Merger Lore: Dispelling the Myth of the Maverick

Eric Fruits —  24 July 2019

There’s always a reason to block a merger:

  • If a firm is too big, it will be because it is “a merger for monopoly”;
  • If the firms aren’t that big, it will be for “coordinated effects”;
  • If a firm is small, then it will be because it will “eliminate a maverick”.

It’s a version of Ronald Coase’s complaint about antitrust, as related by William Landes:

Ronald said he had gotten tired of antitrust because when the prices went up the judges said it was monopoly, when the prices went down, they said it was predatory pricing, and when they stayed the same, they said it was tacit collusion.

Of all the reasons to block a merger, the maverick notion is the weakest, and it’s well past time to ditch it.

The Horizontal Merger Guidelines define a “maverick” as “a firm that plays a disruptive role in the market to the benefit of customers.” According to the Guidelines, this includes firms:

  1. With a new technology or business model that threatens to disrupt market conditions;
  2. With an incentive to take the lead in price cutting or other competitive conduct or to resist increases in industry prices;
  3. That resist otherwise prevailing industry norms to cooperate on price setting or other terms of competition; and/or
  4. With an ability and incentive to expand production rapidly using available capacity to “discipline prices.”

There appears to be no formal model of maverick behavior that does not rely on some a priori assumption that the firm is a maverick.

For example, John Kwoka’s 1989 model assumes the maverick firm has different beliefs about how competing firms would react if the maverick varies its output or price. Louis Kaplow and Carl Shapiro developed a simple model in which the firm with the smallest market share may play the role of a maverick. They note, however, that this raises the question—in a model in which every firm faces the same cost and demand conditions—why would there be any variation in market shares? The common solution, according to Kaplow and Shapiro, is cost asymmetries among firms. If that is the case, then “maverick” activity is merely a function of cost, rather than some uniquely maverick-like behavior.

The idea of the maverick firm requires that the firm play a critical role in the market. The maverick must be the firm that outflanks coordinated action or acts as a bulwark against unilateral action. By this loosey goosey definition of maverick, a single firm can make the difference between success or failure of anticompetitive behavior by its competitors. Thus, the ability and incentive to expand production rapidly is a necessary condition for a firm to be considered a maverick. For example, Kaplow and Shapiro explain:

Of particular note is the temptation of one relatively small firm to decline to participate in the collusive arrangement or secretly to cut prices to serve, say, 4% rather than 2% of the market. As long as price cuts by a small firm are less likely to be accurately observed or inferred by the other firms than are price cuts by larger firms, the presence of small firms that are capable of expanding significantly is especially disruptive to effective collusion.

A “maverick” firm’s ability to “discipline prices” depends crucially on its ability to expand output in the face of increased demand for its products. Similarly, the other non-maverick firms can be “disciplined” by the maverick only in the face of a credible threat of (1) a noticeable drop in market share that (2) leads to lower profits.

The government’s complaint in AT&T/T-Mobile’s 2011 proposed merger alleges:

Relying on its disruptive pricing plans, its improved high-speed HSPA+ network, and a variety of other initiatives, T-Mobile aimed to grow its nationwide share to 17 percent within the next several years, and to substantially increase its presence in the enterprise and government market. AT&T’s acquisition of T-Mobile would eliminate the important price, quality, product variety, and innovation competition that an independent T-Mobile brings to the marketplace.

At the time of the proposed merger, T-Mobile accounted for 11% of U.S. wireless subscribers. At the end of 2016, its market share had hit 17%. About half of the increase can be attributed to its 2012 merger with MetroPCS. Over the same period, Verizon’s market share increased from 33% to 35% and AT&T market share remained stable at 32%. It appears that T-Mobile’s so-called maverick behavior did more to disrupt the market shares of smaller competitors Sprint and Leap (which was acquired by AT&T). Thus, it is not clear, ex post, that T-Mobile posed any threat to AT&T or Verizon’s market shares.

