I INTRODUCTION

Merger control agencies in jurisdictions around the world use safe-harbours based on structural criteria such as measures of concentration, market shares and the number of effective competitors to screen out the vast majority of proposed mergers from further review. For those mergers that miss the safe harbours, there is increased demand for rigorous economic analysis to inform decision-making regarding investigations of proposed mergers, reflecting improved reliability and wide acceptance of economics tools for merger control. Thus, while market definition and structural presumptions based on market shares are still given weight in merger analysis, there continues to be more emphasis on using economic tools to predict the competitive effects of mergers.

For the vast majority of mergers, the initial screening is based on defining relevant product markets as the lines of business that each merging party is involved in, and relevant geographic markets as regional, national or global based on prevailing shipment patterns. Parties and agencies then calculate market shares based on tentative relevant market definition, calculate relevant concentration measures, and test calculated concentration measures against established safe harbours. Combined shares may also be examined against market share thresholds used as screens for market dominance. Where lack of precision in defining the relevant product and geographic markets does not substantially impact market concentration tests or market dominance tests, no further analysis is undertaken. The vast majority of mergers are cleared on this basis.2

In the relatively small number of mergers that do not pass this informal screening, merger control authorities increasingly are turning to a structured economic analysis of market definition and competitive effects to determine investigation decisions. Unfortunately, despite notable efforts to simplify the information needs for testing mergers using theoretically consistent approaches for assessing potential anticompetitive effects, the tools available remain sensitive to data selection and the construction of relevant measures such as margins, elasticity and diversion measures, and potential efficiencies. As a result, available approaches to simplifying merger assessment come with difficult trade-offs in terms of accuracy versus simplicity. Accordingly, only careful assessments of industry facts using the appropriate analysis tools, which are guided by reliability standards developed by the merger control authorities, the courts, the merging parties, and independent researchers, are likely to minimise potential customer harm, while clearing pro-competitive mergers.

Below, we provide a general review of some of the economics tools used to evaluate various aspects of horizontal and vertical mergers, including market definition, competitive effects, and barriers to entry. Our objective is to provide the economic principles underlying each of the tools reviewed, some background and insight into a collection of broadly applied tools for analysing mergers, and a guide to the resources discussing specific applications. For example, in addition to the publication of merger guidelines, the US and European Commission merger control authorities provide annual guidance on the use of economic analysis in merger reviews.3 This chapter is intended to provide a bridge between the merger guidelines and annual review articles, and a growing economic literature on specific tools and approaches for economic analysis of mergers.

ii Critical loss analysis

Although controversial, critical loss and critical demand elasticity analyses have often been used as a tool for defining relevant product or geographic markets as an initial step in merger assessment.4 As typically practiced, critical loss analysis involves two distinct steps: the first step involves the calculation of the maximum volume of lost sales that a hypothetical monopolist in a putative relevant market could suffer before a specified price increase (typically, a 5 per cent increase) became unprofitable; the second step involves determination of the likely actual loss that the hypothetical monopolist would suffer if it actually did raise prices by the specified amount.5 If the predicted actual loss for a specified price increase is smaller than the estimated critical loss, the specified price increase can be inferred to be profitable and the relevant antitrust market is inferred to be no broader than the corresponding putative relevant market.

The break-even critical loss analysis implements a test whether a hypothetical monopolist in the supply of goods in a candidate relevant market would find it profitable to impose a small but significant non-transitory increase in price (SSNIP). However, the test specified in the US Department of Justice (DOJ)/US Federal Trade Commission (FTC) Joint Horizontal Merger Guidelines issued in 2010 (US HMGs) is whether a profit-maximising hypothetical monopolist would find it optimal to impose at least a SSNIP. Although the break-even critical loss analysis approach may not exactly implement the hypothetical monopolist test in the US HMG, and the break-even critical loss has been controversial in other respects, assessment of the break-even critical loss analysis is widely used for testing market definition due to several advantages: it does not require knowledge or assumption of the shape of consumer demand curves over the relevant price increases; it is equivalent to the profit-maximising critical loss estimate for small changes in prices; and the likely actual loss can reliably be assessed with information from business documents, surveys, elasticity estimates, and natural experiments - such as customers' responses to price increases resulting from cost shocks or partial supply interruptions.6

Profit-maximising critical-loss or critical-elasticity analysis is consistent with the hypothetical monopolist test, but requires knowledge or assumption regarding the mathematical form of consumer demand functions. Assuming that consumer preferences generate linear demand curves, for example, allows the estimation of the profit-maximising critical demand elasticity (the maximum elasticity that the hypothetical monopolist could face and still maximise profits at the target price increase). If the actual aggregate demand elasticity for a given set of products in a given geographic area (i.e., the putative relevant market) is above the critical demand elasticity then the putative market definition is too broad, and if below then the relevant market is no broader than the putative relevant market.7

Critical loss analysis is more apt as a tool for market definition in industries where products are homogenous, where the assumption of uniform price increases by the hypothetical monopolist is justified, and where screens based on industry concentration measures are likely to provide a reliable assessment of whether a particular merger is likely to raise competitive concerns. Critical loss analysis has also been adapted to test potential coordinated effects and the likelihood of vertical foreclosure.8 In industries where suppliers offer a number of differentiated products pre-merger, it is likely that the hypothetical monopolist would maximise its profits by imposing different levels of price increases on different products relative to pre-merger levels. Critical loss analysis has been adapted for industries with multi-product firms,9 although the assumptions required may not hold in all cases. Although based on a number of their own key assumptions, alternative tools discussed below, such as diversion ratio-based merger screening, can be more flexible than critical loss analysis and are widely used in assessing the effects of mergers in differentiated products industries.10

iii Substitution, demand elasticity and diversion ratios

Measuring customer responses to relative price changes is currently a central focus of economic analysis in merger control investigations, whether the issue being addressed is traditional market definition or an attempt to directly measure the competitive effects of a merger. The market definition exercise is typically based on customer choice among alternatives inside and outside the candidate relevant market.11 The assessment of anticompetitive effects, net of efficiencies, involves the assessment of customer responses to merger-induced changes in pricing, quality and product choice. Two key measures of consumer response to price changes are demand elasticities, which measure the percentage change in quantity demanded of a given product (and, separately, of rival products) for each percentage change in the price of the given product, and diversion ratios, which measure the effect of a price change for a given product on the relative sales gains of rival products in response to the price increase (relative to the sales lost by the product for which the price changed). Demand elasticities and the related measure of diversion ratios12 may be derived from estimation of consumer preferences and utility maximisation, or from business customers' technology and downstream competitive conditions.

Economists use a wide array of tools to assess customer substitution patterns, depending on the facts of the industry and the available data. In consumer products industries, where grocery store scanner data or other detailed purchasing data are commercially available, economists often estimate demand elasticities using appropriate econometric modelling techniques.13 However, where detailed, industry-wide transactions data are unavailable and where the competitive effects do not involve merely incremental changes to prices of existing products, economists may analyse evidence from business documents, customers' response to price shocks, switching costs, win and loss reports, discount requests, salespeople call reports, customer switching patterns, or customer surveys to infer patterns of substitution. For example, where companies maintain win and loss reports of bid data, the information can be used to test the relative frequency of head-to-head bidding among the merging parties, and the rates of each of the merging parties' wins out of the other's losses can be used to estimate diversion ratios.14

Demand elasticities or diversion ratios are typically used, as discussed below, in merger screens based on gross upward pricing pressure index (GUPPI) calculations15 or in merger simulations. However, demand elasticities and other analyses of substitution patterns can, in certain cases, be used to implement other tests for the potential competitive effects of mergers. For example, when substitution patterns suggest that customer preferences are accurately reflected in the market shares of individual suppliers, the agencies may infer potential competitive effects from the post-merger level of concentration and the change in concentration levels from before the merger.16 In industries with negotiated prices, or structured auctions, mergers can have anticompetitive effects when they involve suppliers with a high relative frequency of head-to-head bidding, and a pattern where the one party often emerges as the runner-up in opportunities that the other wins, and vice versa. When the above fact pattern shows two merging firms are close competitors in a highly concentrated industry, the agencies often conclude that the merger can reduce customers' ability to pit the suppliers against each other.17

