Archives For consolidation

Rising Concentration: Drifters Followup Is Worse Than the Original

Eric Fruits —  18 September 2020

Germán Gutiérrez and Thomas Philippon have released a major rewrite of their paper comparing the U.S. and EU competitive environments. 

Although the NBER website provides an enticing title — “How European Markets Became Free: A Study of Institutional Drift” — the paper itself has a much more yawn-inducing title: “How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift.”

Having already critiqued the original paper at length (here and here), I wouldn’t normally take much interest in the do-over. However, in a recent episode of Tyler Cowen’s podcast, Jason Furman gave a shout out to Philippon’s work on increasing concentration. So, I thought it might be worth a review.

As with the original, the paper begins with a conclusion: The EU appears to be more competitive than the U.S. The authors then concoct a theory to explain their conclusion. The theory’s a bit janky, but it goes something like this:

  • Because of lobbying pressure and regulatory capture, an individual country will enforce competition policy at a suboptimal level.
  • Because of competing interests among different countries, a “supra-national” body will be more independent and better able to foster pro-competitive policies and to engage in more vigorous enforcement of competition policy.
  • The EU’s supra-national body and its Directorate-General for Competition is more independent than the U.S. Department of Justice and Federal Trade Commission.
  • Therefore, their model explains why the EU is more competitive than the U.S. Q.E.D.

If you’re looking for what this has to do with “institutional drift,” don’t bother. The term only shows up in the title.

The original paper provided evidence from 12 separate “markets,” that they say demonstrated their conclusion about EU vs. U.S. competitiveness. These weren’t really “markets” in the competition policy sense, they were just broad industry categories, such as health, information, trade, and professional services (actually “other business sector services”). 

As pointed out in one of my earlier critiques, In all but one of these industries, the 8-firm concentration ratios for the U.S. and the EU are below 40 percent and the HHI measures reported in the original paper are at levels that most observers would presume to be competitive. 

Sending their original markets to drift in the appendices, Gutiérrez and Philippon’s revised paper focuses its attention on two markets — telecommunications and airlines — to highlight their claims that EU markets are more competitive than the U.S. First, telecoms:

To be more concrete, consider the Telecom industry and the entry of the French Telecom company Free Mobile. Until 2011, the French mobile industry was an oligopoly with three large historical incumbents and weak competition. … Free obtained its 4G license in 2011 and entered the market with a plan of unlimited talk, messaging and data for €20. Within six months, the incumbents Orange, SFR and Bouygues had reacted by launching their own discount brands and by offering €20 contracts as well. … The relative price decline was 40%: France went from being 15% more expensive than the US [in 2011] to being 25% cheaper in about two years [in 2013].

While this is an interesting story about how entry can increase competition, the story of a single firm entering a market in a single country is hardly evidence that the EU as a whole is more competitive than the U.S.

What Gutiérrez and Philippon don’t report is that from 2013 to 2019, prices declined by 12% in the U.S. and only 8% in France. In the EU as a whole, prices decreased by only 5% over the years 2013-2019.

Gutiérrez and Philippon’s passenger airline story is even weaker. Because airline prices don’t fit their narrative, they argue that increasing airline profits are evidence that the U.S. is less competitive than the EU. 

The picture above is from Figure 5 of their paper (“Air Transportation Profits and Concentration, EU vs US”). They claim that the “rise in US concentration and profits aligns closely with a controversial merger wave,” with the vertical line in the figure marking the Delta-Northwest merger.

Sure, profitability among U.S. firms increased. But, before the “merger wave,” profits were negative. Perhaps predatory pricing is pro-competitive after all.

Where Gutiérrez and Philippon really fumble is with airline pricing. Since the merger wave that pulled the U.S. airline industry out of insolvency, ticket prices (as measured by the Consumer Price Index), have decreased by 6%. In France, prices increased by 4% and in the EU, prices increased by 30%. 

The paper relies more heavily on eyeballing graphs than statistical analysis, but something about Table 2 caught my attention — the R-squared statistics. First, they’re all over the place. But, look at column (1): A perfect 1.00 R-squared. Could it be that Gutiérrez and Philippon’s statistical model has (almost) as many parameters as variables?

Notice that all the regressions with an R-squared of 0.9 or higher include country fixed effects. The two regressions with R-squareds of 0.95 and 0.96 also include country-industry fixed effects. It’s very possible that the regressions results are driven entirely by idiosyncratic differences among countries and industries. 

