Ergas on the Merger Guidelines

It looks like CRA’s Henry Ergas has joined the blogosphere and is a welcome voice. Yesterday he posted on the ACCC’s new merger guidelines. He wrote:

… the Guidelines devote a great deal of space to discussing vertical and conglomerate mergers and the ways in which they could, at least in theory, harm competition: indeed, the discussion of the potential unilateral effects of these mergers dwarfs that of horizontal mergers. This is striking, as it is usually sensible to presume that mergers that are purely vertical or purely conglomerate will not materially harm competition. Indeed, a recent survey of the empirical literature on vertical mergers (by Francine Lafontaine & Margaret Slade, “Vertical Integration and Firm Boundaries: The Evidence” in the Journal of Economic Literature, 2007) finds that the “weight of evidence is overwhelming” that vertical mergers tend to benefit consumers, even in industries where concentration levels are high.

Henry is concerned that the ACCC is overly interested in vertical mergers that often have beneficial impacts on consumers.

But isn’t that precisely where we want guidelines to be more specific? Vertical mergers are the hard stuff of competition law precisely because there are many instances where they benefit consumers. In that respect, we want the guidelines to carefully delineate alternative possibilities and provide guidance as to how the ACCC will approach them. Moreover, when it comes down to it, studies that show that such mergers benefit consumers are biased in an important direction: those mergers are either not opposed or are selected on the basis of the potential weight of competition law. That means that mergers that happen are those that benefit consumers while those that do not never make it to actuality. The result is that amongst mergers that have taken place, we will see them benefiting competition. That is just an indication that the system is working.

Of course, some get through. The ACCC opposed AGL’s partial acquisition of Loy Yang A a few years ago but the Court let that merger through. Interestingly, the new guidelines tell us that the ACCC will look at both the ability of a firm acquiring a vertical asset to harm competition as well as its incentive to do so. This is a useful distinction that reflects the latest thinking in vertical merger analysis. But consider how this would apply in the AGL case. There was agreement between the experts in that case that there might be an incentive to raise prices but the ability of the conglomerate to do so was brought into question.

That merger happened despite the ACCC’s assessment that it would be bad for consumers. Frank Wolak and I looked back at it last year to see whether the ACCC’s concerns were borne out and concluded that they were. So this is a situation where the ACCC was right to be concerned; although we both acted for the ACCC in that case. (Henry Ergas represented AGL).

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