In a number of recent merger cases, US merger control agencies have focused on competitive effects within markets that are limited to regional or national customers. For example, in FTC v. Sysco Corp, the FTC alleged a relevant market that was limited to ‘broadline foodservice distribution services sold to national customers.' A similar focus on regional or national customers took place in FTC v. Staples, and similarly in US v. Anthem. The submarkets defined by the merger control agencies were upheld in court in all three of these cases, and were supported in part by economic analyses of bid data. For example, in FTC v. Sysco, the FTC's economic expert used RFP or bidding data to calculate actual diversion ratios between US Foods and Sysco for national customers, finding that the actual aggregate diversion ratio was over 70 per cent and exceeded the threshold aggregate diversion ratio of 50 per cent, implying that the merged firm could profitably impose a SSNIP on broadline foodservice distribution sold to national customers. The court ruled in favour of the FTC's market definition in part because it found that the FTC's economics expert's implementation of the hypothetical monopolist test18 was more consistent with the direct evidence - ‘practical indicia' - on market definition, from documents and industry participants' testimony, than that of the defendants' economics expert, despite the court's hesitation, ‘to rely on the precise aggregate diversion ratio percentages'19 estimated by the FTC's economics expert.

iv upward pricing pressure (UPP) and merger simulation

In differentiated products industries, unilateral competitive effects, rather than coordinated effects, are typically the focus of merger control investigations. The unilateral competitive effects of mergers in differentiated products industries are often determined by the relative closeness of competition among the merging parties' products, rather than merely by the level of concentration in the industry.20 Economists use diversion ratios to measure the closeness of competition among differentiated products, and to derive the likely unilateral competitive effects, whether by merger screens or by merger simulation.21

Merger screens involving UPP were discussed in the latest version of the US HMG published in 2010. UPP analysis is a tool used to identify the incentive for a merged firm to raise the price of one or more products, recognising that the merged firm would internalise some of the lost sales that would have resulted from a similar price increase by the individual firms pre-merger.22 Advocates for UPP screens point to their theoretical consistency and computational simplicity as providing a useful approach for screening mergers based on limited information available during merger review. The information needed for quantifying the UPP index in a given merger are the diversion ratio and pre-merger margins. However, critics point out that UPP, including its many forms, virtually always predicts a price increase absent merger efficiencies, does not quantify the likely effects of mergers on prices or consumer welfare, and only indicates whether firms have an incentive to increase prices post-merger. Since antitrust policy is defined in terms of likely price and consumer welfare effects, UPP analysis is criticised as an insufficient basis for regulating mergers.23 Accordingly, information on diversion ratios, margins, efficiencies, pass-through rates, pre-merger prices, and average incremental costs can be used to simulate the potential price effects of mergers. Merger simulation may build on the UPP analysis, adding information on pass-through rates to determine likely price effects.24

Merger simulations may also be based on solving first-order conditions for profit maximisation pre and post-merger to derive price-change predictions.25 Diversion ratio-based pricing-pressure indices, of which UPP is an example, when combined with empirically estimated pass-through rates, potentially give a more flexible approach to simulating the effects of mergers than merger simulations based on solving the Bertrand-Nash conditions for profit maximisation.26 Assuming that suppliers maximise profits according to Bertrand-Nash pricing rules, merger simulation can be used to develop upper and lower-bounds for merger-induced price effects under broadly applicable assumptions regarding the shape of consumer demand curves.27

UPP analysis and merger simulation can give inaccurate results when repositioning is likely or there are substantial efficiencies from a merger.28 UPP and merger simulations can be adapted to take account of efficiencies, but the analysis of entry and repositioning is not as readily integrated into these analysis.29

Merger simulations based on econometric estimates of demand and cost relations are well established in the economics literature,30 but have not been used in litigated merger cases often. Estimated price effects in at least some of these published merger simulations have not been borne out by retrospective analyses conducted by merger control authorities.31 Thus, while there is a broad consensus on the theoretical foundations for analysing likely competitive effects of mergers in differentiated products industries, there is not a lot of accumulated evidence that practical application of these methods leads to reliable merger enforcement decisions. In part this may be due to assumptions built into the models that are not empirically verified in the markets being studied. Economists have turned to natural experiments to test hypotheses about price effects and other hypotheses related to competitive effects of mergers, combining direct evidence with empirical tests to inform assessment of the likely competitive effects of mergers.

v Natural experiments

Economists use the term ‘natural experiment' to describe a broad array of study designs based on observed data.32 Analysis of natural experiments has been used to examine the effects of changes in market structure, entry or cost shocks to assess issues of market definition, competitive effects and other issues in guidelines analysis of mergers.33 While economists often use multiple regression analysis to perform statistical tests of inferences regarding the effects of merger, graphical analysis and simple statistics have sometimes been used to analyse natural experiments and quantify the potential effect of merger.34 Natural experiments useful for testing hypotheses about the effect of a merger involve careful research design to construct a dataset and hypothesis tests regarding the effects of mergers and related events on economic outcomes relevant to consumer welfare, such as pricing, product choice, product quality or industry output.35 Consider an example from the literature.

Economists Christopher Taylor and Daniel Hosken at the FTC examined the effects of a consummated merger among two regional gasoline refiners on prices using the natural experiments approach.36 Hosken and Taylor defined the area experiencing the greatest change in concentration from the merger as the ‘treatment' area, and several areas with otherwise similar characteristics but that did not experience a merger as ‘control' areas. Using data for both control and treatment areas from before and after the merger, Hosken and Taylor tested whether the change in price post-merger in the treatment area exceeded the change in price post-merger in the control areas using multiple regression analysis.37 The change in price in the control area illustrates how prices would change absent the merger, thus providing a benchmark against which to test the post-merger price change in areas affected by the merger: a finding that the change (difference) in price in the treatment area is no different than the change (difference) in price in the control area supports the inference that the merger did not have an anticompetitive effect, whereas if the change in price in the area affected by the merger exceeded the change in price in the area unaffected by the merger, the merger is inferred to have had the anticompetitive effect of raising prices. Analysis of natural experiments using the above approach has been aptly labelled ‘difference-in-difference regression'.38 The authors did not find an anticompetitive price increase from the merger analysed in their study.

Analysis of natural experiments using difference-in-difference regressions has been used to assess the effects of consummated mergers in a variety of industries, including wholesale and retail gasoline39 and hospitals.40 While typically the economist analyses the effect of the merger on the post-merger conduct of the merged firm, some authors have proposed tests of whether rivals raised prices post-merger, to assess the effects of merger on competition.41

In contrast to analysis of consummated mergers, a natural experiment for analysis of a proposed merger must carefully be chosen to identify a treatment that mimics the change in structure that results from the merger. Candidate events to proxy the impact of a proposed merger include regulatory constraints imposed on a supplier in certain markets but not others, prior entry in selected markets, or a prior merger among suppliers present in certain geographic markets for a given product but not in other geographic markets for the same product. A natural experiment may also be used to test key assumptions in the guidelines analysis, such as market definition or the likelihood of entry.42

vi Analysis of healthcare provider mergers

Certain countries rely in part on private sector competition to provide health care services. Much of the recent literature on economic modelling and empirical analysis of mergers in the US has focused on healthcare provider mergers, where there is a great deal of available data. Some of the economics tools used for regulations of healthcare provider mergers can be applied in other industries.

Over the past decade, the FTC has overhauled its approach to regulating hospital and physician group mergers based on an assessment of the effects of consummated and prospective mergers among hospitals. Analysis based on natural experiments involving mergers in the hospital industry, utilising the difference-in-difference regressions discussed above, demonstrated that hospital mergers had a high likelihood of resulting in higher prices and lower quality care.43 Among the mergers that resulted in higher prices were ones in which the courts had denied FTC efforts to block the merger on the basis of flawed application of patient flow analysis to define geographic markets, and of flawed application of critical loss analysis.44

As an alternative, economists working at the FTC collaborated with academic experts to produce a series of papers for testing the effects of healthcare mergers45 and developing a merger simulation approach based on the potential effect of hospital mergers on the willingness to pay (WTP) for health plans by participants.46 This WTP approach to simulating the effects of hospital mergers begins with (Stage 1) estimation of demand parameters from a rich set of patient discharge data and calculation of patients' WTP for inclusion of each hospital in commercial insurance plans' networks. The analysis then usually proceeds to (Stage 2) a multiple regression analysis of hospital prices or margins, based on WTP estimates from the first stage and other relevant controls, using either a reduced-form regression approach or a structural modelling approach.47 Detailed data required for implementing the two-stage WTP approach are typically available from state agencies, and from health plans. The economic intuition underlying the use of these models for hospital merger simulation is that the change in willingness-to-pay associated with inclusion of a given hospital measures the monopsony power of the hospital in negotiations with health plans.48 The estimated relationship from Stage 2, between hospital prices (or margins) and WTP, can thus be used to simulate the effects of the merger, translating the change in WTP to changes in hospital prices.

