The impact of access to consumer data on the competitive effects of horizontal mergers and exclusive dealing

• Author: Abraham L. Wickelgren,Liad Wagman,Jin‐Hyuk Kim
• Date: 01 June 2019
• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/jems.12285

Received: 1 March 2017

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Revised: 20 July 2018

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Accepted: 23 July 2018

DOI: 10.1111/jems.12285

ORIGINAL ARTICLE

The impact of access to consumer data on the competitive

effects of horizontal mergers and exclusive dealing

Jin‐Hyuk Kim

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Liad Wagman

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Abraham L. Wickelgren

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Department of Economics, University of

Colorado, Boulder, Colorado

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Stuart School of Business, Illinois

Institute of Technology, Chicago, Illinois

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School of Law, University of Texas,

Austin, Texas

Correspondence

Jin‐Hyuk Kim, Department of Economics,

University of Colorado, Boulder, CO

80309.

Email: jinhyuk.kim@colorado.edu

Funding information

Korea Fair Trade Mediation Agency,

Grant/Award Number: Year 2015

Abstract

We examine the influence of firms’ability to employ individualized pricing on

the welfare consequences of horizontal mergers. In a two‐to‐one merger, the

merger reduces consumer surplus more when firms can price discriminate

based on individual preferences compared to when they cannot. However, the

opposite holds true in a three‐to‐two merger, in which the reduction in

consumer surplus is substantially lower with individualized pricing than with

uniform pricing. Further, the merger requires an even smaller marginal cost

reduction to justify when an upstream data provider can make exclusive offers

for its data to downstream firms. We also show that exclusive contracts for

consumer data pose significant antitrust concerns independent of merger

considerations. Implications for vertical integration and data mergers are

drawn.

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INTRODUCTION

Improvements in information technology have brought growing concerns about privacy intrusion in commercial marketplaces

to the forefront of public debate. Nearly all US consumers now use online media to shop (BIA/Kelsey, 2013) and over two‐

thirds of online adults in the United States are registered on social networks (Pew, 2013). This has led to the proliferation of so‐

called data brokers (Federal Trade Commission, 2014), who collect consumers’personal, behavioral, and financial data from a

wide range of sources, use them to form detailed individualized profiles for nearly every US consumer, and sell this data as a

critical input for a variety of marketing purposes across a number of industries.

In response to growing privacy concerns, some policy commentators and consumer groups have urged antitrust

authorities to deal with privacy issues that arise in the context of mergers while others have disagreed.

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Specifically,

privacy advocates are concerned with the concentration of consumer data and its implications over and beyond the

concentration of market power in the product market. This paper provides a theoretical analysis of price discrimination

in the context of horizontal mergers and shows that its welfare implications may depend on the product market

structure, that is, whether or not it is a merger to monopoly and whether the upstream data market is competitive or

monopolistic.

Our contribution builds on a prior work by Cooper, Froeb, O’Brien, and Tschantz (2005) who analyze the effects of

price discrimination on postmerger average prices but do not endogenize the decision to acquire consumer data or

demonstrate its differential impact based on market structure. We extend their framework by focusing explicitly on

situations where firms can choose whether or not to purchase consumer data that enables individualized pricing, and

compare the effects on consumer welfare with the standard merger analysis which typically assumes uniform pricing.

We then consider how this choice and the subsequent equilibrium are affected by the market structure in the upstream

data‐broker industry.

J Econ Manage Strat. 2019;28:373–391. wileyonlinelibrary.com/journal/jems © 2018 Wiley Periodicals, Inc.

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We consider a product market with horizontal differentiation and an upstream data market. Firms that have access

to the data can tailor their prices to each consumer’s location.

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We analyze two cases in detail: (a) Firms can purchase

consumer data from a competitive upstream data market at sufficiently low prices, and (b) a monopoly data broker

offers downstream firms contracts (including, possibly, exclusive contracts) to purchase consumer data to maximize its

profit. We then extend our analysis to a case of oligopolistic data brokers. Although the extent of business practices

concerning consumer data acquisition has been neglected in merger reviews, our analysis can provide an upper bound

on the implications of individualized pricing on horizontal mergers.

