Assessing market power: The trade-off between market concentration and multi-market participation

Journal of Competition Law and Economics

Volumn 1, Issue 2, 2005, Pages 339-354

  Weisman, Dennis L ^a  

^a KANSAS STATE UNIVERSITY   (United States)

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EID: 27744574180     PISSN: 17446414     EISSN: None     Source Type: Journal    
DOI: 10.1093/joclec/nhi011     Document Type: Article

References (63)

1. There has been significant merger activity in the telecommunications and transportation industries in recent years. See, for example, Yochi J. Dreazen, 'FCC, Faced With Telecom Crisis, Could Let a Bell Buy WorldCom,' The Wall Street Journal (2002), at A1
2. Yochi J. Dreazen, Greg Ip and Nicholas Kulish, 'Oligopolies Are on the Rise As the Urge to Merge Grows,' The Wall Street Journal (2002), at A1
3. and Dennis L. Weisman, 'Footprints In Cyberspace: Toward A Theory of Mergers In Network Industries,' 1 (4) info 305 (1999).
4. This argument differs from the familiar double-marginalization rationale for vertical mergers. See, for example, Jerry A. Hausman, Gregory K. Leonard and J. Gregory Sidak, 'Does Bell Company Entry into Long-Distance Telecommunications Benefit Consumers?', 70 (2) Antitrust Law Journal 463 (2002).
5. The term 'footprint' in this context refers to the degree to which the MMP participates in other markets.
6. The parallels with Farrell and Shapiro are noteworthy. Welfare can rise with market concentration in the Farrell and Shapiro framework if demand is redistributed from relatively inefficient to relatively efficient firms. In this analysis, welfare can rise with market concentration if demand is redistributed from IMPs to MMPs. This occurs because, in the case of complementary demands, the MMP takes into account, whereas the IMP does not, that a higher price in market i reduces demand in market j, where i ≠ j. In the case of substitutable demands, precisely the opposite is true. Joseph Farrell and Carl Shapiro, 'Horizontal Mergers: An Equilibrium Analysis', 80 (1) The American Economic Review 107 (1990).
7. These are sometimes referred to as 'network effects' or network externalities. For a comprehensive survey of the literature, see Stanley J. Liebowitz and Stephen E. Margolis, 'Network Effects', in Martin Cave, Sumit Majumdar, and Ingo Vogelsang (eds), Handbook of Telecommunications Economics (Amsterdam: North-Holland 2002) vol. 1, 75-96.
8. For a discussion of network effects and their prominent role in recent high-profile court cases, see Howard J. Shelanski and J. Gregory Sidak, 'Antitrust Divestiture in Network Industries,' 68 (1) The University of Chicago Law Review 1 (Winter 2001).
9. In contrast, when demands are substitutable, multi-market participation serves to compound the price-increasing effect of higher market concentration.
10. White conducted a recent analysis of aggregate concentration trends in the U.S. economy. Despite significant merger activity in selected industries, he finds no evidence of a wholesale increase in aggregate market concentration. See Lawrence J. White, 'Trends in Aggregate Concentration in the United States', 16 (4) Journal of Economic Perspectives 137 (2002).
11. Richard A. Posner, 'Antitrust in the New Economy', 68 Antitrust Law Journal 925 (2001).
12. The guidelines state at section 1.5 that 'Unlike the four-firm concentration ratio, the HHI reflects both the distribution of the market shares of the top four firms, and the composition of the market outside the top four firms.' Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, 1992 [Inclusive of 8 April 1997 Revisions]. We argue subsequently that a careful assessment of the merits of a proposed merger requires that antitrust authorities go even further - to investigate the distribution of market concentration across IMPs and MMPs, pre/post-merger.
13. Id., at section 1.51.
14. Id.
15. In the Nash equilibrium of the Cournot game, each firm chooses an output level that maximizes its profit given the output choice of each of its rivals. A Nash equilibrium thus represents a simultaneously rational choice of output for each firm in the market.
16. Stephen Martin, Advanced Industrial Economics (Cambridge, MA: Blackwell Publishers 1993) 21.
17. Abba P. Lerner, 'The Concept of Monopoly and the Measurement of Monopoly Power', 1 (3) The Review of Economic Studies (1934), at 157
18. Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization (4th edn, Boston, MA: Addison-Wesley, 2005) 283.
19. See Richard Schmalensee, 'Industrial Economics: An Overview', 98 (392) The Economic Journal (1988), at 643.
20. Judge Bork argues that 'The Sherman Act was clearly presented and debated as a consumer welfare prescription' - a view the U.S. Supreme Court affirmed in Reiter v Sonotone. A consumer welfare prescription is synonymous with the non-increasing price condition, abstracting from quality considerations. Robert H. Bork, The Antitrust Paradox (New York: Macmillan 1978) 66