The hospital merger simulation approach has been extended to analysis of physician group mergers, with the added innovation of deriving WTP from providers' shares by patient segment or microsegment, rather than an econometric estimation of a choice model.49 The bilateral bargaining approach for analysing mergers is also applicable in other industry contexts where suppliers negotiate prices with a small number of buyers. Notably, the approach has been used for analysing mergers among cable television providers,50 including the proposed merger between Comcast and Time Warner Cable (TWC), which was ultimately abandoned over US regulators' objections.51 One such objection involved the increase in monopsony power in internet interconnection services, based on a bilateral bargaining analysis.

Although the literature defines a general bargaining framework in which payors and providers negotiate payments for hospital or physician services, the typical approach includes no fact-specific derivation of the price increase resulting from a merger among providers.52 Thus, while the regression analysis in Stage 2 facilitates the computation of price effects from merger, it is also critical for grounding the competitive effects analysis on the facts of the industry: the use of patient discharge data and payor data to generate estimates of the likely response of providers and payors to the estimated increase in willingness to pay due to the proposed merger among providers is crucial for ensuring that the estimated price effects are reliable for the merger being analysed.53

While there is much to commend for the bargaining approach based on estimated changes in WTP from provider mergers, its application to any specific merger must be based on rigorous testing of the validity of crucial underlying assumptions, and other analysis to ensure that inferences regarding potential merger effects are supported by the facts of the specific merger under review. In a retrospective analysis of two hospital mergers, merger-induced price changes to five payors were found to differ dramatically from payor to payor, with some payors experiencing prices increases from a given merger, while other payors experienced no price change or even a price decrease from the same merger.54 Given these findings, and the well-documented dynamics of healthcare provider markets, pooled estimates of patient-choice parameters and a common estimate of the price effect of a given merger are likely unreliable for inferring the probable competitive effects of real-world provider mergers.

Recent appellate decisions in hospital mergers reflect a growing acceptance by the courts of market definition and competitive effects analysis based on application of bilateral bargaining models in hospital mergers. In May 2016, the FTC suffered its first setback in a hospital merger case in over 10 years, when it sought a preliminary injunction against the proposed merger between Penn State Hershey Medical Center and Pinnacle Health System.55 However, on appeal, the Third Circuit reversed the lower court's assessment of the impact of long-term contracts on the likely effects of the merger, and rejected the lower court's critique of bilateral bargaining models for market definition analysis.56 The Circuit Court then relied on evidence from specific events demonstrating the competitive significance of relative bargaining leverage between the hospitals and insurers, and the impact of the merger on the relative bargaining leverage of hospitals, to implement the hypothetical monopolist test.57 Similarly, on remand, the district court in FTC and the State of Illinois v. Advocate Health Care, et al. (Advocate/NorthShore) found that the competitive effects analysis based on a bilateral bargaining model, as put forth by the FTC's expert was probative on market definition and competitive effects.58 Interestingly, in Advocate/NorthShore the FTC and the court chose to give little weight to the Merger Guidelines' example 6. In that example, the next best substitute competitor for the merging firms should not be excluded from a market in favour of a lessor substitute.59 The FTC and court excluded Northwestern Memorial hospital, a close competitor to the hospitals attempting to merge, because it offered both advanced and basic healthcare as a teaching hospital, and Advocate and NorthShore only offered basic care. However, on remand the district court then found ‘While they may draw patients from the NorthShore Area, they remain ‘destination' hospitals unable to fulfill the need for local GAC services in the North Shore Area, and the data does not support the argument that they are ‘closer' substitutes for the defendant hospitals, from the standpoint of insurers, than other hospitals in the NorthShore Area.'60

VII Analysis of Consummated Mergers

As is apparent from the discussion above regarding regulation of healthcare mergers, US agencies have relied on analysis of consummated mergers to develop direct evidence on the anticompetitive effects of mergers,61 although in some recent cases the agencies have relied on structural presumptions to regulate the breakup of consummated mergers. Jurisdictions with voluntary notification regimes intrinsically have post-consummation review authority, while jurisdictions with mandatory merger control review may also have post-consummation merger control authority, as in the United States.62

Recent transactions in which US merger control agencies have exercised post-consummation review authority include US v. BazaarVoice, Inc (DOJ) and In The Matter of Polypore International, Inc (FTC).63 In both of these cases, the finding was that the merger was likely to result in a substantial lessening of competition based on market share presumptions. Another recent post-consummation review, US and New York v. Twin America, LLC (TwinAmerica), involved concerns regarding a merger to monopoly in ‘hop-on, hop-off bus tours in New York City', and the DOJ also found a substantial increase in post-merger prices as an anticompetitive effect of the merger.64 In TwinAmerica, the economist relied on (1) critical loss analysis to demonstrate that the loss of competition due to the formation of the joint venture created an incentive to raise prices, (2) analysis of margins to determine that price increases occurring after the formation of the joint venture exceed the levels that would be expected on the basis of cost increases alone, and (3) analysis of customer demand to show that the demand elasticity for hop-on/hop-off bus tours was sufficiently low that the estimated price increase would have increased the merged firms' profits post-merger.65 As discussed in the preceding sections, analysis of natural experiments is often relied upon in post-consummation investigations, where prices and other market data from before and after the merger can be used to assess whether the merger resulted in an anticompetitive price increase.66

The remedies in the BazaarVoice and Polypore cases were asset sales and licence or intellectual property transfers sufficient for asset purchasers to compete vigorously. In TwinAmerica, the DOJ demanded that the acquiring party surrender all of the target's bus stop authorisations to the relevant regulatory authority, and also to pay $7.5 million as disgorgement of profits flowing from the monopoly power acquired through an anticompetitive merger. Thus, post-consummation merger review can result in substantial asset divestitures as well as significant financial penalties to the merged firm.

Where the agencies focus solely on evidence of post-merger price increases by the merged firms, the analysis may be incomplete and give misleading results regarding the welfare effects of the merger. In Evanston Northwestern Hospital Corp's 2000 acquisition of Highland Park Hospital, the FTC found several years later that the merger led to higher prices for acute in-patient health-care services.67 Controversy over the FTC's regulation of the Evanston/Highland Park merger involved both the FTC's econometric analysis and the FTC's interpretation of evidence on post-merger price increases.68 One issue with the interpretation of the FTC's finding of post-merger price increases was whether the price increase flowed from anticompetitive conduct or from factors independent of the merger.69 Generally speaking, merging parties may enhance product quality or marketing post-merger, which may result in a price increase as well as offsetting customer benefits. Thus, analysis of industry and merging firms' output is helpful for more fully assessing whether any observed post-merger price increases are anticompetitive or are offset by accompanying customer benefits. A case study of two airline mergers found that although post-merger price increases differed significantly between the two mergers, both resulted in significant reductions in service.70

viii Vertical mergers

Vertical mergers are receiving an increasing amount of regulatory scrutiny, and there have been a series of high profile cases involving vertical effects analysis in the US, including Comcast/Time Warner, Comcast/NBCU, and the pair of mergers involving map data suppliers in TomTom/TeleAtlas and Nokia/NavTEQ. While the European Commission has released merger guidelines related to regulation of vertical mergers,71 merger control authorities in the US have not published guidelines on the regulation of vertical mergers since the 1984 US Merger Guidelines. While enforcement actions against certain mergers in the US have addressed concerns identified in the 1984 US Merger Guidelines, several others have identified potential anticompetitive effects from vertical mergers by applying economic principles and methods that differ substantially from those discussed in the US Merger Guidelines of 1984.72 Vertical effects of concern according to the 1984 US Merger Guidelines involve the creation of barriers to entry, the potential to increase coordination among upstream suppliers and elimination of a disruptive buyer.73 More recently, economists have applied transactions cost analysis to show that, in certain circumstances, vertical integration may increase upstream suppliers' monopoly power, or allow integrated suppliers to raise the costs of either upstream or downstream rivals, through partial or complete foreclosure.74 Interestingly, foreclosure was not even mentioned in the 1984 edition of the US Horizontal Merger Guidelines, whereas foreclosure issues have been determinative in recent merger investigations.

