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COMPETITION ECONOMICS llc 1
How do Economists use Evidence?
Luke FroebVanderbilt University
10:30am, 24 April 2012
NAAG Midwestern Region MeetingWyndham Hotel 633 N St. Clair St. Chicago, IL 60611
COMPETITION ECONOMICS llc
Acknowledgements
Michael Doane, Competition Economics
Forbes Belk, Competition Economics
Greg Werden, US Dept of Justice
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COMPETITION ECONOMICS llc
OUTLINE (15 minutes)
I. What do economists do?
II. “Natural” experiments Perch bid rigging Car Rental merger
III. Structural Models CRB merger
IV. Lessons for NAAG’s
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I. What good are economists, anyway?
Antitrust litigation poses “but-for” (counter-factual) questions Did this conspiracy raise price? Will this merger harm consumers?
Economists are trained to answer these questions? Econometric comparisons (“natural” experiments)
How good is the experiment? Is the experiment a good “metaphor” for effect?
Economic models How well does the model fit the evidence? Are the predictions of the model biased?
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II. Perch Bid-rigging Conspiracy
Price collapsed suddenly after DOJ began investigation
Use the post-conspiracy period to estimate model of frozen fish prices.
Backcast into conspiracy period to determine “but for” prices
Froeb, Luke, Robert Koyak & Gregory Werden, What is the Effect of Bid-Rigging on Prices?, Economics Letters, 42 (1993) pp. 419-423. available at SSRN
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Conspiracy raised price 23% above “but-for” prices
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Is Big Bad Again?:Staples-Office Depot Aftermath
Staples-Office Depot merger was successfully challenged by FTC using price comparisons Prices 7.5% higher in one-office superstore cities than in two-office
superstore cities With a 15% estimated pass-through rate, would imply a 50% mc reduction
to offset merger effect.
Would you block merger based on these data?
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What could go wrong?
Experiment is “polluted,” i.e., something else accounts for results Spurious correlation Example: movie tickets (Davis, 2005)
Finding: Price is $0.90 higher with competitor <.5 mile away Movie theatres are locating in areas with high demand
Experiment might be bad metaphor for merger Merger changes ownership concentration Does data mimic this effect?
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New Work on Car Rental Mergers
Doane, Michael J., Luke M. Froeb, and David Zimmer, and Gregory Werden, Pricing and Ownership Concentration: A New Estimation Strategy (April 4, 2012), available at SSRN.
Dollar-Thrifty rebuffed two suitors Avis-Budget Hertz-Advantage
Expedia Price Data from 400 airports in US
Compare prices with at airports with same number of brands, but different ownership structures Are prices higher at airports with three 1-brand firms, or one 3-brand firm? Comparison can “predict” effects of ownership change caused by merger.
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At Which Airports will the Proposed Car Rental Mergers Raise Price?
PredictedMarket Average Price Increase
Acquisition by Avis-Budget
Acquisition by Hertz-Advantage
.01–.99% 0 2
1.00–1.99% 11 77
2.00–4.99% 104 38
5.00–9.99% 3 0
10.00–19.99% 2 0
>19.99% 0 0
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III. Model Example:US v. Altivity and Graphic (2008)
US DOJ challenge Altivity (35%) + Graphic (17%) of North American capacity
Market Geographic: North America Product: Coated Recycled Board
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Theory of Harm
Nicholas Hill, “Analyzing Mergers with Capacity Closures,” DOJ Working paper, at SSRN
Model: Once built, mills produce at capacity; and merger would increase incentive to close mills
Mechanism: mill shutdown supply decrease higher price
Model tells us What matters: demand elasticity, import supply response Why it matters: increases profitability of shutdown How much it matters: divest 2 plants representing 11% of capacity
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Why Attorneys Should Care About Modeling
Models are “blueprints” for enforcement Model guides interpretation of evidence Evidence guides selection of model
Agencies do it 2011 DOJ blocked H&R Block/TaxAct proposed merger 2009 FTC blocked CCC Holdings/Aurora proposed merger
Other reasons Analysis of models provides a solid foundation for enforcement concerns Analysis of models clarifies the precise nature and determinants of mergers in
particular settings. Application of models to cases permits a fact-based, quantitative assessment
of merger effects.13
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Conclusions
Economists are uniquely trained to answer the kind of “but-for” questions that arise in litigation
The earlier you get an economist involved, the better off you will be But you have to communicate frequently
Tip for communicating: ask three questions 1. How will economist investigate the questions posed by the case? 2. What are the possible outcomes of the investigation? 3. How will the outcomes influence judge or jury?
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