Concentration, Mergers and Entry Barriers I

Transcription

1 Concentration, Mergers and Entry Barriers I Chapter 8. February 24, 2016

2 The very rst device to carry the BlackBerry name was the BlackBerry 850, an pager, released January 19, It was the rst device to integrate . On January 9, 2007 Steve Jobs announced the iphone at the Macworld convention. On June 29, 2007 the rst iphone was released. When Samsung Galaxy, was released in June 2009, it marked Samsung s entry into the Android smartphone market.

3 Why do rms in some industries make pure pro ts? When Oligopolies make pure pro ts, how come entry of new rms does not always occur, thereby eliminating all pure pro ts? What can explain mergers among rms in a given industry? What is and what should be the regulators attitudes towards concentrated industries?

4 Compare concentration among di erent industries in the same or di erent countries regulating authority would like to intervene or prevent What is a concentrated industry? The number of rms in the industry The distribution of output among the rms N i=1 q i, Problems... Market share of rm i : s i 100 q i Q

5 The four- rm concentration ratio I 4 4 i=1 s i and I HH N i=1 (s i ) 2 "The Her ndahl-hirshman Index"

6 Merges (takeovers, acquisitions, integration) Independently owned rms join under the same ownership We investigate the gains and incentives to merge and consequences on productivity and performance Three general categories (Federal Trade Commission) Horizontal merger Vertical merger Conglomerate merger

7 Mergers (takeovers, acquisitions, integration) Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999 Rank Year Purchaser Purchased Transaction value (in mil. USD) 1 Vodafone Airtouch 1999 [16] PLC Mannesmann 183, Pfizer [17] Warner Lambert 90, Exxon [18][19] Mobil 77, Citicorp Travelers Group 73, SBC Communications Ameritech Corporation 63, Vodafone Group AirTouch Communications 60, Bell Atlantic [20] GTE 53, BP [21] Amoco 53, Qwest Communications US WEST 48, Worldcom MCI Communications 42,000

8 Mergers (takeovers, acquisitions, integration) U.S. Airline Mergers and Acquisitions in the past ve years. Title Announced Closed Resulting Entity Republic Airways / Midwest Airlines 6/23/2009 7/31/2009 Republic Airways Republic Airways / Frontier Airlines 8/14/ /1/2009 Republic Airways United Airlines / Continental Airlines 5/3/ /1/2010 United Airlines Pinnacle Airlines / Mesaba Airlines 7/1/2010 7/1/2010 Pinnacle Airlines / Mesaba Airlines SkyWest / Atlantic Southeast Airlines 8/4/ /15/2010 SkyWest / SureJet / ExpressJet Airlines Southwest Airlines / AirTran Airways 9/27/2010 5/2/2011 Southwest Airlines US Airways/AMR/American Airlines 2/14/ /9/2013 American Airlines

9 Mergers 2015 (source Dealogic - M&A Analytics) 2015 has been a record year for M&A. It reached a volume of $4.9 trillion, beating the record of $4.6 trillion in P zer and Allergan: $191 billion. The US pharmaceutical P zer and Irish counterpart Allergan announced a plan to merge late in November. Shell and BG Group: $81 billion. Royal Dutch Shell announced plans to acquire British energy supplier BG in April. Diversify Shell s operations. Charter and Time Warner Cable: $78 billion. announced late in May. Dow Chemical and DuPont: $68 billion, announced a "merger of equals" in December. Dell and EMC: $66 billion. Dell signed an agreement to acquire data storage company EMC in October. The deal was described as the second-biggest technology merger. Heinz and Kraft Foods: $55 billion. Heinz and Kraft completed their merger early in July.