Issues of input and customer foreclosure, as well as analysis of conditions of entry and the likely efficiencies from the merger, were the focus of the merger control investigation of the proposed merger between Comcast, an operator of cable television systems, and NBC Universal, a supplier of a wide variety of television programming including the NBC network and several specialised cable television channels, and feature films.75 The Federal Communications Commission, which reviewed the transaction along with the DOJ, undertook a series of analyses regarding the likelihood that the merged firm would foreclose rivals of the Comcast cable network from content of NBC Universal. These analyses included:

  • a a financial assessment (vertical arithmetic76) of whether, at pre-merger demand elasticities and margins, the merged firm would find it profitable to withhold content of NBC Universal from Comcast's downstream rivals, making up for the lost profits from this action in profits from diverting dissatisfied customers of rival cable networks that switch to Comcast;
  • b applying a Nash bargaining model to industry data, the parties' documents, and academic research on industry conduct, to evaluate whether the bargaining power between the integrated firm and rivals of the Comcast cable system would result in higher prices for bundles of programming;
  • c an analysis of natural experiments to test whether past vertical integration has resulted in higher prices to consumers; and
  • d a hypothesis test, based on a stylised economic model, of whether Comcast had previously foreclosed rival cable networks, versus changing its distribution practices to enhance efficiency.77

Similarly, in Comcast/TWC, customers opposed the transaction on grounds that Comcast post-merger would have an incentive to partially foreclose online video distributors (OVDs), e.g., Netflix, from access to content in order to favour its own cable distribution platform, or multichannel video programming distribution (MVPD) platform. Vertical foreclosure was argued to hurt both OVDs and the edge providers, e.g., Cogent Communications (Cogent), that OVDs rely on to, in turn, interconnect with large internet service providers (ISPs) such as Comcast to deliver content to consumers.78 Economists for Netflix and Cogent used the vertical arithmetic to argue that the combined share of the merged firm would be sufficiently large so as profitably to divert OVD customers to the merged firm's MVPD platform, with higher interconnection fees or degraded service to OVDs and edge providers.

An alternative to the vertical arithmetic is to perform merger simulations that assess the profit-maximising prices that the merged firm would charge, taking account of the potential to divert customers lost to upstream and downstream rivals to its own upstream and downstream affiliates.79 Critical loss analysis and UPP indices have also been proposed to assess the potential anticompetitive effects of vertical mergers.

Enforcement actions in purely vertical mergers often involve conduct remedies that limit the likelihood of strategic anticompetitive conduct post-merger, such as Comcast/NBCU. However, the DOJ more recently decided that no such remedies were appropriate in Comcast/TWC, even after the parties had offered to divestures to remedy horizontal overlaps.

ix Analysis of entry

‘When entering a market is sufficiently easy, a merger is unlikely to pose any significant anticompetitive risk.'80 However, entry is only considered to effectively replace the competition lost due to merger if it would be timely, likely and sufficient. Although a two-year time frame had been considered as the typical duration for timely entry,81 merger control authorities recognise the competitive constraints of entry over a shorter or longer duration. For example, in heavy industries where competitors qualify a product, or where product development involves extensive customer trials, entry may involve a longer period of time that may significantly restrain incumbents' pricing.

The likelihood of entry can be assessed using a discounted cash flow analysis to assess whether a potential entrant would find profitable the investment needed to enter, in the sense that the aggregate margin earned from entry net of the terminal value of the assets of the entrant would exceed the initial investment needed to enter (i.e., whether the net present value of entry would be greater than zero).82 A break-even version of the analysis could be used to assess the level of output the firm must attain over a specified period in order to render the investment in entry profitable; if the break-even level is low relative to the size of the relevant market, and there are no impediments to the entrants achieving the break-even level of output, entry can be considered likely. Moreover, if entry is likely, and the entrant can be expected to attain the size of one of the merging parties, it can be expected to replace the competition lost due to the merger, and hence would be considered sufficient to prevent anticompetitive effects from the merger. Depending on demand elasticities and margins, and the oligopoly conduct of firms in the industry, further analysis of the pricing conduct of the merging firms may show that more limited entry could also effectively constrain the merged firms' prices post-merger by cannibalising a sufficiently large share of the merged firms' sales to render a price increase unprofitable.

In practice, agencies often require evidence of past entry, or documentary evidence of planned entry such as in corporate press releases or articles in the trade press, to consider entry.83 Past and current entry can be important in evaluating barriers to entry. A relatively large number of entrants may suggest ease of entry, at least through the period when that entry occurred. However, if many of these entrants have since exited the market and it appears the market conditions for entry have become more difficult, then that can be evidence of barriers to entry. Analysis of natural experiments can be effective for demonstrating pro-competitive effects of entry in similar product markets, or in other geographic markets involving the same relevant product. Analysis of natural experiments can also be used to test the likelihood of entry.84

In differentiated products industries, repositioning and line extensions can result in adequate competitive constraints for the merged firm, despite entry not entirely replacing the competition lost due to the merger.85 Methods used for analysing repositioning and line extensions are similar to the analysis of entry; however, the additional effect of cannibalisation of existing products may need to be considered in analysing the likelihood of entry. Recent research in economics has pursued a more direct approach to analysing the likelihood of repositioning as a result of merger.86 In this approach the economist models the effect of the merger on both prices and the slate of products offered, using detailed data on consumer demand along with a two-stage model of firm conduct that permits inference regarding variable margins and the fixed costs of new product introductions.87 Moreover, repositioning by other competitors in the market and the merging firms may reduce or increase the potential anticompetitive effects from a merger. A recent study of the smartphone and CPU markets suggests that mergers may be found to have a greater reduction in consumer welfare when the economist takes account of competitive effects on both price and product choice after repositioning or eliminating choices, than when estimated considering only price effects.88 A benefit of direct analysis of repositioning over prior approaches is an estimation of the effect of repositioning as well as of the likelihood of repositioning.

In vertical mergers, a showing that entry in either the upstream or the downstream market, or through backward or forward integration by market participants, can alleviate concerns related to potential input foreclosure or customer foreclosure. More generally, a demonstration that entry would be timely, likely, and sufficient can result in a merger being cleared by the merger control agency. Data reported by FTC regarding merger investigations from 1996 to 2011 include a number of mergers with an affirmative showing on the ease of entry that were all cleared with no further enforcement action.89

x Analysis of efficiencies

Economic analysis of merger-induced efficiencies includes the identification of cost savings likely to result from the merger and be passed on to consumers in lower prices, as well as output expansion and product introduction that would not be feasible absent the merger.90 In vertical mergers, efficiencies may be particularly likely to be merger-specific and substantial, such as investments in new product introduction or enhanced distribution from a merger with a downstream entity, as well as potential greater innovation resulting from eliminating transaction costs in sharing knowhow between the supplier and customer. The elimination of double-marginalisation is potentially also an efficiency due to vertical merger.91

Evidence from merger data published by enforcement agencies and in review articles92 shows that a significant number of merger reviews include an analysis of efficiencies. However, merger control agencies tend to consider efficiencies as likely to overcome only moderate anticompetitive effects.93

Efficiencies analysis may include models of cost reductions due to, inter alia, plant or route reorganisation by the merged firm, introduction of new products or services, and the combination of intellectual property with manufacturing and distribution.94 In order to be given due weight, efficiencies claims must be shown to be merger-specific, and sufficiently detailed and supported by data and analysis so as to be verifiable. While merger-induced cost savings may be expressed as a percentage of revenues, agencies typically assess efficiencies claims in detail rather than simply offsetting a percentage increase due to the anticompetitive effects of merger against the percentage cost savings. Among the issues analysed in assessing efficiency claims are whether the cost savings are likely to be passed through in lower prices, and the net effect of the cost-savings taking account of the pass-through rate. However, economic research has found that the pass-through rate may be high when anticompetitive effects are most likely, and thus a finding of significant merger effects absent efficiencies can be inconsistent with a finding of a low pass-through rate for merger-specific efficiencies.95 Economists at the FTC have proposed the use of multiple regression analysis examining the pass-through rate of firm-specific cost changes can be used to assess the likelihood that merger-induced efficiencies would be passed on to customers.96