21. and Reiter v Sonotone Corp. et al., No. 78-690, Supreme Court of the United States. 442 U.S. 343, 1979.
22. For an early formal analysis of the trade-off between market concentration and merger efficiencies, see Oliver Williamson, 'Economies as an Antitrust Defense: The Welfare Trade-offs', 58 American Economic Review 18 (1968).
23. An IMP in market i serves only market i. A MMP in market i serves market i and at least one other market h, i ≠ h.
24. See Dennis L. Weisman, 'A Generalized Pricing Rule For Multi-Market Cournot Oligopoly,' 81 (1) Economics Letters 95 (2003).
25. ii for some, but not all, markets i.
26. Tirole derives a mark-up rule for a price-setting, multi-product monopolist with interdependent demands. This rule indicates that when the goods are complements, the multi-product monopolist sets a lower price than a single-product monopolist operating independently in each market. The complementary nature of demand forces the multi-product monopolist, but not the single-product monopolist, to account for the fact that a higher price in market i reduces demand in market h. The logic underlying this analysis is similar except that it is cast in terms of MMPs and IMPs rather than multi-product and single-product monopolists, respectively. Jean Tirole, The Theory of Industrial Organization (Cambridge, MA: MIT Press 1988) 70.
27. The cross-demand elasticity measures the percentage change in (inverse) demand in market i with respect to a 1 % change in quantity demanded in market h. This differs from the more familiar cross-price elasticity, which measures the percentage change in quantity demanded in market i with respect to a 1 % change in price in market h.
28. This case raises the possibility that a MMP may have an incentive to set price below marginal cost in selected markets. See, above n 20.
29. It is important to recognize that the degree of complementarity (substitutability) increases as the cross-demand elasticity decreases in absolute value.
30. ih → ∞.
31. It is possible to examine this trade-off when IMPs and MMPs operate simultaneously in a given market, but this requires imposing additional structure on the demand functions. For example, Weisman derives a simple expression for the marginal rate of substitution of MMPs for IMPs that depends only on the parameters of the symmetric, linear demand functions. See Dennis L. Weisman, 'Market Concentration, Multi-Market Participation and Mergers In Network Industries', 4 (2) The Review of Network Economics (2005 forthcoming).
32. i (0, 2) = 20 > 15, ceteris paribus. Hence, in the case of substitutes, traditional merger analysis understates the upward pricing pressures resulting from higher market concentration.
33. i = 2.
34. The critical value of z is actually 2.5, but recall that z is constrained to take on only integer values.
35. Note that this type of market consolidation poses no difficulties for Judge Bork's definition of competition. Judge Bork argues that: 'Competition,' for purposes of antitrust analysis, must be understood as a term of art signifying any state of affairs in which consumer welfare cannot be increased by judicial decree. He therefore rejects the idea that 'competition' is synonymous with 'rivalry.' See Bork, above n 16, at 58.
36. This possibility, while perhaps intriguing, would still have to be reconciled with the specific wording contained in Section 7 of the Clayton Act which proscribes acquisitions 'wherein any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly.' Clayton Act. 15 USCS §18 (2003).
37. For a formal derivation of this result, see Dennis L. Weisman, 'Market Concentration, Multi-Market Participation and Antitrust', KSU Working Paper (November 2004).
38. For an insightful discussion of the consumer welfare standard in antitrust jurisprudence, see Jerry A. Hausman and J. Gregory Sidak, 'A Consumer-Welfare Approach to the Mandatory Unbundling of Telecommunications Networks', 109 The Yale Law Journal (1999), at 452-53.
39. See also Hans B. Thorelli, The Federal Antitrust Law (Baltimore, MD: The Johns Hopkins Press 1955).
40. This is not to suggest that the applications discussed herein are necessarily restricted to network industries. Consider, for example, the possibility that consumption of a particular good in one geographic market increases the likelihood of consumption of that good in another geographic market.
41. See Dale E. Lehman and Dennis L. Weisman, The Telecommunications Act of 1996: The 'Costs' of Managed Competition (Boston, MA: Kluwer Academic Publishers 2000).
42. Empirical demand analysis in the telecommunications industry confirms the existence of demand complementarities in the form of point-to-point traffic patterns. See, for example, Lester D. Taylor, Telecommunications Demand In Theory and Practice (Boston, MA: Kluwer 1994);
43. and Alexander C. Larson, Dale E. Lehman, and Dennis L. Weisman, 'A General Theory of Point-to-Point Long-Distance Demand', in A. de Fontenay, M.H. Shugard and D.S. Sibley (eds), Telecommunications Demand Modelling (Amsterdam: North-Holland Publishing Co, 1990) 299-318.
