One More Thought on Ex Ante Competition and Merger Analysis

Josh Wright —  25 March 2008

One last issue with respect to ex ante competition and merger analysis.  What if it could be demonstrated convincingly that XM and Sirius payments to automobile manufacturers. The DOJ hints at this possibility in the press release:

XM and Sirius engaged in head-to-head competition for the right to distribute their products and services through each car company. As a result of this competitive process, XM and Sirius have provided car manufacturers with subsidies and other payments that indirectly reduce the equipment prices paid by car buyers to obtain a satellite radio.

The general approach of the Merger Guidelines is that efficiencies and consumer welfare benefits in product markets outside the relevant market don’t count for the purposes of Section 7 analysis.  I understand that some arbitrary rules about the scope of the competitive effects analysis must be made in order to make the problem tractable, but I tend to think the exclusion of these benefits from the calculation doesn’t make any sense.

The DOJ leaves open the possibility here that these subsidies would be passed on to consumers in the form of “indirectly” lower prices for the satellite radio equipment and so one might think of these as “in the relevant market.”  But in my analysis of slotting contracts with Ben Klein involving payments to multi-product retailers like supermarkets, we show that one reason why supermarkets prefer to receive lump sum payments rather than wholesale price reductions is that the supermarket is not forced to pass on the payments in the form of lower prices on the particular product.  In other words, a slotting fee on Coca-Cola is not likely to be passed on in the form of lower prices on Coca-Cola. There is little doubt that the payment is ultimately passed on to consumers in the competitive retail environment, however.  Supermarkets pass on these payments in the form of various price and non-price benefits on margins that will have the greatest impact of store traffic and inter-retailer competition.  For example, supermarkets may use payments to subsidize lower prices on staples that drive inter-store substitution or non-price amenities like a deli, longer hours, etc.

The point is that the economics of pass-through of these ex ante payments in the multi-product retailer context is much more complex.  However, the Merger Guidelines limit the complexity by arbitrarily limiting consideration of efficiencies to those within the relevant product market (in my example above, soda) and not including the other benefits accumulated by consumers as a result of the payments.  This is odd from a consumer welfare perspective.  One can understand the 2 year timing limitation as an arbitrary but necessary mechanism for limiting the complexity of antitrust analysis or the operation of some discount rate on future consumers.  I think a reasonable argument can be had about the merits of this approach given our limited ability to make predictions into the future (see generally Katz & Shelanski on the topic of Mergers and Uncertainty).

But I view the limitation on “out of market” consumer welfare benefits as less defensible in the context of multi-product retailers as in this slotting fee situation.  If the payments on Coca-Cola are passed on along some other price or non-price dimension, it is generally the same consumers accumulating the benefits and there is very little doubt that these payments are passed through in competitive retail environments.  To know that economic theory and empirical evidence suggests that these payments are improving consumer welfare — the very same class of consumers in the supermarket — but prevent consideration of those benefits as an efficiency strikes me as both arbitrary and perverse.