In the proposed merger between US health insurers Anthem and Cigna, the parties put forth efficiency studies by a consultant from McKinsey, as well as an economist. The DOJ defined the relevant market as national customers (accounts with 5,000 or more members) purchasing fully insured and administrative services only (ASO) plans in one of the 14 states where Anthem is licensed to ‘use the Blue brand'.97 The DOJ also alleged distinct relevant markets for large group customers by Core-Based Statistical Area (CBSA).98 With respect to efficiencies, the District Court found that both types of claimed cost savings - medical costs savings due to lower provider rates negotiated by the merged firm, as well as lower general and administrative (G&A) costs from integration - were unverifiable, and the medical cost savings were also not merger-specific. The court's analysis turned on the cognisability of the medical costs savings, as the DOJ's economics expert showed that even in the parties' economic expert's own analysis, the merger would be found to result in higher prices when only the G&A savings were credited but the medical costs savings were not.99 The parties' economics expert used a bilateral negotiation model to infer that the merged firm would use its increased leverage to obtain at most the lower of the prices negotiated between Anthem and Cigna on the one hand, and the respective healthcare providers on the other. These cost savings would then be passed on to employers, lowering their total medical spending on administrative services and provider fees combined. The District Court found, and the Circuit Court affirmed, that these medical cost savings were not merger specific, as they were based on simply applying the lower of the fees negotiated by Anthem and Cigna respectively to the purchase patterns of existing members; the reasoning being that if lower provider fees were the primary gain to customers, they (customers) could merely switch to the insurer with the lower provider fee schedule pre-merger.100 Moreover, the District Court questioned the relevance of the negotiation model in this particular application, as ultimately the parties' economic expert simply applied the lower of the available rates to Anthem and Cigna to patients in the data, whereas Anthem officials testified that this could be achieved unilaterally under the terms of existing contracts.101 Having concluded that the claimed efficiencies did not offset the anticompetitive effects of the merger, the District Court did not address the government's claim that the merged firm would acquire monopsony power to force lower rates upon providers, and the majority opinion of the Circuit Court was also silent on this issue.102

Efficiencies were also at issue in the merger between Aetna and Humana, another recently proposed merger between US health insurers.103 In Aetna/Humana, the efficiencies study was initially prepared by the parties' integration team, and the parties then hired an expert to assess which of the efficiencies identified by the integration team were merger-specific.104 The court found the efficiencies claims unverifiable, given various issues pointed out by the DOJ's economics expert.105 In addition, the court considered testimony by the parties' other economic expert that the efficiencies would be subject to only a 42 per cent rate of passthrough to customers, and the court also noted that it was not clear from the efficiency expert's analysis as to the portion of the claimed cost savings relevant to the customers within the relevant market.106 Finally, the court found that despite the parties' efficiency expert's testimony, certain categories of efficiencies included in his estimate were not merger specific, including those related to equalising physician rates negotiated between Aetna and Humana and individual providers.107 Finally, in both Anthem/Cigna and in Aetna/Humana, the courts noted that parties facing a finding that the merger is likely to result in anticompetitive harm must then show ‘extraordinary efficiencies' to overcome the presumption of consumer harm from the merger.108

Merging parties sometimes claim efficiencies involve new products that would not be feasible without the proposed merger. Evaluation of the net effects of the merger then involves, (1) quantifying the welfare gains from new product introduction by estimating the expected increase in consumer surplus from the anticipated sales of the new product, balanced against (2) the welfare loss from potential anticompetitive effects from the merger absent efficiencies, and (3) quantifying the net effect on consumer welfare.109

xi meta-analysis of mergers

Economic theory predicts a merger can result in higher prices, reduced innovation, and harm to consumers if it eliminates a significant competitor in a concentrated market. Some researchers have attempted to quantify the effects of mergers that have been unchallenged, unsuccessfully challenged, successfully challenged, or allowed with a remedy designed to maintain competition. John Kwoka summarises and analyses natural experiment studies on the competitive effects of mergers in a meta-analysis.110

Kwoka draws a number of conclusions from his work. Regarding his review of the FTC and DOJ data on mergers, he points out that the agencies investigate a small fraction of mergers and challenge an even smaller fraction of proposed mergers. He finds that merger control as practiced by the US competition agencies is considerably more tolerant of mergers than the stated policy in the Horizontal Merger Guidelines (2010) would imply for all but the highest levels of concentration, and that the US agencies' policy implementation has become more tolerant over time in moderate or low concentration industries.111 Kwoka also finds that the studies in his meta-analyis find price increases after a merger to be, on average, 5-7 per cent. The largest product-level price increases were in the hospital, scientific journal, and airline industries, where price increases averaged 15 per cent and reached 30 per cent in some cases. Kwoka's findings are similar to previous studies that were based on a smaller number of studies. Kwoka finds that even when the agencies allowed mergers to proceed with some sort of remedy, there was an average price increase of 7.71 per cent. Cleared mergers also resulted in price increases of only slightly smaller magnitudes. Disaggregating the studies by type of remedy, divestiture remedies are associated with an average price increase of 6.1 per cent and conduct remedies with a price increase of 12.81 per cent. Kwoka sees these results as indicating that these remedies are largely ineffective in restraining post-merger price increases.

Meta analyses of prior studies on the competitive effects of mergers are very useful for the broad perspective they provide on the effectiveness of merger control. Nonetheless, Kwoka's conclusion regarding the FTC becoming more lenient over time and the ineffectiveness of FTC-imposed divestiture remedies over the last 20 years have been challenged by FTC economists and policy makers, based, in part, on (1) the small number of merger studies involving remedies, (2) some of Kwoka's test methodologies, and (3) disagreement with Kwoka's reading of the results of some of the studies in his meta-analysis.112

In a separate analysis relying on a methodology similar to Kwoka's, Mariuzzo, Ormosi, and Havel (MOH) summarise estimates of the impact of European mergers on prices.113 These authors find substantially different results in Europe than Kwoka finds in the US. The overall mean price increase in the studies of the mergers MOH analyse is 3 per cent. When MOH eliminate estimates from two outlier studies of one merger, the overall average falls to 0.23 per cent. MOH also calculate the average price changes for approved and remedied mergers including the outliers. The approved mergers had a mean price increase of 5.14 per cent, but this average falls to 0.77 per cent when the two outlier studies are removed. For mergers where there was a remedy imposed, MOH found prices fell by -0.55 per cent for all studies.

xi Conclusions

There is broad consensus regarding the need to base merger control on reliable economic evidence. Matching the economic analysis to the facts of the case and relying on the appropriate tools for conducting the analysis are critical to developing reliable economic evidence for effective merger control.

S Murthy Kambhampaty

CAP Economics, LLC and Navigant Economics

Murthy Kambhampaty is the founder and principal at CAP Economics, LLC and an expert affiliate with Navigant Economics. He specialises in the economic analyses of mergers and antitrust issues, class certification, regulation, commercial damages, patents, infrastructure investment and in economic impact analysis. He has testified or provided expert economic analysis in cartel, merger and other antitrust investigations before European and US agencies, in US litigation and arbitration, and on other economic policy issues before US federal and state agencies or legislative bodies.

Robert Kneuper

Navigant Economics

Robert Kneuper is director and principal at Navigant Economics and has a Ph.D. in Applied Economics from Clemson University. Dr. Kneuper also serves as an adjunct professor at both Loyola University Chicago School of Law and at Charleston Southern University, where he teaches courses in antitrust economics, managerial economies and corporate finance. Dr. Kneuper consults on a wide variety of applied economic and applied finance topics such as antitrust, damages, class certification, intellectual property, and regulation. Dr. Kneuper provides testimony both for private sector clients and for government regulators. His work spans a wide variety of industries including healthcare, pharmaceuticals, insurance, energy, media, entertainment, transportation, real estate, internet, sports, gaming, aerospace, defence, waste collection, retail and consumer products.

James A Langenfeld

Navigant Economics

James Langenfeld is a managing director and principal at Navigant Economics, and is the head of the antitrust and competition practice. He is also an adjunct professor at Loyola University School of Law and Editor of Research in Law and Economics. As a consultant, he provides economic analyses in the context of litigation, regulation and economic policy that relate to competition and antitrust, intellectual property, class certification, damages and the impact of government actions. In over 25 years as a professional economist, he has done extensive work in many industries, including healthcare, pharmaceuticals and medical devices, insurance, petroleum, chemicals, motor vehicles, defence and aerospace and tobacco, and on a wide variety of other consumer and industrial products. Dr Langenfeld regularly testifies for private parties and government agencies engaged in litigation and regulatory proceedings at the federal and state levels in the US, as well as in Europe, Canada and other countries. He worked on hundreds of mergers while working at the FTC, and has worked in consulting since leaving the FTC.

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1 Murthy Kambhampaty is founder and principal at CAP Economics LLC and an expert affiliate at Navigant Economics, Rob Kneuper is a director and principal at Navigant Economics, and James Langenfeld is a managing director at Navigant Economics.

