#90 - Ecmr Theory - Competition Law

ECMR- Theory

Conglomerate Mergers (ideal and actual level of intervention)

Ideal Level of Intervention

• Conglomerate mergers arise when there is a merger between two or more companies operating in markets for products that are either independent or at least not in direct competition with each other.

• These can produce synergies, e.g. shared costs in payroll, such as marketing or R&D (especially where the products are related/similar)

• These reduce transaction costs for consumers since consumers can buy their products in one place (and, where relevant, by one set of negotiations).

• Danger is Leveraging Theory: If the merged firm will dominate one market, but not a related market, it might tie/bundle the products together, foreclosing the market (in which it is not dominant) from competitors, especially where the product in the market it dominates is essential to the second.

  • Bundling is not a problem in the short term: Overall the costs of the two bundled products (minus the transaction cost saved) must not exceed the cost of buying the two separately (i.e. the non-dominant product from elsewhere), or consumers simply won’t purchase the bundle items. Thus price won’t exceed the pre-merger level.

  • Tying isn’t a problem in the short term: A Monopolist/dominant firm will charge the price at which it maximises profits. If it then imposes an additional cost on consumers, effectively raising the price to consumers (here, in the form of requiring consumers to spend more money on nails than a competitor would charge) it will move beyond the point of profit maximisation. To engage in tying profitably, the overall cost of the hammer and nails could not exceed that which would persist before the merger.

  • In the long term it could be problematic: A long-term profit maximiser might be willing to suffer short term reduction of profit by tying the products and lowering prices, to incentivise consumers not to purchase from the competitor in the non-dominant product, if it will eventually enable him to dominate that market and charge higher long term prices. However, this still depends on (1) the inability of competitors to integrate and thus reduce the effect of the initial merger; (2) Barriers to entry in the non-dominant market, since dominant-company prices may attract competitors, which would force the conglomerate to go through the process of tying and losing profits again; and (3) buyer-power and how essential either of the tied products are i.e. look at elasticity of demand.

Actual Level of Intervention

• In practice the commission recognises that conglomerates are unlikely to cause competition problems, and ECJ in Tetra Laval underlines high threshold of evidence required. However by failing to distinguish between long and short term prospects, commission still arguably takes too hostile an attitude.

Vertical Mergers (ideal and actual level of intervention)

• Vertical integration occurs between firms at different stages of production.

Ideal Level of Intervention

• Efficiencies:

  • Avoidance of double marginalisation problems

  • Lowering of transaction costs between supplier and retailer (management decisions replace lengthy negotiations, litigation etc)

• Risks to Competitions:

  • Input foreclosure: Where an upstream company either refuses to supply downstream customers or will only do so at a higher price.

  • Customer foreclosure: the downstream company refuses to purchase from upstream competitors, causing them to lose business and possibly force them to leave the market.

  • Bork/Posner: Anticompetitive effects unlikely to occur- any rational party would only tie itself down to one supplier or manufacturer (and risk losing a lower cost of supply or a downstream customer) if the arrangement promotes overall efficiency by lowering costs i.e. if the other party is the most efficient one available.

  • However in the long term there are risks: If the upstream division monopolises its market, then a refusal to supply to downstream competitors would be rational in the long term as it would inevitably cause their exit from the market, allowing it to dominate the downstream market too. Freed from all competitive pressure, it could then raise prices above a competitive level. This applies in the opposite way to a downstream monopoly who could obtain an upstream monopoly too by refusing to be supplied by anyone other than its own upstream division. NB, though, this is subject to buyer power (elasticity of demand) and potential competition from an integrated entrant (especially if barriers to entry are low and prices obtained by the incumbent are...