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- Mergers may increase market power.
- Substitutability between mergers and cartels as alternative means of securing market power explains strength of US merger boom of 1899-1900 in comparison to UK.
- Scherer and Ross (1990) Late 19th century US merger boom aimed at creating monopolies.
- Sherman Act made cartel agreements more difficult - encouraged mergers.
Thomas Edison commenting on the creation of General Electric Company in 1892
'Recently there has been sharp rivalry between [Thomson-Houston and Edison General Electric], and prices have been cut so that there has been little profit in the manufacture of electrical machinery for anybody. The consolidation of the companies....will do away with a competition which has become so sharp that the product of the factories has been worth little more than ordinary hardware.' New York Times, 21.2.1892. Cited in Scherer and Ross (1990).
- Most developed economies have merger control legislation as well as competition legislation.
- Merger controls first introduced in Ireland in 1978.
- EU Treaty made no provision for merger control Merger Regulation only came into force in September 1990.
- Many EU countries only introduced merger legislation after EU Regulation.
- Cable, (1986), Empirical research - no single dominant motive for mergers.
- Optimise benefits of complementary strengths, and take advantage of economies of scale and scope.
- Efficiencies in administration, marketing and other ancillary activities.
- Larger firms may suffer from increased levels of internal bureaucracy, with consequent negative effects on performance.
- Mergers transfer control of assets to owners who believe they can make more productive use of them, i.e. operate them more profitably than existing owners and managers.
- Management position likely to be in doubt in the event of take-over.
- Mergers important in increasing efficiency - part of the competitive process.
- Market for corporate control may be inefficient. Far easier for a larger firm to take-over a smaller one than other way around, regardless of relative efficiency.
- Models of market for corporate control assume share prices are efficient i.e. provide an accurate indicator of fundamental value of businesses – but unlikely because of information asymmetries.
- Threat of take-over can prompt short-term behaviour by management to guard against take-over.
- Traditionally tended to be something of an inexact science.
- 1960s US cases – Supreme Court blocked mergers in cases where merging firms combined market shares below 10%
- Philadelphia National Bank
- Vons Grocery Stores
- Incipiency Theory – Now discredited
- UK merger decisions described as 'rough justice: some deals get stopped while others sneak through. But rough justice is better than no justice at all.' (P. Martin, The Merger Police, Financial Times, 12.3.1998).
- Has altered significantly in recent years.
- Mainly US led but other countries following suit.
Detailed price and sales data obtained from stores' price scanning records has been used in a number of US merger cases
SDNY.
- US v. Interstate Bakeries Corporation and Continental Baking Company.
- State of New York v. Kraft General Foods, Inc., Nabisco Cereals, Inc., et al.,
FTC v. Staples, Inc ., 970 F. Supp. 1066 (D.D.C.) 1997.EU merger investigations still rely on more traditional approach, involving assessment of market shares and qualitative criteria such as ease of entry and buyer power. Ivaldi, M. and Verboven, F., (2001): Quantifying the Effects of Horizontal Mergers in European Competition Policy, Centre for Economic Policy Research, Discussion Paper No. 2697.
- Depoliticised merger decisions, except in case of media mergers
- CA now has sole responsibility for merger decisions
- Two commonly used standards
- Dominance Test – Traditional EU Standard
- Substantial Lessening of Competition (SLC) Test – US Standard.
- Competition Act, 2002 – SLC Test
- EU Commission has revised test.
- SLC test now generally used in all major jurisdictions.
'The SLC test is interpreted in terms of consumer welfare. Consumer welfare depends on a range of variables including price, output, quality, variety and innovation. In most cases, the effect on consumer welfare is measured by whether the price in the market will rise. The conclusion that an SLC will result from a merger is thus based on whether the price to buyers is expected to rise (or output to fall). Where price is not the appropriate variable, welfare is measured by the changes in the relevant variables.'
- Consumer Welfare v. Total Welfare
- Implications for Treatment of Efficiencies.
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