2 For example, the latest Hart-Scott-Rodino Annual Report jointly published by the US Federal Trade Commission and Department of Justice shows that during the 10-year period from 2004 to 2013, fewer than 5 per cent of reported merger transactions were investigated in detail (i.e., received a second request), and over 50 per cent of merger reviews in the US were terminated before the initial review period (i.e., were granted early termination). Report available online at www.ftc.gov/system/files/documents/reports/36th-report-fy2013/140521hsrreport.pdf.

3 Ronald Drennan, Matthew Magura and Aviv Nevo, ‘The Year in Review: Economics at the Antitrust Division 2012-2013', Review of Industrial Organization, Vol. 43, 2013, pp. 291-302; Julie A Carlson, et al., ‘Economics at the FTC: Physician Acquisitions, Standard Essential Patents, and Accuracy of Credit Reporting', Federal Trade Commission, 2013; Benno Buehler, et al., ‘Recent Developments at DG Competition: 2013-2014', Review of Industrial Organization, Vol. 45, 2014, pp. 399-415.

4 James Langenfeld and Wenqing Li, ‘Critical Loss Analysis for Evaluating Mergers', The Antitrust Bulletin, Summer 2001, pp. 299-337; Gregory Werden, ‘Demand Elasticities in Antitrust Analysis', Antitrust Law Journal, 1998, pp. 363-414.

5 Ibid.

6 Ibid.; James Langenfeld and Wenqing Li, ‘The Use and Misuse of Critical Loss Analysis', LECG Perspectives, Vol. 2, No. 3, July 2001.

7 Langenfeld and Li discuss potential pitfalls in the application of critical loss and critical demand elasticity analysis.

8 US Submission to OECD on Economics Evidence in Merger Analysis, 9 February 2011, pp. 1-16, available at www.justice.gov/atr/public/international/268683.pdf; Steven Salop and Daniel P Culley, ‘Potential Competitive Effects of Vertical Mergers: A How-To Guide for Practitioners', Georgetown University Law Center, 2014, pp. 1-65.

9 Serge Moresi, Steven Salop and John Woodbury, ‘Implementing the Hypothetical Monopolist SSNIP Test With Multi-Product Firms', The Antitrust Source, February 2008, pp. 1-8.

10 Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition', The B.E. Journal of Theoretical Economics, Vol. 10, No. 1, 2010, pp. 1-39; Carl Shapiro, ‘The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years', Antitrust Law Journal, Vol. 77, 2010, pp. 701-758.

11 ‘Horizontal Merger Guidelines', US Department of Justice and the Federal Trade Commission, 19 August 2010 (‘US HMG'); ‘European Union, Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentration between Undertakings', Official Journal, C 31, 2 May 2004, pp. 5-18, available at eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52004XC0205(02) (‘EU HMG').

12 For a useful definition of diversion ratio, see Carl Shapiro, ‘Mergers with Differentiated Products', Antitrust, ABA, Spring 1996, pp. 23-30; see also Gregory Werden, ‘A Robust Test For Consumer Welfare Enhancing Mergers Among Sellers Of Differentiated Products', Journal of Industrial Economics, Vol. 44, 1996, pp. 409-413, 1996.

13 Hausman, Leonard and Zona provide examples of demand elasticity estimation. See Jerry Hausman, Gregory Leonard, and J. Douglas Zona, Competitive Analysis with Differenciated Products, Annales d'Économie et de Statistique, No. 34, 1994; see also Werden (1998). Consumer demand elasticity estimation requires assumptions regarding the mathematical form of consumer utility functions. Traditionally, economists specified (indirect) utility functions in terms of the (prices) quantities of various products consumed in the choice set, and solved necessary conditions for optimisation to derive a system of demand equations specifying that the demand for each product in the choice set is determined by the price of the product, as well as the prices of all other products in the choice set and a demand shifter. While this form of estimation gives rise to direct estimation of demand elasticities, it involves the estimation of many of unknown parameters, which presents significant challenges in most real-world mergers. An alternative approach, based on discrete choice modelling of the likelihood of purchase of each product in the choice set based on respective products' price, other relevant product attributes and information about customers requires the estimation of far fewer parameters. However, identification of the relevant attributes for accurately estimating demand elasticities can be time consuming and even imprecise. Thus, elasticity estimation tends to require careful assessment of the available data, and interpretation of elasticity estimates must take account of data limitations and assumptions used.

14 Farrell and Shapiro (2010), ‘In bidding markets, the diversion ratio is the probability that Product 2 is the buyer's second choice when Product 1 wins' (p. 19). See also, US HMG, Sections 4.1.3 and 6.1; US Department of Justice and the US Federal Trade Commission, ‘Quantitative Approaches To Competitive Effects In Bid Market Merger Investigations', Roundtable on Competition in Bidding Markets, Note by the US Department of Justice and the US Federal Trade Commission, DAF/COMP/WD(2006)77, 13 October 2006; Ken Heyer and Carl Shapiro, ‘The Year in Review: Economics at the Antitrust Division, 2009-2010', Review of Industrial Organization, Vol. 37, 2010, pp. 291-307; Gregory Werden and Luke Froeb, ‘Unilateral Competitive Effects of Horizontal Mergers', in Advances in the Economics of Competition Law, Paolo Buccirossi, editor, MIT Press, 2007.

15 The gross upward pricing pressure index can be defined as DM, where D represents the diversion ratio between the merging firms' products, and M represents the relative margin (relative to price) on the merging firms' products. The formula can be generalised to cases where the merging firms' diversion ratios, prices and margins differ (i.e., are not symmetric).

16 US Submission to OECD on Economics Evidence in Merger Analysis.

17 US HMG.

18 Federal District Court for the District of Columbia, in Federal Trade Commission, et al. v. Sysco Corporation et al., Memorandum Opinion, filed 06/29/2015, pp. 35-37.

19 Ibid, p. 39.

20 Shapiro (1996).

21 Farrell and Shapiro (2010); Richard Schmalensee, ‘Should New Merger Guidelines Give UPP Market Definition?' CPI Antitrust Chronicle, Vol. 12, No. 1, December 2009, pp. 1-7.

22 Absent any efficiencies, UPP analysis is a GUPPI analysis.

23 Schmalensee (2009); Jerry Hausman, ‘2010 Merger Guidelines: Empirical Analysis', The Antitrust Source, October 2010, pp. 1-7.

24 Farrell and Shapiro (2010); Sonia Jaffe and E Glen Weyl, ‘The First-Order Approach to Merger Analysis', American Economic Journal: Microeconomics, Vol. 5, No. 4, December 2011, pp. 188-218.

25 Jerry Hausman and Gregory Leonard, ‘Economic Analysis of Differentiated Products Mergers Using Real World Data', George Mason Law Review, Vol. 5, 1997, pp. 321-343.

26 See Jaffe and Weyl (2011).

27 Hausman (2010).

28 Ariel Pakes, ‘Empirical Tools and Competition Analysis: Past Progress and Current Problems', National Bureau of Economics Research, Working Paper 22086 (March 2016).

29 However, if the UPP measures are based on estimation of the elasticity matrix, then the elasticity matrix may be recomputed under reasonable assumptions regarding the likely effects of entry or repositioning, consumption patterns, and diversion ratios and UPP indexes can then be recalculated.

30 Hausman, Leonard and Zona (1994); Hausman and Leonard (1997); Aviv Nevo, ‘Mergers with Differentiated Products: The Case of the Ready-To-Eat Cereal Industry', Rand Journal of Economics, Vol. 31, 2000, pp. 395-421; Gautam Gowrisankaran, Aviv Nevo and Robert Town, ‘Mergers When Prices Are Negotiated: Evidence from the Hospital Industry', American Economic Review, Vol. 105, No. 1, 2015, pp. 172-203.

31 Malcolm Coate and Jeffrey Fischer, ‘Daubert, Science and Modern Game Theory: Implications for Merger Analysis', 2008, available at SSRN: ssrn.com/abstract=1268386; also, Joshua D Angrist and Jörn-Steffen Pischke, ‘The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con out of Econometrics', Journal of Economic Perspectives, Vol. 24, No. 2, 2010, pp. 3-30.

