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Unilateral competitive effects

Unilateral competitive effects: merger facilitates unilateral exercise of market power by the merged firm (market becomes less competitive as a result of merger)

Guideline 2 (unilateral effects): mergers can violate the law when they eliminate substantial competition between firms (unilateral effects)

The Agencies examine whether competition between the merging parties is substantial since their merger will necessarily eliminate any competition between them

  • Under Copperweld, merged firms are one decisionmaker and can’t agree with one another, so S1 doesn’t apply

An analysis of the existing competition between the merging firms can demonstrate that a merger threatens competitive harm independent from an analysis of market shares

  • Intended to help P: P can prove the case without indirect evidence and discussion of market concentration under PNB
  • Guideline 4.2.A: generally applicable considerations to evaluate competition among firms (on an exam, go down this list)

(1) Strategic deliberations or decisions: HRB, look at documents, did the companies think they were in competition with each other, did they price with the other companies in mind

(2) Prior merger, entry, and exit events

(3) Customer substitution

(4) Impact of competitive actions (e.g., advertising, investment) on rivals

(5) Impact of eliminating competition between firms

(6) Additional evidence, tools, and metrics

  • Guideline 4.2.B: considerations when terms are set by firms

(1) Diversion ration: fraction of unit sales lost by the first product that is diverted to the second product (higher ratio = more competition between products)

(2) Aggregate diversion ration: the diversion ratio of the products of one firm to a group of products made by other firms

(3) Value of diverted sales: diversion ratio times the change in quantity of product A times (price of B minus marginal cost of product B)

  • Intuition: number of A’s units diverted to B times the profit per unit of B

(4) Gross Upward Price Pressure Index (GUPPI): value of diverted sales of product B divided by revenue lost of product A

  • Dividing by 2 gives a rough measure of how much agencies expect firms will raise prices: if this value is above 5% (a SSNIP), then it can be used to define the market
    • If a firm that got control of this one other product would raise prices by a SSNIP, then a firm that got control of the whole market would be even worse
  • Doesn’t account for how other firms might change prices or reposition products
  • Basically measures how much of A’s diverted sales will flow back into their pocket via B after the merger
  • Provides an analysis of existing competition that is independent from market shares (come up with estimate of how much

(5) Critical loss: how much would you need to lose on a 5% increase in price (SSNIP) to exactly break even (measured as the difference between the units sold before and after the price increase divided by the units sold before the price increase)

(6) Critical elasticity: what is the elasticity of demand at which rising the price 5% makes you break even

  • 4.2.B. stats can be used in three places:

When agencies screen:

P’s prima facie case:

  • Market definition: use to show likelihood of competitive effect (just like hypothetical monopolist test)
  • Theory of harm: can help show unilateral competitive effects
  • Mathematical Exercise

Other considerations:​

4.2.C. Considerations when terms are set through bargaining or auctions

  • E.g., insurance company has less bargaining power after a hospital merges

4.2.D. Considerations when firms determine capacity and output

  • (1) High market shares
  • (2) Undifferentiated products
  • (3) Market elasticity of demand is low
  • (4) Margin on suppressed output is low
  • (5) The supply responses of rivals are small

4.2.E. Considerations for innovation and product variety and competition

Caselaw​

N.Y. v. Kraft General Foods (S.D.N.Y. 1995) (unilateral effects of merger not concerning)

Holding:

  • Concern is the loss of competition between Post’s Grape Nuts and Nabisco’s Shredded Wheat (unilateral effects of the merger)
  • Court: not enough head-to-head competition to support a finding of unilateral competitive effects
    • (1) Physical similarity/image similarity: marketed as healthy, plain cereals with some distinguishing features
    • (2) Customer testimony on buyer substitution: Executives of grocery retailers set the prices of the two independently and didn’t consider them to be close competitors
    • (3) Marketing survey data on customer demographics: Grape Nuts higher income and younger; Nabisco Shredded Wheat less wealthy and older
    • (4) Extent to which firms monitor/respond to one another: Post documents – both brands near the top of each other’s list of competitors (but Post looked to Kellogg – no evidence that Post looked at Nabisco to price)
    • (5) Econometric evidence on buyer substitution: low cross elasticity of demand between the two
  • Court: it would not be profitable for Kraft to raise the price of Grape Nuts in the expectation that a substantial portion of its lost sales would go to Nabisco Shredded Wheat

Facts: Merger of Kraft (owner of Post) (12%) and Nabisco (~3%) in the ready-to-eat (RTE) cereal market (large shares given there are hundreds of cereals). Kellogg and General Mills together have 60% of the RTE cereal market (>200 RTE cereal products). Post sells Grape Nuts, while Nabisco sells Shredded Wheat.

Prof. Note:

  • Shares are low in absolute terms, so there wouldn’t be a strong prima facie case under PNB. This case is P’s attempt to get around PNB by showing there is substantial head-to-head competition between the merging parties (i.e., appeal to the unilateral competitive effects).
  • Today, the econometric evidence would include GUPPI, which would be run for every pairwise instance of competition (every

U.S. v. H&R Block (D.D.C. 2011)​

Holding:

  • Unilateral effects
    • (1) Elimination of Direct Competition (P): TA and HRB are direct competitors, merger will result in a loss of competition between the two
    • (2) Pledge to maintain current prices (D): not a legal basis for defending a merger, there are other ways to harm competition besides lowering prices (e.g., decreasing quality)
    • (3) Market segmentation (D): court rejects D’s argument that TA and HRB are not competitors because TA is sold for a lower price and HRB is sold for a higher price
      • Prof. Note: this is a plausible argument, but court rejects it here
    • (4) Combined market share (D): court rejects the idea that unilateral competitive effects should only be considered once the market size is above some threshold
      • The point of considering unilateral competitive effects is just to evaluate whether there was a loss of competition between the merging firms, regardless of market size
    • (5) Post-merger dual brand strategy (P): there was a plan to raise the price of HRB, the expensive product, post-merger because lost sales would flow to TA
      • The price differentiation of HRB and TA is actually anticompetitive
    • (6) Merger simulation (P): GUPPI suggested a price increase, there was an elaborate back and forth
    • (7) Repositioning (P): entry is tough in this market. There are only 3 firms and no evidence of entry or repositioning