Gutiérrez and Philippon provide no interpretation for their results in Table 2, but it seems to work like this, using column (1): A 10% increase in the 4-firm concentration ratio (which is different from a 10 percentage point increase), would be associated with a 1.8% increase in prices four years later. So, an increase in CR4 from 20% to 22% (or an increase from 60% to 66%) would be associated with a 1.8% increase in prices over four years, or about 0.4% a year. On the one hand, I just don’t buy it. On the other hand, the effect is so small that it seems economically insignificant. 

I’m sure Gutiérrez and Philippon have put a lot of time into this paper and its revision. But there’s an old saying that the best thing about banging your head against the wall is that it feels so good when it stops. Perhaps, it’s time to stop with this paper and let it “drift” into obscurity.

In Antitrust & Competition, European Union, Federal Trade Commission, Google, International, Mergers & Acquisitions, Platforms, Telecommunications, Truth on the Market , , , , ,
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New Paper Reveals “Stealth” Consolidation But Competitive Effects Remain Hidden

Alec Stapp —  20 June 2019

Thomas Wollmann has a new paper — “Stealth Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino Act” — in American Economic Review: Insights this month. Greg Ip included this research in an article for the WSJ in which he claims that “competition has declined and corporate concentration risen through acquisitions often too small to draw the scrutiny of antitrust watchdogs.” In other words, “stealth consolidation”.

Wollmann’s study uses a difference-in-differences approach to examine the effect on merger activity of the 2001 amendment to the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 (15 U.S.C. 18a). The amendment abruptly increased the pre-merger notification threshold from $15 million to $50 million in deal size. Strictly on those terms, the paper shows that raising the pre-merger notification threshold increased merger activity.

However, claims about “stealth consolidation” are controversial because they connote nefarious intentions and anticompetitive effects. As Wollmann admits in the paper, due to data limitations, he is unable to show that the new mergers are in fact anticompetitive or that the social costs of these mergers exceed the social benefits. Therefore, more research is needed to determine the optimal threshold for pre-merger notification rules, and claiming that harmful “stealth consolidation” is occurring is currently unwarranted.

Background: The “Unscrambling the Egg” Problem

In general, it is more difficult to unwind a consummated anticompetitive merger than it is to block a prospective anticompetitive merger. As Wollmann notes, for example, “El Paso Natural Gas Co. acquired its only potential rival in a market” and “the government’s challenge lasted 17 years and involved seven trips to the Supreme Court.”

Rolling back an anticompetitive merger is so difficult that it came to be known as “unscrambling the egg.” As William J. Baer, a former director of the Bureau of Competition at the FTC, described it, “there were strong incentives for speedily and surreptitiously consummating suspect mergers and then protracting the ensuing litigation” prior to the implementation of a pre-merger notification rule. These so-called “midnight mergers” were intended to avoid drawing antitrust scrutiny.

In response to this problem, Congress passed the Hart–Scott–Rodino Antitrust Improvements Act of 1976, which required companies to notify antitrust authorities of impending mergers if they exceeded certain size thresholds.

2001 Hart–Scott–Rodino Amendment

In 2001, Congress amended the HSR Act and effectively raised the threshold for premerger notification from $15 million in acquired firm assets to $50 million. This sudden and dramatic change created an opportunity to use a difference-in-differences technique to study the relationship between filing an HSR notification and merger activity.

According to Wollmann, here’s what notifications look like for never-exempt mergers (>$50M):

And here’s what notifications for newly-exempt ($15M < X < $50M) mergers look like:

So what does that mean for merger investigations? Here is the number of investigations into never-exempt mergers:

We see a pretty consistent relationship between number of mergers and number of investigations. More mergers means more investigations.  

How about for newly-exempt mergers?

Here, investigations go to zero while merger activity remains relatively stable. In other words, it appears that some mergers that would have been investigated had they required an HSR notification were not investigated.

Wollmann then uses four-digit SIC code industries to sort mergers into horizontal and non-horizontal categories. Here are never-exempt mergers:

He finds that almost all of the increase in merger activity (relative to the counterfactual in which the notification threshold were unchanged) is driven by horizontal mergers. And here are newly-exempt mergers:

Policy Implications & Limitations

The charts show a stark change in investigations and merger activity. The difference-in-differences methodology is solid and the author addresses some potential confounding variables (such as presidential elections). However, the paper leaves the broader implications for public policy unanswered.