32 US Submission to OECD on Economics Evidence in Merger Analysis; Mary Coleman and James Langenfeld, ‘Natural Experiments', Issues in Competition Law and Policy, ABA Section of Antitrust Law, Vol. 1, 2008, pp. 743-772; see also Orley Ashenfelter, ‘Econometric Methods in Staples', Princeton Law & Public Affairs, Paper No. 04-007, April 2004. Recent scholarship has associated the term natural experiments with the use of instrumental variables techniques, along with fixed effect and difference-in-differences estimators for testing hypotheses in the presence of latent variables or omitted variables. See Joshua Angrist and Jorn-Steffen Pischke, Mostly Harmless Econometrics: An Empiricist's Companion, Princeton, NJ: Princeton University Press, 2008.

33 Malcolm Coate, ‘The Use of Natural Experiments in Merger Analysis', 2013, available at SSRN: papers.ssrn.com/sol3/papers.cfm?abstract_id=1853705.

34 Coleman and Langenfeld (2008).

35 Angrist and Pischke (2008).

36 Christopher Taylor and Daniel Hosken, ‘The Economic Effects of the Marathon - Ashland Joint Venture: The Importance of Industry Supply Shocks and Vertical Market Structure', Journal of Industrial Economics, Vol. 55, 2007, pp. 419-451; see also Coleman and Langenfeld (2008).

37 Taylor and Hosken (2007) used multiple control areas to address differences in regulatory requirements for gasoline blends at the various control areas and the treatment area.

38 Taylor and Hosken faced a variety of issues that resulted in a complex analysis, which we do not attempt to summarise here.

39 Taylor and Hosken (2007); Justine S Hastings, ‘Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California', American Economic Review, Vol. 94, No. 1, 2004, pp. 317-28; Nicholas Kriesle, ‘Merger Policy at the Margin: Western Refining's Acquisition of Giant Industries', US Federal Trade Commission, Working Paper No. 319, September 2013.

40 Michael Vita and Seth Sacher, ‘The Competitive Effects of Not-for-Profit Hospital Mergers: A Case Study', Journal of Industrial Economics, No. 49, Vol. 1, pp. 63-84; Deborah Haas-Wilson, and Christopher Garmon, ‘Hospital Mergers and Competitive Effects: Two Retrospective Analyses', International Journal of the Economics of Business, Vol. 18, No. 1, February 2011, pp. 17-32; Patrick Romano and David Balan, ‘A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare', International Journal of the Economics of Business, Vol. 18, No. 1, February 2011, pp. 45-64; Steven Tenn, ‘The Price Effects of Hospital Mergers: A Case Study of the Sutter-Summit Transaction', International Journal of the Economics of Business, Vol. 18, No. 1, February 2011, pp. 65-82; Aileen Thompson, ‘The Effect of Hospital Mergers on Inpatient Prices: A Case Study of the New Hanover-Cape Fear Transaction', International Journal of the Economics of Business, Vol. 18, No. 1, February 2011, pp. 91-101; Leemore Dafny, ‘Estimation and Identification of Merger Effects: An Application to Hospital Mergers', Journal of Law and Economics, Vol. 52, No. 3, August 2009, pp. 523-550.

41 Hastings (2004) and Dafny (2009); see also Christopher Taylor, Nicholas Kreisle and Paul Zimmerman, ‘Vertical Relationships and Competition in Retail Gasoline Markets: Comment', The Federal Trade Commission, Bureau of Economics Working Paper 291, 2007.

42 Coate (2013).

43 David Dranove and Andrew Sfekas, ‘The Revolution in Health Care Antitrust: New Methods and Provocative Implications', The Milbank Quarterly, Vol. 87, No. 3, September 2009, pp. 607-632.

44 Dranove and Sfekas (2009); Langenfeld and Li (2001).

45 Robert Town and Gregory Vistnes, ‘Hospital Competition in HMO Networks', Journal of Health Economics, Vol. 20, No. 5, 2001, pp. 733-753; Cory Capps, David Dranove and Mark Satterthwaite, ‘Competition and Market Power in Option Demand Markets', Rand Journal of Economics, Vol. 34, No. 4, 2003, pp. 737-763. Gowrisankaran, Gautam, Aviv Nevo, and Robert Town, ‘Mergers When Prices Are Negotiated: Evidence from the Hospital Industry', American Economic Review, Vol. 105, No. 1, 2015, pp. 172-203.

46 Town and Vistnes (2001) and Capps, Dranove and Satterthwaite (2003). See also Joseph Farrell, et al., ‘Economics at the FTC: Hospital Mergers, Authorized Generic Drugs, and Consumer Credit Markets', Review of Industrial Organization, Vol. 39, No. 4, October 2011, pp. 271-296. See also, Tenn (2011).

47 For example, Town and Vistnes (2001) rely on reduced from regression analysis of prices; Capp, Dranove and Satterthwaite (2003) rely on reduced from regressions of hospital margins; Gowrishankaran, Nevo and Town (2015) develop a structural model of hospital prices.

48 Capps, Dranove, and Satterthwaite (2003).

49 Julie Carlson, et al. (2013).

50 Gregory Crawford and Ali Yurukoglu, ‘The Welfare Effects of Bundling in Multichannel Television Markets', American Economic Review, Vol. 102, No. 2, April 2012, pp. 643-85.

51 Declaration of Joseph Farrell, Attachment to Petition to Deny of Cogent Communications Group, 25 August 2014, redacted version at, http://apps.fcc.gov/ecfs/document/view?id=7521817745 (‘Farrell Declaration in Comcast/TWC'). See also, David Evans, ‘Economic Analysis Of The Impact Of The Comcast/Time Warner Cable Transaction On Internet Access To Online Video Distributors', 24 August 2014 (‘Evans Declaration in Comcast/TWC'), redacted version at, www.competitionpolicyinternational.com/assets/Evans-Initial-Declaration-Including-CV-August-25-2014.pdf; and Mark Israel, ‘Economic Analysis Of The Effect Of The Comcast-TWC Transaction On Broadband: Reply To Commenters', 22 September 2014, redacted version at, http://corporate.comcast.com/
images/2014-09-23-REDACTED-Comcast-TWC-Opposition-and-Response-Exhibit-1-Israel.pdf (‘Israel Declaration in Comcast/TWC'); DOJ press release announcing Comcast's abandoning its proposed acquisition of Time Warner Cable, online at, www.justice.gov/opa/pr/comcast-
corporation-abandons-proposed-acquisition-time-warner-cable-after-justice-department.

52 Gowrishankaran, Nevo, and Town (2015) attempt to address this shortcoming with detailed analysis of payor data for the Stage 2 regression.

53 UPP analysis is inappropriate for healthcare provider mergers, where suppliers negotiate prices with a small number of customers, rather than making all or nothing offers at set prices (Pakes 2016).

54 Haas-Wilson and Garmon (2011).

55 United States District Court For The Middle District Of Pennsylvania, in U.S. Federal Trade Commission and the Commonwealth of Pennsylvania vs. Penn State Hershey Medical Center and Pinnacle Health System, Civil Action No. 1:15-cv-2362, Memorandum Opinion And Order (John E Jones III, Judge).

56 United Sates Court of Appeals for the Third Circuit, in Federal Trade Commission and Commonwealth of Pennsylvania v. Penn State Hershey Medical Center and Pinnacle Healthy System, at p. 25.

57 Ibid, pp. 28-31.

58 Ibid, pp. 17-23.

59 US HMG, Section 4.1.1, Example 6.

60 United States District Court For The Northern District Of Illinois Eastern Division, In Federal Trade Commission and Sate of Illinois v. Advocate Healthcare, Advocate Health and Hospitals Corporation, and Northshore University, Redacted Memorandum Opinion and Order, filed 03/16/2017; pp. 15-16.

61 Richard Liebeskind, ‘Challenges to Consummated Mergers: Making the Game Worth the Candle', ABA Mergers and Acquisitions Newsletter, Vol. 4, No. 2, Spring 2004.

62 OECD Secretariat, ‘Executive Summary of the Roundtable on Investigations of Consummated and Non-Notifiable Mergers', OECD, 2015. Available online at www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/WP3/M%282014%291/ANN3/FINAL&docLanguage=En.

63 United States District Court, Northern District of California, in United States of America v. BazaarVoice, Inc, Case No. 13-cv-00133-WHO, Memorandum Opinion; and Opinion of the Commission, In the Matter of Polypore International, Inc, a corporation; Docket No. 9327.

64 Competitive Impact Statement, United States of America and State of New York v. Twin America LLC, et al., defendants, Civil Action No. 12-CV-8989 (ALC) (GWG), United States District Court for the Southern District of New York.

