percent. $ ^{200} $ If this 5 percent supply reduction were replaced by other supply, the price would return to its previous level. In particular, the attempted 5 percent price increase would be defeated if capacity equal to 5 percent of segment supply were diverted from outside the segment to inside the segment. In that case, supply would be returned to its original level. Consequently, the capacity diversion percentage is equal to 5 percent of segment sales divided by the capacity outside the segment.

In the R.R. Donnelley matter, between 9 percent and 31 percent of all gravure capacity was devoted to the segment in question (depending on various
assumptions). $ ^{201} $ For the purposes of discussion here, we can assume that the figure is 9 percent. To see how the calculation works, without any loss of generality, assume there are 100 units of gravure capacity. In that case, 9 units (9 percent) of gravure capacity were devoted to supplying the segment and 91 units were devoted to uses outside of the segment. To achieve a 5 percent price increase within the segment, the gravure printers would have had to coordinate and reduce their capacity devoted to the segment by 5 percent of 9 units, or 0.45 units of capacity. The capacity diversion percentage is therefore 0.5 percent (i.e., 0.45 divided by 91). In other words, only 0.5 percent of capacity outside the segment (91 units) would have to be diverted into the segment to defeat the coordinated price increase within the segment. The Commissioners—who performed calculations similar to the ones discussed above—concluded that the amount of necessary diversion, as measured by this percentage, was so small that a coordinated price increase to the segment was unlikely to succeed. $ ^{202} $

### d. Conclusion

The two primary factors that appeared to influence the Commissioners' decision were the inability to identify customers who would accept a discriminatory price increase (which was required for the staff's market definition based on price discrimination) and the small amount of capacity diversion that would be necessary to defeat a discriminatory price increase even if customers could be identified. The capacity diversion calculation was a key input to the Commissioners' reasoning on this second point.

E. Analyses of the Relationship Between Price and Number of Competitors or Price and Concentration

### 1. Methodology

We previously described the background of the Staples/Office Depot merger and how “natural experiments” were used by the parties’ economists to determine the appropriate relevant market definition and to assess the likely competitive effects of
the merger. At the hearing before the U.S. District Court, the FTC staff took a different approach to analyzing these questions. Specifically, FTC staff examined whether Staples' prices were lower in local markets where it faced competition from either Office Depot or Office Max than in local markets where it faced no other office superstore competition. The FTC staff also studied whether Staples' prices were lower in markets where it faced both other office superstore competitors (Office Depot and Office Max) than in markets where it faced only one. Looking across markets in this fashion, it was the case that Staples appeared to have higher prices in markets where it was the only office superstore chain than it did in markets where it faced competition from Office Depot. The FTC concluded that this demonstrated that the appropriate relevant market consisted of office superstores only and that the merger was likely to have a significant anticompetitive effect.

This type of inquiry is an example of using an observed relationship between the price and the number of competitors in a market to infer the post-merger effect of a proposed merger. For instance, suppose it is observed that markets with three superstores have prices that are 5 percent lower than that in markets with two superstores, which in turn have prices that are 10 percent lower than that in markets with only one superstore. One might try to use these data to argue that a merger between two of the superstore chains would raise prices by 5 percent in markets that had three superstores prior to the merger and by 10 percent in markets that had two superstores prior to the merger. $ ^{203} $ This is one of the types of analyses that the FTC relied upon in its case before the U.S. District Court.

### 2. Case Study: Use of the Price-Concentration Relationship in the Praxair Acquisition of Liquid Carbonic

The same type of analysis can be performed using market concentration instead of the number of competitors. For example, suppose it is observed that the price charged for a product in different local markets appears to increase with the supplier concentration in the local market. Specifically, suppose that the price is 10 percent higher in markets with an HHI of 2500 compared to markets where the HHI is around 1500. This would suggest that a merger would cause prices to increase by 10.
percent in local markets where the merger would increase the HHI from 1500 to 2500. Conversely, if it was shown that price was unrelated to the HHI, it might be inferred that a merger that increased the HHI in some local markets may not have anticompetitive effects.