44. Steven A. Morrison and Clifford Winston, 'The Remaining Role for Government Policy in the Deregulated Airline Industry', in Sam Peltzman and Clifford Winston (eds), Deregulation of Network Industries (Washington, DC: AEI-Brookings Joint Center For Regulatory Studies 2000) 1-40.
45. These findings may have implications not only for mergers, but also for alliances between commercial airlines. For example, Brueckner and Whalen found that international alliances can reduce interline airfares without necessarily raising fares in those markets in which the alliance partners compete directly. See Jan K. Brueckner and W. Tom Whalen, 'The Price Effects of International Airline Alliances', 43 Journal of Competition Law and Economics 503 (2000).
46. Curtis Grimm and Clifford Winston, 'Competition in the Deregulated Railroad Industry: Sources, Effects, and Policy Issues', in Sam Peltzman and Clifford Winston (eds), Deregulation of Network Industries (Washington, DC: AEI-Brookings Joint Center For Regulatory Studies 2000) 41-71.
47. Joon Je Park, Michael W. Babcock, Kenneth Lemke and Dennis L. Weisman, 'Simulating The Effects of Railroad Mergers', 67 (4) Southern Economic Journal 938 (2001).
48. For a critique of the application of modern antitrust law to network industries, see George L. Priest, 'Flawed Efforts to Apply Modern Antitrust Law to Network Industries', in Robert Hahn (ed), High Stakes Antitrust: The Last Hurrah? (Washington, DC: AEI-Brookings Joint Center for Regulatory Studies 2003) 117-57.
49. Jesse Drucker and Almar Latour, 'AT&T Wireless, Cingular in Talks on Possible Deal', The Wall Street Journal (2004) (On-Line Edition).
50. Federal Communications Commission, In the Matter of Applications of AT&T Wireless Services, Inc. and Cingular Wireless Corporation For Consent to Transfer Control of Licenses and Authorizations, WT Docket No. 04-70, 26 October 2004.
51. These are Cingular, Nextel, Sprint PCS, T-Mobile, and Verizon Wireless. Federal Communications Commission, Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services, Ninth Report. WT Docket No. 04-111, 28 September 2004, at para 36. At the time of this writing, a merger between Sprint PCS and Nextel is pending.
52. These carriers collectively operate 3,123 wireless systems in the U.S. and serve in excess of 180.46 million subscribers as of 26 March 2005. See CTIA at http://www.ctia.org/and CTIA (2005) and Cellular Telecommunications and Internet Association (CTIA), 'Semi-Annual Wireless Industry Survey', http://www.ctia.org/public_policy/ statistics/index.cfm/AID/10030 (2004).
53. As of 2004, 276 million people, or 97% of the population in the U.S., live in counties in which there are three or more wireless providers. Approximately 250 million people, or 87% of the population in the U.S., live in counties in which there are five or more wireless providers. More than 216 million people, or 76% of the population in the U.S., can now choose from among six or more different wireless providers. Finally, 84 million people, or almost 30% of the population, live in counties served by seven or more different wireless providers. See FCC, above n 44, at para 49. This increasing competition has led to a pronounced reduction in prices. For example, average revenue per minute declined from dollar;0.47 per minute in 1994 to dollar;0.10 at the beginning of 2003, a reduction of 79%.
54. See FCC, above n 44, at para 171.
55. As a result of consolidation, the number of Class I railroads in the U.S. declined from 40 in 1980 to 12 in 1993. See Association of American Railroads, Washington, DC, 1981, at 2
56. 1994, p. 3. (Class I railroads are defined by operating revenue thresholds that are adjusted annually for inflation. In 2002, a class I railroad was defined as any railroad with at least dollar;272 million in annual revenues. See Association of American Railroads, Washington D.C., 2003, at 3). In 2003, there were only seven remaining Class I Railroads in the U.S. These are the Norfolk Southern, the Kansas City Southern, the Burlington Northern/Santa Fe, the Canadian National, the Soo Line (owned by the Canadian Pacific), the Union Pacific and CSX Transportation. See Surface Transportation Board, Office of Economics, Environmental Analysis, and Administration, Statistics of Class I Freight Railroads in the United States for the Year Ended December 31, 2002, at 3.
57. See Surface Transportation Board, Office of Economics, Environmental Analysis, and Administration, Statistics of Class I Freight Railroads in the United States for the Year Ended December 31, 2001, at 9.
58. Id., at 43.
59. Id., at 10.
60. Id., at 14.
61. Surface Transportation Board Decision, SBC Ex Parte No. 582 (Sub-No.1), Major Rail Consolidation Procedures, 11 June 2001, at 14.
62. In fact, despite significant consolidation in the railroad industry, inflation-adjusted, railroad rates have decreased by more than 45% since 1984. See Surface Transportation Board, above n 48, at n 11.
63. See Department of Justice, above n 9, at section 4.