Mergers with Differentiated Products

T he antitrust treatment of horizontal mergers by the Justice Department and the Federal Trade Commission is one of the most well developed and closely scrutinized areas of antitrust law. The enforcement agencies have extraordinary experience reviewing mergers and the merger bar is no less sophisticated. From my perspective as an antitrust economist, this sophistication permits merger enforcement to be at the cutting edge when it comes to incorporating economic learning into competition policy. The 1992 DOJ and F TC Merger Guidelines have placed important attention on the " unilateral effects " of a merger , i.e., the tendency of a horizontal merger to lead to higher prices simply by virtue of the fact that the merger will eliminate the direct competition between the two merging firms, even if all other firms in the market continue to compete independently. Unilateral effects are contrasted to " coordinated effects, " i.e., the danger that the merger will lead to collusion between the merged entity and its remaining rivals. This article discusses some of the methods used by the Antitrust Division to analyze unilateral effects in mergers involving differentiated products. While the methods outlined here do not replace the standard steps of defining markets and measuring market shares and concentration , they can significantly supplement those steps. To place the topic in context, it is instructive to compare mergers with homogeneous products to those involving differentiated products. For homogeneous products, the traditional structural approach of defining markets and measuring market shares and market concentration has deep roots, along with a rich empirical tradition linking market structure to performance. In these markets, it is both natural and appropriate to count up each firm's unit or dollar sales, or capacity, to measure market shares, and to make inferences about a merger's effects based on market structure, including the HHI of market concentration. The danger of collusion is surely related to market concentration (although quantifying this relationship is difficult), and economists' primary model of non-cooperative oligopolistic competition among manufacturers of homogeneous goods relates market structure to performance. 1 Although economists continue to debate the empirical relationship between market structure and performance, there exists a solid foundation for using market structure prominently in evaluating horizontal mergers involving homogeneous goods. 2 This traditional structural approach towards merger policy, which dates back to the 1960s but has been refined as just described, is less attractive for differentiated products. When …