Archives For mavericks

Last month the EU General Court annulled the EU Commission’s decision to block the proposed merger of Telefónica UK by Hutchison 3G UK. 

It what could be seen as a rebuke of the Directorate-General for Competition (DG COMP), the court clarified the proof required to block a merger, which could have a significant effect on future merger enforcement:

In the context of an analysis of a significant impediment to effective competition the existence of which is inferred from a body of evidence and indicia, and which is based on several theories of harm, the Commission is required to produce sufficient evidence to demonstrate with a strong probability the existence of significant impediments following the concentration. Thus, the standard of proof applicable in the present case is therefore stricter than that under which a significant impediment to effective competition is “more likely than not,” on the basis of a “balance of probabilities,” as the Commission maintains. By contrast, it is less strict than a standard of proof based on “being beyond all reasonable doubt.”

Over the relevant time period, there were four retail mobile network operators in the United Kingdom: (1) EE Ltd, (2) O2, (3) Hutchison 3G UK Ltd (“Three”), and (4) Vodafone. The merger would have combined O2 and Three, which would account for 30-40% of the retail market. 

The Commission argued that Three’s growth in market share over time and its classification as a “maverick” demonstrated that Three was an “important competitive force” that would be eliminated with the merger. The court was not convinced: 

The mere growth in gross add shares over several consecutive years of the smallest mobile network operator in an oligopolistic market, namely Three, which has in the past been classified as a “maverick” by the Commission (Case COMP/M.5650 — T-Mobile/Orange) and in the Statement of Objections in the present case, does not in itself constitute sufficient evidence of that operator’s power on the market or of the elimination of the important competitive constraints that the parties to the concentration exert upon each other.

While the Commission classified Three as a maverick, it also claimed that maverick status was not necessary to be an important competitive force. Nevertheless, the Commission pointed to Three’s history of maverick-y behavior by launching its “One Plan” as well as free international roaming and offering 4G at no additional cost. The court, however, noted that those initiatives were “historical in nature,” and provided no evidence of future conduct: 

The Commission’s reasoning in that regard seems to imply that an undertaking which has historically played a disruptive role will necessarily play the same role in the future and cannot reposition itself on the market by adopting a different pricing policy.

The EU General Court appears to express the same frustration with mavericks as the court in in H&R Block/TaxACT: “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.”

With the General Court’s recent decision raising the bar of proof required to block a merger, it also provided a “strong probability” that the days of maverick madness may soon be over.  

In antitrust lore, mavericks are magical creatures that bring order to a world on the verge of monopoly. Because they are so hard to find in the wild, some researchers have attempted to create them in the laboratory. While the alchemists couldn’t turn lead into gold, they did discover zinc. Similarly, although modern day researchers can’t turn students into mavericks, they have created a useful classroom exercise.

In a Cambridge University working paper, Donja Darai, Catherine Roux, and Frédéric Schneider develop a simple experiment to model merger activity in the face of price competition. Based on their observations they conclude (1) firms are more likely to make merger offers when prices are closer to marginal cost and (2) “maverick firms” – firms who charge a lower price – are more likely to be on the receiving end of those merger offers. Based on these conclusions, they suggest “mergers may be used to eliminate mavericks from the market and thus substitute for failed attempts at collusion between firms.”

The experiment is a set of games broken up into “market” phases and “merger” phases.

  • Each experiment has four subjects, with each subject representing a firm.
  • Each firm has marginal cost of zero and no capacity constraints.
  • Each experiment has nine phases: five “market” phases of 10 trading periods and a four “merger” phases.
  • During a trading period, firms simultaneously post their asking prices, ranging from 0 to 100 “currency units.” Subjects cannot communicate their prices to each other.
  • A computerized “buyer” purchases 300 units of the good at the lowest posted price. In the case of identical lowest prices, the sales are split equally among the firms with the lowest posted price.
  • At the end of the market phase, the firms enter a merger phase in which any firm can offer to merge with any other firm. Firms being made an offer to merge can accept or reject the offer. There are no price terms for the merger. Instead, the subject controlling the acquired firm receives an equal share of the acquiring firm’s profits in subsequent trading periods. Each firm can acquire only one other firm in each merger round.
  • The market-merger phases repeat, ending with a final market phase.
  • Subjects receive cash compensation related to the the “profits” their firm earned over the course of the experiment.

Merger to monopoly is a dominant strategy: It is the clearest path to maximizing individual and joint profits. In that way it’s a pretty boring game. Bid low, merge toward monopoly, then bid 100 every turn after that. The only real “trick” is convincing the other players to merge.

The authors attempt to make the paper more interesting by introducing the idea of the “maverick” bidder who bids low. They find that the lowest bidders are more likely to receive merger offers than the other subjects. They also find that these so-called mavericks are more reluctant to accept a merger offer. 

I noted in my earlier post that modeling the “maverick” seems to be a fool’s errand. If firms are assumed to face the same cost and demand conditions, why would any single firm play the role of the maverick? In the standard prisoner’s dilemma problem, every firm has the incentive to be the maverick. If everyone’s a maverick, then no one’s a maverick. On the other hand, if one firm has unique cost or demand conditions or is assumed to have some preference for “mavericky” behavior, then the maverick model is just an ad hoc model where the conclusions are baked into the assumptions.

Darai, et al.’s experiment suffers from these same criticisms. They define the “maverick” as a low bidder who does not accept merger offers. But, they don’t have a model for why they behave the way they do. Some observations:

  • Another name for “low bidder” is “winner.” If the low bidders consistently win in the market phase, then they may believe that they have some special skill or luck that the other subjects don’t have. Why would a winner accept a merger bid from – and share his or her profits with – one or more “losers.”  
  • Another name for “low bidder” could be “newbie.” The low bidder may be the subject who doesn’t understand that the dominant strategy is to merge to monopoly as fast as possible and charge the maximum price. The other players conclude the low bidder doesn’t know how to play the game. In other words, the merger might be viewed more as a hostile takeover to replace “bad” management. Because even bad managers won’t admit they’re bad, they make another bad decision and resist the merger.
  • About 80% of the time, the experiment ends with a monopoly, indicating that even the mavericks eventually merge. 

See what I just did? I created my own ad hoc theories of the maverick. In one theory, the maverick thinks he or she has some unique ability to pick the winning asking price. In the other, the maverick is making decisions counter to its own – and other players’ – long term self-interest. 

Darai, et al. have created a fun game. I played a truncated version of it with my undergraduate class earlier this week and it generated a good discussion about pricing and coordination. But, please don’t call it a model of the maverick.

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.