We find that in a merger to monopoly, access to consumer data exacerbates the anticompetitive effect (reduction in

consumer surplus) of the merger. However, since mergers to monopoly are rarely approved even in the absence of

individualized pricing, more relevant results concern the effects of consumer data on mergers in a market where there

is a nonmerging firm. In this case, easy access to consumer data via a competitive data market substantially lowers the

anticompetitive effects of a merger by about a third. The reason is that nonmerging firms, through individualized price

offers, can put a more effective restraint on the merging firms’prices than without individualized pricing.

The above result holds when access to data is endogenized and despite the fact that accessing such data lowers

industry profits. More importantly, we show that with a competitive data market, while the anticompetitive effects of a

three‐to‐two merger are always smaller when firms have access to consumer data, access to consumer data does not

change the necessary efficiencies required to eliminate the negative impact of the merger on consumer welfare. That is,

the difference in the consumer welfare change is decreasing in the marginal cost reduction from the merger and it

reaches zero exactly at a level in which the merger creates no decrease in consumer welfare both with and without

access to consumer data; however, the marginal cost reduction necessary to keep consumer surplus from falling by

more than 5% is vastly lower.

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Interestingly, we find that with a monopoly data broker the anticompetitive effect of a three‐to‐two merger is smaller

than in both the cases of no data and the competitive data broker case; access to consumer data can therefore turn an

anticompetitive merger into a procompetitive merger. That is, the necessary efficiency gain for the merger to increase

consumer surplus is substantially smaller (one‐third of the size) than it is without access to consumer data. Thus, when

the data are provided by a monopoly data broker, antitrust authorities should consider being more willing to approve

downstream mergers for smaller efficiency gains than would be the case both if there were no consumer data and if data

were available for a more competitive cost.

This result is driven by the assumption that there is no antitrust restriction on the monopoly data broker’s use of

exclusive contracts. In that case, it is profit maximizing for the monopoly data broker to agree to only sell its data

exclusively to one downstream firm to soften the competition that widespread availability of consumer data would

produce. As a result, exclusive dealing contracts for the sale of consumer data should receive careful antitrust scrutiny

because these contracts are both profitable and anticompetitive absent offsetting efficiencies. In fact, we show that even

if there are several data brokers all with the same set of consumer data, they will find it profit maximizing to sell their

data exclusively to one downstream firm. This suggests that in the data broker market, a lack of market power should

not immunize exclusive dealing from antitrust scrutiny. Furthermore, vertical mergers that might result in exclusive

access to data should be carefully scrutinized and courts and antitrust agencies should give serious considerations to

conditions that require nondiscriminatory access to data after a vertical merger.

Our framework can be flexibly adopted to derive additional policy implications. As examples, we show that mergers

motivated by the acquisition of data can have the following consumer welfare implications. First, when a downstream firm is

vertically integrated with the monopoly data broker, the merger between the integrated firm and one of its downstream

competitors is less harmful to consumers than a merger between nonintegrated firms. Second, when only the merging firms

can price discriminate by combining different types of data they have premerger, the merger is actually procompetitive in the

sense that there is a gain in consumer surplus which is proportional to the efficiency gain due to the merger.

The remainder of the paper is organized as follows. Section 2 discusses the relevant literature. Section 3 examines mergers

in a linear city model. Section 4 analyzes mergers in a circular city model and derives additional policy implications. Section

5 extends our monopoly data broker results from Section 4 to the oligopoly case. Section 6 concludes.

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RELATED LITERATURE

This paper aims to contribute to the intersection of consumer privacy and antitrust policy. While we do not attempt to

survey the fields, the literature on privacy has considered the possibility that past purchases allow firms to segment the

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