Evaluating Market Power with Two-Sided Demand and Preemptive Offers to Dissipate Monopoly Rent: Lessons for High-Technology Industries from the Antitrust Division's Approval of the XM-Sirius Satellite Radio Merger
Journal of Competition Law and Economics, Vol. 4, No. 3, pp. 697-751, 2008
55 Pages Posted: 31 Jan 2008 Last revised: 2 Nov 2009
Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions.
In the proposed XM-Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by dynamic demand. We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities - that is, without evidence of buyer substitution between the two products in response to a relative change in prices - then market definition is unbounded.
On March 24, 2008, the Antitrust Division announced that it would not challenge the merger because, in the agency's estimation, the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers. The Division's use of a higher standard for intervention than the incipiency standard in section 7 of the Clayton Act increases the risk of false negatives.
Finally, the XM-Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate post-merger rents to influential third-party interveners. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the pre-merger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as à-la-carte. These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies.
To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission lacks the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the à-la-carte offering would not hold constant other non-price factors, consumer surplus could fall.
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By Lars Persson