Economic Models in Merger Analysis: A Case Study of the Merger Guidelines
Potomac Law and Economics Working Paper No. 05-04
44 Pages Posted: 21 May 2005
Date Written: May 2005
Merger analysis is a field in which economic theory is systematically applied, day-in, day-out. Economics structures the definition of the relevant market, and then economics drives the evaluation of the likely competitive effect of the merger. Exactly which models appear to be used by Federal Trade Commission staff would be of great interest to the stake-holder community, as would any details on how the models are applied. This paper provides this information with an in-depth study of the merger review process focused on 124 single market horizontal mergers evaluated between FY 1993 and 2003. Five different market models are identified with a homogenous goods analysis (two choices) useful in about one-third of the cases and a differentiated goods analysis (three choices) relevant for the others. Within the relevant markets, unilateral effects analysis was used in slightly more than half of the cases and coordinated interaction theories in just less than half. The unilateral analyses generally applied a head-to-head model of competition, while the coordinated interaction cases utilized three different models of collusion. The outcomes of the Guidelines-based theories are then matched with other evidence of the likely competitive effect. Evidence contained in hot documents, validated customer concerns and event studies appear to play an important role in confirming Guidelines-based theoretical predictions for the competitive effect of a proposed merger.
Keywords: Merger Guidelines, Merger enforcement, Federal Trade Commission
JEL Classification: K21, L40
Suggested Citation: Suggested Citation