Furthermore, given the limits of the data in this analysis, it’s not possible for this approach to explain competitive effects in the relevant antitrust markets, for three reasons:

Four-digit SIC code industries are not antitrust markets

Wollmann chose to classify mergers “as horizontal or non-horizontal based on whether or not the target and acquirer operate in the same four-digit SIC code industry, which is common convention.” But as Werden & Froeb (2018) notes, four-digit SIC code industries are orders of magnitude too large in most cases to be useful for antitrust analysis:

The evidence from cartel cases focused on indictments from 1970–80. Because the Justice Department prosecuted many local cartels, for 52 of the 80 indictments examined, the Commerce Quotient was less than 0.01, i.e., the SIC 4-digit industry was at least 100 times the apparent scope of the affected market.  Of the 80 indictments, 19 involved SIC 4-digit industries that had been thought to comport well with markets, so these were the most instructive. For  16 of the 19, the SIC 4-digit industry was at least 10 times the apparent scope of the affected market (i.e., the Commerce Quotient was less than 0.1).

Antitrust authorities do not rely on SIC 4-digit industry codes and instead establish a market definition based on the facts of each case. It is not possible to infer competitive effects from census data as Wollmann attempts to do.

The data cannot distinguish between anticompetitive mergers and procompetitive mergers

As Wollmann himself notes, the results tell us nothing about the relative costs and benefits of the new HSR policy:

Even so, these findings do not on their own advocate for one policy over another. To do so requires equating industry consolidation to a specific amount of economic harm and then comparing the resulting figure to the benefits derived from raising thresholds, which could be large. Even if the agencies ignore the reduced regulatory burden on firms, introducing exemptions can free up agency resources to pursue other cases (or reduce public spending). These and related issues require careful consideration but simply fall outside the scope of the present work.

For instance, firms could be reallocating merger activity to targets below the new threshold to avoid erroneous enforcement or they could be increasing merger activity for small targets due to reduced regulatory costs and uncertainty.

The study is likely underpowered for effects on blocked mergers

While the paper provides convincing evidence that investigations of newly-exempt mergers decreased dramatically following the change in the notification threshold, there is no equally convincing evidence of an effect on blocked mergers. As Wollmann points out, blocked mergers were exceedingly rare both before and after the Amendment (emphasis added):

Over 57,000 mergers comprise the sample, which spans eighteen years. The mean number of mergers each year is 3,180. The DOJ and FTC receive 31,464 notifications over this period, or 1,748 per year. Also, as stated above, blocked mergers are very infrequent: there are on average 13 per year pre-Amendment and 9 per-year post-Amendment.

Since blocked mergers are such a small percentage of total mergers both before and after the Amendment, we likely cannot tell from the data whether actual enforcement action changed significantly due to the change in notification threshold.

Greg Ip’s write-up for the WSJ includes some relevant charts for this issue. Ironically for a piece about the problems of lax merger review, the accompanying graphs show merger enforcement actions slightly increasing at both the FTC and the DOJ since 2001:

Source: WSJ

Overall, Wollmann’s paper does an effective job showing how changes in premerger notification rules can affect merger activity. However, due to data limitations, we cannot conclude anything about competitive effects or enforcement intensity from this study.

In Antitrust & Competition, Cartels, Exemptions, Google, Justice Department, Market Definition, Mergers & Acquisitions, Platforms , , , ,
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A Brief Assessment of the Procompetitive Effects of Organizational Restructuring in the Ag-Biotech Industry

Geoffrey Manne —  9 May 2017

Today the International Center for Law & Economics (ICLE) Antitrust and Consumer Protection Research Program released a new white paper by Geoffrey A. Manne and Allen Gibby entitled:

A Brief Assessment of the Procompetitive Effects of Organizational Restructuring in the Ag-Biotech Industry

Over the past two decades, rapid technological innovation has transformed the industrial organization of the ag-biotech industry. These developments have contributed to an impressive increase in crop yields, a dramatic reduction in chemical pesticide use, and a substantial increase in farm profitability.

One of the most striking characteristics of this organizational shift has been a steady increase in consolidation. The recent announcements of mergers between Dow and DuPont, ChemChina and Syngenta, and Bayer and Monsanto suggest that these trends are continuing in response to new market conditions and a marked uptick in scientific and technological advances.

Regulators and industry watchers are often concerned that increased consolidation will lead to reduced innovation, and a greater incentive and ability for the largest firms to foreclose competition and raise prices. But ICLE’s examination of the underlying competitive dynamics in the ag-biotech industry suggests that such concerns are likely unfounded.

In fact, R&D spending within the seeds and traits industry increased nearly 773% between 1995 and 2015 (from roughly $507 million to $4.4 billion), while the combined market share of the six largest companies in the segment increased by more than 550% (from about 10% to over 65%) during the same period.

Firms today are consolidating in order to innovate and remain competitive in an industry replete with new entrants and rapidly evolving technological and scientific developments.

According to ICLE’s analysis, critics have unduly focused on the potential harms from increased integration, without properly accounting for the potential procompetitive effects. Our brief white paper highlights these benefits and suggests that a more nuanced and restrained approach to enforcement is warranted.

