The HyperLaw Report
Internet Release No. 96-20
April 10, 1996
HOW DOJ ANALYZES WEST/THOMSON MERGER
DOJ FRAMEWORK FOR MERGER ANALYSIS
COMPETITION IN DIFFERENTIATED PRODUCTS
WHY OTHER PUBLISHERS MAY NOT COMPLAIN ABOUT THE MERGER
The next several issues of the HyperLaw Report will examine certain antitrust
merger issues based upon United States Department of Justice policy statements
and the possible application of these statements to the West-Thomson merger.
The mini-discussions are intended to stimulate thought and discussion, and
perhaps stimulate communication to the Department of Justice and/or to
organizations channeling communications to the department.
We would appreciate being advised if anyone has been interviewed by any DOJ
investigator who has shown the slightest interest in these analytic issues that
are taken from DOJ policy statements.
These documents are found at the DOJ gopher, justice2.usdoj.gov.
DOJ FRAMEWORK FOR MERGER ANALYSIS
We first describe the overall framework for a Merger analysis as set forth in
the Guidelines. In particular, we draw your attention to the second element,
which relates to existing market concentration and other factors that
characterize the market. We do this partly because the DOJ has shown, based
upon those who we know have been interviewed, relative if not complete
disinterest in the second factor. This disinterest is shown by: the absence of
specific questions on this issues, the absence of follow-up questions when the
issue is raised by the interviewee, the failure to explore documents with the
interviewee which may relate to this second element, the failure to conduct
follow-up interviews with those who provide documentary information, and the
failure to interview those identifies as having information relevant to the
second factor.
Excerpts from
Department of Justice And Federal Trade Commission
Horizontal Merger Guidelines
April 2, 1992
"The Guidelines describe the analytical process that the
Agency will employ in determining whether to challenge a
horizontal merger. First, the Agency assesses whether the
merger would significantly increase concentration and result
in a concentrated market, properly defined and measured.
Second, the Agency assesses whether the merger, in light of market
concentration and other factors that characterize the market,
raises concern about potential adverse competitive effects.
Third, the Agency assesses whether entry would be timely,
likely and sufficient either to deter or to counteract the
competitive effects of concern. Fourth, the Agency assesses
any efficiency gains that reasonably cannot be achieved by the
parties through other means. Finally the Agency assesses
whether, but for the merger, either party to the transaction
would be likely to fail, causing its assets to exit the
market. The process of assessing market concentration,
potential adverse competitive effects, entry, efficiency and
failure is a tool that allows the Agency to answer the
ultimate inquiry in merger analysis: whether the merger is
likely to create or enhance market power or to facilitate its
exercise."
COMPETITION IN DIFFERENTIATED PRODUCTS
The second issue relates to the analyze of potential anti-competitive effects
of a merger where the parties sell so-called differentiated products. Many law
librarian observers have noted that many West and Thomson products compete, but
not exactly -- but, exact competition is not required for anti-competitive
effect. Apparently, the term economists use for these types of products are
"differentiated" products.
For example, United States Code Annotated (West) and United States Code Service
compete even though they are not the same product. Some libraries lawyers
purchase one, some the other, and some both. Where the merging firms sells
both the first and second choices, there is ample opportunity for
anti-competitive effect as described in the discussion in the policy
statements. For example, prices could be increased in the first choice
product, say USCA, and those who will not pay the price, will then purchase
USCS. As long as the merged entity properly manages profit margins for the
products, this can be a win-win situation, at least for the merged entity.
Presumably, a CD-ROM case reporter, printed case reports, and on-line versions
are all different products, yet still compete, in different ways depending on
the circumstances, and differentiated product analysis may be applied, although
it may not be as simple.
We also note that the guidelines assume that the merged entity will act in its
self-interest.
The following two excerpts, one from the Merger Guidelines and the other from a
speech given by Carl Shapiro, Chief Economist for DOJ, discusses differentiated
products.
Excerpts from
Department of Justice And Federal Trade Commission
Horizontal Merger Guidelines
April 2, 1992
A merger between firms in a market for differentiated
products may diminish competition by enabling the merged firm
to profit by unilaterally raising the price of one or both
products above the premerger level. Some of the sales loss due
to the price rise merely will be diverted to the product of the
merger partner and, depending on relative margins, capturing
such sales loss through merger may make the price increase
profitable even though it would not have been profitable
premerger. Substantial unilateral price elevation in a market
for differentiated products requires that there be a significant
share of sales in the market accounted for by
consumers who regard the products of the merging firms as their
first and second choices, and that repositioning of the
non-parties' product lines to replace the localized competition lost
through the merger be unlikely. The price rise will be greater
the closer substitutes are the products of the merging firms,
i.e., the more the buyers of one product consider the other
product to be their next choice.
Excerpted From:
Mergers With Differentiated Products
Carl Shapiro
Antitrust Division
U.S. Department of Justice
American Bar Association
International Bar Association
The Merger Review Process in the U.S. and Abroad"
November 9, 1995
"These analytical steps can be described more simply: If a significant
number of consumers consider the merging firms' products to be their first
and second choices (at pre-merger prices), then the merged entity will have
an incentive to impose a non-trivial price increase following the merger.
Unless product repositioning or entry would defeat (make unprofitable) such
a price increase, and unless reductions in marginal costs imply that the price
increase will not in fact raise profits, the merger will injure consumers and
be anticompetitive. Hopefully, this all sounds familiar to those of you versed
in the Merger Guidelines."
WHY OTHER PUBLISHERS MAY NOT COMPLAIN ABOUT THE MERGER
Not all publishers are opposed to the merger, because they believe that the
short term future will provide opportunity for profit. According to DOJ
antitrust theorists, this is to be expected. However, DOJ investigators looks
to competitors of West and Thomson to provide packaged economic and legal
analysis to the department. But, not all competitors are so inclined to
protest.
This is what Carl Shapiro, the Chief Economist had to say:
"I should note that rivals' responses do not necessarily reduce the
profitability of a post-merger price increase. Game-theoretic analyses of
pricing competition with differentiated products indicate that rivals will
typically find it optimal to raise their prices in response to higher prices
set
by the merging firms. Accounting for these accommodating responses tends
to increase, not decrease, the predicted post-merger price increase."
So, if the merger goes through, librarians may find that other publishers will
find it in their economic self-interest to raise prices as well, if the merged
entity does. This may help to explain why at least one CD-ROM publisher is
telling librarians it has no problem with the merger.
CONCLUSION
In the following days, we will explore other issues based upon DOJ policy
statements.
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