10 Mergers (takeovers, acquisitions, integration) Why do mergers occur? Competition Costs Uncertainty about the future

11 Horizontal Merger Should a regulator refuse to permit a merger to take place (on the basis of increase in concentration)? Assume a High and Low cost rm: c 1 = 1 and c 2 = 4 Demand p = 10 Q Under the Cournot Duopoly market q C 1 = 4 qc 2 = 1, pc = 5 and π C 1 = 16, πc 2 = 1 Hence CS(Q) = 25 2, W C = CS(Q) + π C 1 + πc 2 = 29.5

12 Horizontal Merger Allow merger between two rms (Multiplant Monopoly) Plant 2 is shut down Q m = 4.5 and p m = = 5.5, hence π m = 81 4 = 20.25, CS(Q m ) = 81 8 = , Wm = CS(Qm ) + π m = Comparing the premerger concentration with that of the postmerger: I C HH = (80%)2 + (20%) 2 = 6, 800 < 10, 000 = (100%) 2 = I m HH

13 Horizontal Merger Proposition 8.1: Under Cournot market structure, a merger among rms leading to an increase in concentration does not necessarily imply an overall welfare reduction. There exist a trade o between product e ciency and the degree of monopolization What would happen if rms play Bertrand?

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15 Examples Vertical Mergers One of the most well-known examples of a vertical merger took place in 2000 when internet provider America Online combined with media conglomerate Time Warner. Time Warner supplied content to consumers through properties like CNN and Time Magazine, while AOL distributed such information via its internet service. Disney teaming up with Pixar in a $7.4 billion deal. Steve Jobs to become board member at Disney.

16 Vertical Merger Merger between Supplier of an intermediate good and producer of the nal good. Intermediate-good suppliers is called upstream rms Final-good producers is called downstream rms Let s think about the case where upstream and downstream markets are characterized by a Bertrand price competition. Assume Bertrand price competition for the upstream market and Cournot quantity competition for the downstream market.

17 Downstream Competition Demand: p = α q 1 q 2, where α > 0 and q 1 and q 2 are the output levels sold by downstream rms 1 and 2. Assume c 1 and c 2 Hence q i = α 2c i + c j 3 π i = (α 2c i + c j ) 2 9 and Q = 2α c 1 c 2 3 and p = α Q = α + c 1 + c 2 3

18 Upstream Competition Before the Merger The upstream rms A and B sell their product to the downstream rms 1 and 2 Assume c A and c B equal to zero Since we assume Bertrand competition, prices fall to their unit production cost. Hence q 1 = q 2 = α 3, π 1 = π 2 = α2 9 and π A = π B = 0

19 Upstream and downstream merge Suppose that Upstream A merges with Downstream rm 1: A1 The input cost of the merged rm A1 is zero The Upstream rm B is now a monopoly in the factor max c 2 π B = c 2 q 2 = c 2 (α 2c 2 + c 1 ) 3 c 2 = α 4, c 1 = 0, q 1 = 5α 12, q 2 = α 6, Q = 7α 5α 12, and p = 12 π A1 = pq A1 = 25α2 144 and π 2 = (p c 2 )q 2 = α2 36

20 Upstream and downstream merge Proposition 8.2: A merger between an upstream and downstream rm increases the output level of the merged rm and reduces the output level of the downstream rm that does not merge. Proposition 8.3: 1 The combined pro t of the merging upstream and downstream rms increase after they merge. 2 A merger between the upstream and the downstream rms will not foreclose the market of the disjoint downstream rm but will only reduce its pro t.

21 Horizontal merger among rms producing complementary goods Consider a market for computer systems (Computers (X) and Monitors (Y)) p X is the price of one computer and p Y the price of a monitor The price of a System is : p S = p X + p Y The aggregate consumers demand is : Q = α p S = α (p X + p Y )

22 Horizontal merger among rms producing complementary goods Independently owned producing rms: max p X π X = p X X (p X ) = p X [α p X p Y ] π X p X = α 2p X p Y = 0 Hence, p X = p Y = α 3, Q = α [π X + π Y ] = Q p X = α2 9 (p X + p Y ) = α 3 and

23 Monopoly producing all components Assume that Firm Y and X merge under a single ownership. Monopoly max p S π XY = p S [α p S ] π XY p S = α 2p S = 0 Hence ps M = α 2, QM = α 2 and πm XY = α2 4 Proposition 8.4: A merger into a single monopoly rm between rms producing complementary products would: reduce the price of the systems (ps M < p X ); increase the number of systems sold (Q M > Q); and increase the sum of pro ts (π M XY > π X + π Y )