Efficiency gains and myopic antitrust authority in a dynamic merger game

Abstract

This paper models a sequential merger formation game with endogenous efficiency gains in which every merger has to be submitted for approval to the Antitrust Authority (AA). Two different types of AA are studied: first, a myopic AA, which judges a given merger without considering that subsequent mergers may occur; and, second, a forward looking AA, which anticipates the ultimate market structure a given merger will lead to. By contrasting the decisions of these two types of AA, merger policy implications can be drawn. In particular, the efficiency offence argument does not find any justification under a forward looking AA. D

EFFICIENCY GAINS AND STRUCTURAL REMEDIES IN MERGER CONTROL*

“…This cost structure was proposed by Motta and Vasconcelos (2004). 8 It assumes that each firm operates with a constant marginal cost of production, but the level of its marginal cost is a decreasing function of its capital holdings, k i .…”

“…14 This is motivated by the fact that the EC Notice on remedies emphasizes that the divested activities (capital assets in our model) must consist of a viable business, meaning that the business must be able to compete effectively with the merged entity. 15 In addition, the Notice (paragraph 46) stresses that "in a typical divestiture commitment, the business to be divested normally consists of a combination of tangible and intangible assets, which could take the form of a pre-existing company or group of companies".…”

“…15 See EC Notice, paragraph 14. 16 If α ≥ 1/4, then dC(q i , 1)/dq i = 4α ≥ 1, which in turn implies that the equilibrium quantity in the status quo industry structure is q (1; 1, 1, 1) = 0.…”

“…As explained in Motta and Vasconcelos (2004), after a merger between two of the four firms in the status quo market structure, the induced postmerger market structure might be either {2, 1, 1} or simply a monopoly market structure of the type {2}. 19 If after the merger the two outsiders are able to make positive profits, the induced market structure is {2, 1, 1}.…”

Compulsory or voluntary pre-merger notification? Theory and some evidence

“…While much attention has been paid to empirical analyses of merger policies, there is a paucity of theoretical studies that analyze the optimal merger notification policy. Motta and Vasconcelos (2005) study a dynamic merger game where the antitrust authority can be either myopic or forward looking. Lagerlöf and Heidhues (2005) analyze the merging parties' incentives to gather and strategically reveal efficiency-related information to the regulator.…”