Antitrust Limits on Merger Decision Markets?

Cite this Article
Joshua D. Wright, Antitrust Limits on Merger Decision Markets?, Truth on the Market (February 05, 2008),

At Overcoming Bias, Robin Hanson points to the absence of decision markets evaluating competitive conditions in the post-merger world as evidence that “these companies are just not serious about finding the highest value applications of prediction markets.” Here’s a description of the markets that Robin has in mind:

Decision markets could say whether this merger is good for shareholders, by estimating the combined stock price given a merger, and given no merger. Similarly, decision markets could say whether this merger is good for these firms’ customers, by estimating the price and/or quantity of web ads given a merger, and given no merger. This might help convince regulators to approve the merger.

I certainly agree that these types of internal decision markets might be relevant to both firms contemplating mergers and to antitrust regulators. I’m also very hawkish on the use of prediction markets within firms and to inform policy as a general matter. But I’m not sure that Robin is right that the problem in the merger context is that firms do not take prediction markets seriously enough. At least, thats not the only problem. One immediate and important problem is that these markets might also help convince regulators to reject the merger based on estimates of post-merger prices. The type of information is likely to be a more accurate form of information that government agencies already seek from the merging parties, usually in the form of internal documents, analyses, and forecasts, to analyze the likely competitive effects of a proposed merger.

The antitrust concern is obvious: any information created via internal prediction markets, including information that suggests that prices will increase, will surely be used by the agencies to argue that the merger will violate the Clayton Act. I do wonder whether these types of concerns provide a substantial additional expected costs to the establishment of decision markets on antitrust events, e.g. exactly the types of events where prediction markets might be extremely useful to firms. My hunch is that if antitrust counsel were sitting in the room when firms are contemplating launching a prediction market on a merger or other antitrust event, he or she might strongly oppose the idea for fear of explaining the “hot documents” that it might produce.

The above discussion assumes that we are talking about “internal” prediction markets. And I do believe that the types of antitrust concerns raised there are real and possibly constrain adoption of these markets for antitrust events in the real world. However, if we allow for prediction markets where folks outside the firm (e.g. competitors) can also participate, the law professor can’t help but raise a scenario fit for an antitrust exam hypothetical:

Firm A launches a prediction market on antitrust event X (lets say X = raise prices 5% next month). In response, or perhaps simultaneously, rival Firm B also launches a market in which antitrust event Y (Y = raise prices 5% next month) is actionable and Firm A managers and employees can participate. One can also think of more precise and problematic contracts in terms of the prospects for collusion, e.g. “Firm A’s price on January 1, 2008 is greater than or equal to $5.50.” But lets leave that contract aside for the moeBoth firms increase prices by 5% at the start of next month. The DOJ sues alleging that A and B have reached an agreement to raise prices in violation of Section 1 of the Sherman Act. What result? What about if the FTC sues under Section 5 of the FTC Act as a stand-alone offense? Of course, this example is not really about prediction markets. Its about collusion.

Some economists who favor the use of prediction markets have argued for safe harbors for their use from gambling regulations. That’s the easy case since the social value of gambling laws is not likely to be low or perhaps negative whereas there is little dispute about the potential social value in prediction markets. I wonder if these economists would favor a similar safe harbor from antitrust regulations? I can already hear Geoff pointing out that antitrust regulations do not have much social value either. So what about a safe harbor from hard core cartel offenses under Section 1? Or a “safe harbor” preventing antitrust regulators from using internal prediction markets as evidence in court to prove the likely competitive effects of a merger?