This approach was used in the antitrust analysis of the Praxair, Inc. (Praxair) acquisition of Liquid Carbonic Corporation (Liquid Carbonic). Praxair announced its intention to acquire Liquid Carbonic in 1996. The two companies were suppliers of liquid gases to industrial customers. They operated plants located in various locations around the U.S. from which they supplied customers. Because delivery of industrial gas is costly, each industrial gas plant has a fairly limited localized market that it supplies. Some of the plants of the two companies had overlapping market areas. In each case, the plants also overlapped with the plants of one or more competitors. However, the number of overlapping competitors and the capacities of their overlapping plants varied. The antitrust question was whether the increase in supplier concentration induced by the merger would lead to higher prices in markets where Praxair and Liquid Carbonic had overlapping plants.

Data were compiled on the prices and costs for each Praxair plant. Then, the competing plants that overlapped with the market area of each Praxair plant were identified. Using the capacities of the overlapping plants, HHIs were calculated for each Praxair plant's market area. Then, a relationship between price and HHI across the Praxair plants was estimated using an econometric model that accounted for each plant's costs. The following type of econometric specification was used:

$$ \log P_{_{i}}=\beta_{_{0}}+\beta_{_{1}}HHI_{_{i}}+\beta_{_{2}}C_{_{i}}+\beta_{_{3}}D_{_{i}}+\varepsilon_{_{i}} $$

where $ \log P_{i} $ is the price of plant i, HHI is the HHI in the vicinity around plant i, $ N_{i} $ is the number of competitors in the vicinity of plant i, $ C_{i} $ is the variable cost of plant i, and $ D_{i} $ is the distance between plant i and the nearest competing plant.

There was a wide variation in HHI across the Praxair plants: some were located in areas with very few competing plants and thus had relatively high HHIs, while other plants faced many other competitors and thus had relatively low HHIs. Thus, the data provided ample opportunity to observe price differences associated with HHI differences, if any such association existed.

The results of the analysis demonstrated that there was no relationship between price and HHI except at the very highest levels of HHI (essentially “monopoly” levels). These results suggested that the merger would have no anticompetitive effect in most of the market areas with overlapping Praxair and Liquid Carbonic plants. In four geographic areas where Praxair and Liquid Carbonic were
essentially the only two competitors (so that the HHI would have increased to monopoly levels post-merger), the FTC required that one of the two plants be divested. The merger was allowed to proceed under that condition.

### 3. An Aside on the Potential Dangers of Cross-Sectional Analyses

An analysis where different markets (or other units of observation) are compared to each other at a particular point in time is called a "cross sectional" analysis. One potential problem with a cross sectional analysis is that many economic factors likely enter into the economic outcome observed in each of the cross sectional units. For example, the price that Staples set in a particular geographic market was likely influenced by a number of factors specific to that market other than the presence of Office Depot—the size of the market, rental rates in the market, the cost of supplying the Staples store in the market, the location of the Staples store, and the identity and location of competing stores such as Wal-Mart. It is often quite difficult to completely control for all of these factors in an econometric cross sectional analysis. If some factors are not controlled for, the econometric results can be badly biased and thus misleading.

A “time series-cross sectional” econometric analysis can remedy this problem. With time series-cross sectional data, each observational unit (e.g., a Staples store) is observed over several points in time. This allows the econometrician to control for unobserved economic factors that are approximately constant over time, but differ across stores. The analysis can then properly assess the effects of observable factors that change over time. The “natural experiment” analysis described earlier was just such a time series-cross sectional analysis.

To see how the two types of analyses differ, consider two Staples stores (A and B) where pricing is observed for each of two years. In the first year, Store A had no superstore competition whereas Store B had an Office Depot located nearby. By the second year, an Office Depot has opened nearby Store A so that both stores faced Office Depot competition. The cross-sectional analysis would involve the comparison of the pricing of Store A and Store B in the first year. Suppose Store A's average price was $100, while Store B's average price was $95. From this comparison, you might conclude that Office Depot caused a 5 percent reduction in Staples' pricing. Suppose now, however, that you find that Store A's price in year 2 was unchanged from year 1—it was still $100—even though an Office Depot store had opened nearby. This is the comparison that is performed in a time-series cross-sectional analysis. From this