Applying Econometrics to Merger Review

• Pages: 265-299

265

CHAPTER 11

APPLYING ECONOMETRICS TO MERGER REVIEW

Econometrics, as the integration of statistics and economics, can be

used to combine disparate sources of data, insights from economic

theory, and salient institutional details to generate quantitative answers to

key merger questions in a way that other fields cannot.

Modern merger analysis requires economic arguments ranging from

simple diagnostic tools like the HHI to complex econometric modeling

of the competitive process. Rigorous empirical methods are now

employed not only to define relevant markets, but also to construct but-

for worlds and reveal how competition is likely to unfold post-merger.

This chapter focuses on the diagnostic and econometric tools most

commonly used in merger analysis. The chapter begins by describing the

implementation and interpretation of these empirical methods and then

turns to a discussion of recent merger reviews that showcases these

methods.

A. Legal and Regulatory Framework

Econometric evidence has played an increasingly important role in

merger reviews, both by the federal antitrust agencies and in the courts.

Econometric analysis can provide quantitative evidence on a number of

important issues such as the definition of the relevant market (discussed

in the preceding chapter), the sensitivity of demand to price, and the

portion of claimed efficiencies that will be passed on to consumers.

Along with complementary sources of evidence such as documents and

customer interviews, econometric analysis can help a regulatory body, in

merger review, or the finder of fact, in litigation, to determine whether a

proposed transaction violates the antitrust laws.

The Department of Justice’s and Federal Trade Commission’s 2010

Horizontal Merger Guidelines, in addition to articulating the merger

review process used by the federal antitrust agencies, frequently inform

the courts’ evaluation of evidence, including statistical and econometric

testimony.

1

The antitrust statutes and the Guidelines thus provide the

1

. See U.S. DEP’T OF JUSTICE & FED. TRADE. COMM’N, HORIZONTAL

MERGER GUIDELINES (2010).

266 Econometrics

context necessary to judge the usefulness of econometric analysis in

merger review. Out of the 1450 transactions that were reported under the

HSR Act in 2011, the U.S. antitrust agencies issued second requests in

58 transactions, challenged 37 transactions, and litigated one transaction

in federal court.

2

These numbers demonstrate that most merger analysis

takes place inside or before the enforcement agencies and that actual

litigation is a rare occurrence. Moreover, the vast majority of transactions

are quickly determined to pose no threat to competition, and the bulk of

the agencies’ workload involves deciding whether or not to challenge the

small number of mergers that require a detailed investigation.

3

These

decisions are made by specialist economists and lawyers who have

substantial experience thinking about merger analysis, are familiar with

advanced methods and arguments, and are receptive to novel techniques.

In contrast, the finder of fact in a litigated merger challenge is

usually not a specialist in antitrust or merger analysis, and the rules of

evidence place limits on the types of econometric testimony that can be

presented (See Chapters 8 and 9). In these circumstances, simple and

established methods may be preferred to complicated or cutting-edge

techniques.

2

. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N., HART-SCOTT-RODINO

ANNUAL REPORT, FISCAL YEAR 2011, availa ble at

http://www.ftc.gov/os/2012/06/2011hsrreport.pdf.

3

. The agencies also have the authority to challenge already consummated

mergers, which have become an increasingly important part of the

agencies’ workload. FTC Commissioner J. Thomas Rosch reported that

“since the premerger notification filing thresholds sub stantially increased

in 2001, both agencies have investigated and challenged a number of

consummated mergers. During the Bush administration, the FTC and

DOJ together challenged eighteen consummated mergers. During

Chairman Leibowitz’s term, which began in March 20 09, the FTC has

challenged nine consumma ted transactions. Consummated merger

challenges made up about one-fifth of our total merger challenges during

that time.” (J . Thomas Rosch, Consummated Merger Challenges —The

Past Is Never Dead, Remarks before the ABA Sectio n of Antitrust Law

Spring Meeting, W ashington, DC, Mar. 29, 201 2), availa ble a t

http://www.ftc.gov/speeches/rosch/120329springmeetingspeech.pdf.).

Applying Econometrics to Merger Review 267

B. Empirical Methods for Merger Analysis

1.

Diagnostic Techniques Used to Identify Potentially Problematic

Mergers

With thousands of reported proposed mergers each year, the agencies

manage resources by using simple tests to screen for those transactions

more likely to raise competitive concerns. The Guidelines suggest using

market concentration and the Herfindahl-Hirschman Index (“HHI”) in

just this way. No econometrics are required to calculate the sum of the

squared market shares premerger, and the only data necessary are

competitor market shares which are often estimated in the normal course

of business by one or both parties. Post-merger HHIs are equally simple,

once one assumes the merged firm’s share is equal to the sum of the

parties’ premerger shares. The Guidelines provide thresholds for both the

level and change of the market’s HHI, under which a merger is unlikely

to require additional scrutiny.

As is the case with most simple models requiring little data, HHIs are

subject to much criticism and are not intended to be used in isolation.

First, HHIs are very sensitive to the market definition, which is often

contested and can be especially contentious in differentiated product

markets. Second, the post-merger shares of both the merging parties and

the third-party rivals may change for a variety of reasons (e.g., entry or

expansion). Third, because institutional features that shape the

competitive process differ across industries and geographies,

concentration levels in one market may not have the same competitive

implications as the same concentration in a different market.

Nevertheless, ease of use continues to make the HHI a valuable tool for

both screening proposed mergers and as a point of reference when deeper

investigations take place.

In response to the HHI’s shortcomings, Joseph Farrell and Carl

Shapiro developed a diagnostic tool that does not rely on market

definition. This new measure, called Upward Pricing Pressure (“UPP”),

is laid out as a tool for identifying unilateral price effects in differentiated

product markets in the revised Horizontal Merger Guidelines released in

2010.

4

The UPP index evaluates the loss of competition between the

4

. Joseph Farrell & Carl Shapiro, Antitrust Evaluation of Hor izontal

Mergers: An Economic Alternative to Mar ket Definition, 10 B.E. J.

THEORETICAL ECON. (2010).