65 Memorandum In Opposition To Defendants' Motion To Exclude Certain Expert Testimony Of Dr. Russell Pittman, US District Court For The Southern District Of New York. Civil Action No. 12-cv-8989 (ALC) (GWG); redacted version online at, www.justice.gov/atr/case-document/file/641826/download.

66 See, for example, Hosken and Taylor (2007) and Haas-Wilson and Garmon (2011).

67 The FTC argued that ordering the breakup of the merged firm would be unduly costly to Highland Park.

68 Barry Harris and David Argue, ‘FTC v. Evanston Northwestern: A Change from Traditional Hospital Merger Analysis?', Antitrust, Spring 2006, pp. 34-40. See also Joseph Farrell, Paul Pautler and Michael Vita, ‘Economics at the FTC: Retrospective Merger Analysis with a Focus on Hospitals', Review of Industrial Organization, Vol. 35, No. 4, October 2009, pp. 369-85 for other studies analysing the effects of mergers on prices.

69 Ibid.

70 Gregory Werden, Andrew Joskow, and Richard Johnson, ‘The Effects of Mergers on Price and Output: Two Case Studies from the Airline Industry', Managerial and Decision Economics, Vol. 12, No. 5, October 1991, pp. 341-352.

71 ‘European Union, Guidelines on the Assessment of Non-Horizontal Mergers under the Council Regulation on the Control of Concentration between Undertakings', Official Journal, C 265, October 2008, pp. 5-18, available at eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:265:0006:0025:en:PDF.

72 James Langenfeld, ‘Non-Horizontal Merger Guidelines in the United States and the European Commission: Time for the United States to Catch Up?', George Mason Law Review, Vol. 16, No. 4, 2009, pp. 851-884; Salop and Culley (2014).

73 Michael Riordan, ‘Competitive Effects of Vertical Integration', in Handbook of Antitrust Economics, Paolo Buccirossi editor, MIT Press, 2008.

74 Ibid.

75 U.S. Department of Justice Competitive Impact Statement, www.justice.gov/atr/cases/f266100/266158.htm; Jonathan Baker, ‘The FCC Provides a Roadmap for Vertical Merger Analysis', Antitrust, Vol. 25, No. 2, Spring 2011, pp. 36-42. In the United States, mergers in the telecommunications and broadcast industries are reviewed by both the Federal Communications Commission as well as the Department of Justice.

76 For further discussion on the vertical arithmetic, see Salop and Cully (2014).

77 Baker (2011).

78 Farrell Declaration in Comcast/TWC; Evans Declaration in Comcast/TWC; Israel Declaration in Comcast/TWC.

79 Salop and Cully (2014); Anthony Bush, ‘Bridging the Gap between Horizontal and Vertical Merger Simulation: Modifications and Extensions of PCAIDS', Kiel Institute for the World Economy, Economics Discussion Papers, No. 2014-33, 2014, available at www.economics-ejournal.org/economics/discussionpapers/2014-33.

80 EU HMG, Section VI; see also US HMG, Section 9.

81 EU HMG; note that in the 2010 version of the US HMG, the specification of a two-year time frame for assessing the timeliness of entry was deleted.

82 Malcolm Coate, ‘Theory Meets Practice: Barriers to Entry in Merger Analysis', Review of Law & Economics, Vol. 4, No. 1, June 2008, pp. 183-212. See, also, Malcolm Coate and James Langenfeld, ‘Entry Under the Merger Guidelines 1982-1992', The Antitrust Bulletin, Fall 1993, pp. 557-592; and the discussion regarding analysis of minimum viable scale in the (since revised) ‘Horizontal Merger Guidelines', US Department of Justice and the Federal Trade Commission, April 8, 1997.

83 US HMG, Section 9: ‘Recent examples of entry, whether successful or unsuccessful, generally provide the starting point for identifying the elements of practical entry efforts'.

84 See Competitive Impact Statement in United States v. Dairy Farmers of America, No. 6:03-206-KS, Eastern District of Kentucky, October 2006, available at www.justice.gov/atr/cases/f221700/221713.htm.

85 US HMG.

86 Pakes (2016).

87 Alon Eizenberg, ‘Upstream Innovation and Product Variety in the United States Home PC Market', Review of Economic Studies, Vol. 81, 2012, pp. 1003-1045; see also Pakes (2016) for a survey of other research in this area.

88 Ying Fan and Chengyu Yan, ‘Competition, Product Proliferation and Welfare: A Study of the U.S. Smartphone Market', University of Michigan (Working Paper), 2016; downloadable from www-personal.umich.edu/~yingfan/proliferation_Fan_Yang.pdf. Chris Nosko, ‘Competition and Quality Choice in the CPU Market', University of Chicago Booth School of Business, Chicago, IL (Working Paper), 2016, reviewed in Pakes (2016), obtains a similar result in the x86 (PC) microprocessor market.

89 See p. 6, ‘Horizontal Merger Investigation Data: Fiscal Years 1996-2011', US Federal Trade Commission, available at www.ftc.gov/os/2013/01/130104horizontalmergerreport.pdf.

90 Joseph Farrell and Carl Shapiro, ‘Scale Economies and Synergies in Horizontal Merger Analysis', Antitrust Law Journal, Vol. 68, 2001, pp. 685-710.

91 ‘Other possible efficiencies of vertical integration are better coordination of design and production decisions, improved incentives for relationship-specific investments, and better provision of point of sale services', Riordan (2008).

92 Malcolm Coate and Andrew Heimert, ‘Merger Efficiencies At The Federal Trade Commission, 1997-2007', US Federal Trade Commission, Bureau of Economics, February 2009.

93 ‘In the Agencies' experience, efficiencies are most likely to make a difference in merger analysis when the likely adverse competitive effects, absent the efficiencies, are not great.' US HMG.

94 US Submission to OECD on Economics Evidence in Merger Analysis; Farrell and Shapiro (2001).

95 Luke Froeb, Steven Tschantz and Gregory Werden, ‘Pass-Through Rates and the Price Effects of Mergers', International Journal of Industrial Organization, Vol. 23, 2005, pp. 703-715.

96 Orley Ashenfelter, David Ashmore, Jonathan Baker, and Signe-Mary McKernan, ‘Identifying the Firm-Specific Cost Pass-Through Rate', 1998, online at, https://www.ftc.gov/reports/identifying-firm-specific-cost-pass-through-rate. See also, Paul Yde and Michael Vita, ‘Merger Efficiencies: Reconsidering the ‘Passing-On' Requirement', Antitrust Law Journal, Vol. 64, 1996, pp. 735-747.

97 U.S. District Court for the District of Columbia, in United States of America, et al. v. Anthem, Inc., et al. Civil Action No. 16-1493, (Amy B Jackson, Judge), p. 42. Hereafter, ‘FDDC Opinion in Anthem/Cigna'.

98 Ibid, Section V, p. 130.

99 Ibid, p. 118.

100 Ibid, p. 105.

101 Ibid.

102 U.S. Court of Appeals for the D. C. Circuit, in United Sates of America, et. al. vs. Anthem, Inc. and Cigna Corporation.

103 U.S. District Court for the District of Columbia, in United States of America, et al. v. Aetna, Inc. et. al. Civil Action No. 16-1494 (John D. Bates, Judge).

104 Ibid, pp. 148-149.

105 Ibid, p. 149.

106 Ibid, p. 150.

107 Ibid, pp. 151-153.

108 Ibid, pp. 147, 151, 155; also, FDDC Opinion in Anthem/Cigna, pp. 100, 127.

109 US Submission to OECD on Economics Evidence in Merger Analysis.

110 Kwoka, John. 2015. Mergers, Merger Control, and Remedies. Cambridge: MIT Press.

111 Kwoka 2015, p. 37.

112 See James Langenfeld, ‘The Empirical Basis for Antitrust: Cartels, Mergers, and Remedies', International Journal of the Economics of Business, January 27, 2017, 1-18. Available at http://dx.doi.org/10.1080/13571516.2017.1279376; Michael Vita and F. David Osinski, ‘John Kwoka's Mergers, Merger Control, and Remedies: A Critical Review', FTC Working Paper, December 21, 2016; and Edith Ramirez, 2016. ‘Keynote Remarks of FTC Chairwoman Edith Ramirez: 10th Annual Global Antitrust Enforcement Symposium.' Georgetown University Law School. September 20.

113 Franco Mariuzzo, Peter L. Ormosi, and Richard Havel. 2016. ‘What can Merger Retrospectives Tell Us? An Assessment of European Mergers' Social Science Research Network, June 1. Accessed August 7 2016. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2781509.