Geoffrey Manne raised some questions about the government’s maverick theory which also highlights a fundamental problem with the willy nilly way in which firms are given the maverick label:

. . . it’s just not enough that a firm may be offering products at a lower price—there is nothing “maverick-y” about a firm that offers a different, less valuable product at a lower price. I have seen no evidence to suggest that T-Mobile offered the kind of pricing constraint on AT&T that would be required to make it out to be a maverick.

While T-Mobile had a reputation for lower mobile prices, in 2011, the firm was lagging behind Verizon, Sprint, and AT&T in the rollout of 4G technology. In other words, T-Mobile was offering an inferior product at a lower price. That’s not a maverick, that’s product differentiation with hedonic pricing.

More recently, in his opposition to the proposed T-Mobile/Sprint merger, Gene Kimmelman from Public Knowledge asserts that both firms are mavericks and their combination would cause their maverick magic to disappear:

Sprint, also, can be seen as a maverick. It has offered “unlimited” plans and simplified its rate plans, for instance, driving the rest of the industry forward to more consumer-friendly options. As Sprint CEO Marcelo Claure stated, “Sprint and T-Mobile have similar DNA and have eliminated confusing rate plans, converging into one rate plan: Unlimited.” Whether both or just one of the companies can be seen as a “maverick” today, in either case the newly combined company would simply have the same structural incentives as the larger carriers both Sprint and T-Mobile today work so hard to differentiate themselves from.

Kimmelman provides no mechanism by which the magic would go missing, but instead offers a version of an adversity-builds-character argument:

Allowing T-Mobile to grow to approximately the same size as AT&T, rather than forcing it to fight for customers, will eliminate the combined company’s need to disrupt the market and create an incentive to maintain the existing market structure.

For 30 years, the notion of the maverick firm has been a concept in search of a model. If the concept cannot be modeled decades after being introduced, maybe the maverick can’t be modeled.

What’s left are ad hoc assertions mixed with speculative projections in hopes that some sympathetic judge can be swayed. However, some judges seem to be more skeptical than sympathetic, as in H&R Block/TaxACT :

The parties have spilled substantial ink debating TaxACT’s maverick status. The arguments over whether TaxACT is or is not a “maverick” — or whether perhaps it once was a maverick but has not been a maverick recently — have not been particularly helpful to the Court’s analysis. The government even put forward as supposed evidence a TaxACT promotional press release in which the company described itself as a “maverick.” This type of evidence amounts to little more than a game of semantic gotcha. Here, the record is clear that while TaxACT has been an aggressive and innovative competitor in the market, as defendants admit, TaxACT is not unique in this role. Other competitors, including HRB and Intuit, have also been aggressive and innovative in forcing companies in the DDIY market to respond to new product offerings to the benefit of consumers.

It’s time to send the maverick out of town and into the sunset.

 

Eric Fruits

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Eric Fruits, Ph.D. is Chief Economist at the International Center for Law & Economics and Economics International Corp. He is the Oregon Association of Realtors Faculty Fellow at Portland State University. He has written peer-reviewed articles on initial public offerings (IPOs), the municipal bond market, real estate markets, and the formation and operation of cartels. His economic analysis has been widely cited and has been published in The Economist and the Wall Street Journal. Dr. Fruits is an antitrust expert who has written articles on price fixing and cartels for the top-tier Journal of Law and Economics. He has assisted in the review of several mergers including Sysco-US Foods, Exxon-Mobil, BP-Arco, and Nestle-Ralston. He has worked on many antitrust lawsuits, including Weyerhaeuser v. Ross-Simmons, a predatory bidding case that was ultimately decided by the United States Supreme Court. As an expert in statistics, he has provided expert opinions and testimony regarding market manipulation, real estate transactions, profit projections, agricultural commodities, and war crimes allegations. His expert testimony has been submitted to state courts, federal courts, and an international court.