Our analysis suggests that, as in past periods of consolidation, the industry is well positioned to see an increase in innovation as these new firms unite complementary expertise to pursue more efficient and effective research and development. They should also be better able to help finance, integrate, and coordinate development of the latest scientific and technological developments — particularly in rapidly growing, data-driven “digital farming” —  throughout the industry.

Download the paper here.

And for more on the topic, revisit TOTM’s recent blog symposium, “Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries,” here.

In Agricultural and Biotech Mergers Symposium, Announcements, Antitrust & Competition, China, Intellectual Property, International Center for Law & Economics, Law & Economics, Merger Guidelines, Patent, Symposia, Vertical Restraints , , , , , , , , , , , , , , ,
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When Past Is Not Prologue: The Weakness of the Economic Evidence Against Health Insurance Mergers

Geoffrey Manne —  6 December 2016

I just posted a new ICLE white paper, co-authored with former ICLE Associate Director, Ben Sperry:

When Past Is Not Prologue: The Weakness of the Economic Evidence Against Health Insurance Mergers.

Yesterday the hearing in the DOJ’s challenge to stop the Aetna-Humana merger got underway, and last week phase 1 of the Cigna-Anthem merger trial came to a close.

The DOJ’s challenge in both cases is fundamentally rooted in a timeworn structural analysis: More consolidation in the market (where “the market” is a hotly-contested issue, of course) means less competition and higher premiums for consumers.

Following the traditional structural playbook, the DOJ argues that the Aetna-Humana merger (to pick one) would result in presumptively anticompetitive levels of concentration, and that neither new entry not divestiture would suffice to introduce sufficient competition. It does not (in its pretrial brief, at least) consider other market dynamics (including especially the complex and evolving regulatory environment) that would constrain the firm’s ability to charge supracompetitive prices.

Aetna & Humana, for their part, contend that things are a bit more complicated than the government suggests, that the government defines the relevant market incorrectly, and that

the evidence will show that there is no correlation between the number of [Medicare Advantage organizations] in a county (or their shares) and Medicare Advantage pricing—a fundamental fact that the Government’s theories of harm cannot overcome.

The trial will, of course, feature expert economic evidence from both sides. But until we see that evidence, or read the inevitable papers derived from it, we are stuck evaluating the basic outlines of the economic arguments based on the existing literature.

A host of antitrust commentators, politicians, and other interested parties have determined that the literature condemns the mergers, based largely on a small set of papers purporting to demonstrate that an increase of premiums, without corresponding benefit, inexorably follows health insurance “consolidation.” In fact, virtually all of these critics base their claims on a 2012 case study of a 1999 merger (between Aetna and Prudential) by economists Leemore Dafny, Mark Duggan, and Subramaniam Ramanarayanan, Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry, as well as associated testimony by Prof. Dafny, along with a small number of other papers by her (and a couple others).

Our paper challenges these claims. As we summarize:

This white paper counsels extreme caution in the use of past statistical studies of the purported effects of health insurance company mergers to infer that today’s proposed mergers—between Aetna/Humana and Anthem/Cigna—will likely have similar effects. Focusing on one influential study—Paying a Premium on Your Premium…—as a jumping off point, we highlight some of the many reasons that past is not prologue.

In short: extrapolated, long-term, cumulative, average effects drawn from 17-year-old data may grab headlines, but they really don’t tell us much of anything about the likely effects of a particular merger today, or about the effects of increased concentration in any particular product or geographic market.

While our analysis doesn’t necessarily undermine the paper’s limited, historical conclusions, it does counsel extreme caution for inferring the study’s applicability to today’s proposed mergers.

By way of reference, Dafny, et al. found average premium price increases from the 1999 Aetna/Prudential merger of only 0.25 percent per year for two years following the merger in the geographic markets they studied. “Health Insurance Mergers May Lead to 0.25 Percent Price Increases!” isn’t quite as compelling a claim as what critics have been saying, but it’s arguably more accurate (and more relevant) than the 7 percent price increase purportedly based on the paper that merger critics like to throw around.

Moreover, different markets and a changed regulatory environment alone aren’t the only things suggesting that past is not prologue. When we delve into the paper more closely we find even more significant limitations on the paper’s support for the claims made in its name, and its relevance to the current proposed mergers.

The full paper is available here.

In Antitrust & Competition, Antitrust Division, Health Care, Health Insurance, International Center for Law & Economics, Justice Department, Law & Economics, Market Definition, Merger Guidelines, Mergers & Acquisitions , , , , , , , , , , , , , , , , , , ,
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