Why Event Studies Do Not Detect Anti-Competitive Mergers

Anticompetitive mergers increase competitors' profits, since they reduce competition. Using a model of endogenous mergers, we show that such mergers nevertheless may reduce the competitors' share-prices. Thus, event-studies can not detect anti-competitive mergers. Mergers & Acquisitions; Event Studies; Antitrust; Coalition Formation

Market Power in the Nordic Wholesale Electricity Market: A Survey of the Empirical Evidence

We review the recent empirical research concerning market power on the Nordic wholesale market for electricity, Nord Pool. There is no evidence of blatant and systematic exploitation of system level market power on Nord Pool. However, generation companies seem from time to time able to take advantage of capacity constraints in transmission to wield regional market power. Market power can manifest itself in a number of ways which have so far escaped empirical scrutiny. We discuss investment incentives, vertical integration and buyer power, as well as withholding of base-load (nuclear) capacity.Electricity Markets; Deregulation; Market Power; Hydro Power; Transmission Constraints

Why Mergers Reduce Profits and Raise Share Prices: A Theory of Preemptive Mergers

We explain the empirical puzzle why mergers reduce profits and raise share prices. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. We also explain why shareholders of targets gain while acquirers typically break even. These results are derived in an endogenousmerger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared. ZUSAMMENFASSUNG - (Warum Fusionen Profite reduzieren und Aktienpreise steigen lassen) Es wird ein "Mechanismus der Gewinnung eines Vorsprungs durch Fusion" aufgezeigt, der eventuell das empirische Rätsel, warum Fusionen Profite reduzieren und Aktienpreise steigen lassen, erklären kann. Eine Fusion kann starke negative externe Effekte bei den Unternehmen auslösen, die nicht an der Fusion beteiligt sind. Wenn es besser ist ein "Insider" zu sein als ein "Outsider", kann es sein, dass Firmen Fusionieren um dem zuvorzukommen, dass ihre Partner mit jemand anderem fusionieren. Desweiteren ist der Wert eines fusionierenden Unternehmens vor der Fusion niedrig, da er das Risiko ein Outsider zu werden reflektiert. Diese Ergebnisse werden aus einem Modell endogener Fusionen abgeleitet, welches die Bedingungen unter denen eine Fusion stattfindet, wann sie stattfindet und wie der Überschuss verteilt werden wird, vorhersagt.Mergers, Acquisitions, Defensive Mergers, Coalition Formation

A Consumer Surplus Defense in Merger Control

A government wanting to promote an efficient allocation of resources as measured by the total surplus, should strategically delegate to its competition authority a welfare standard with a bias in favour of consumers. A consumer bias means that some welfare increasing mergers will be blocked. This is optimal, if the relevant alternative to the merger is another change in market structure that will even further increase the total surplus. Furthermore, a consumer bias is shown to enhance welfare even though it blocks some welfare increasing mergers when the relevant alternative is the status quo.Merger Control; Competition Policy; Consumer Surplus

Why mergers reduce profits and raise share prices: a theory of preemptive mergers

"We explain the empirical puzzle why mergers reduce profits and raise share prices. If being an 'insider' is better than being an 'outsider', firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. We also explain why shareholders of targets gain while acquirers typically break even. These results are derived in an endogenousmerger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared." (author's abstract)"Dieser Beitrag leuchtet ein Motiv aus, das Unternehmen zu Zusammenschlüssen veranlassen kann, nämlich durch Fusion einen Vorsprung zu gewinnen. Möglicherweise läßt sich so auch das empirische Rätsel erklären, warum Fusionen Profite schmälern und dennoch zu höheren Aktienpreisen führen können. Eine Fusion kann starke negative externe Effekte bei den Unternehmen auslösen, die nicht an ihr beteiligt sind. Wenn es sich als günstiger erweist, 'Insider' statt 'Outsider' zu sein, können sich Firmen entschließen zu fusionieren, um möglichen Zusammenschlüssen ihrer Partner mit Dritten zuvorzukommen. Des weiteren ist der Wert eines fusionierenden Unternehmens vor der Fusion niedriger, da er das potentielle Outsider-Risiko reflektiert. Diese Ergebnisse werden aus einem Modell endogener Fusionen abgeleitet, das vorhersagt, unter welchen Bedingungen eine Fusion stattfindet, wann sie erfolgt und wie der Überschuß verteilt wird." (Autorenreferat

Industry Concentration and Welfare - On the Use of Stock Market Evidence from Horizontal Mergers

There is diverging empirical evidence on the competitive effects of horizontal mergers: consumer prices (and thus presumably competitors' profits) often rise while competitors' share prices fall. Our model of endogenous mergers provides a possible reconciliation. It is demonstrated that anticompetitive mergers may reduce competitors' share prices, if the merger announcement informs the market that the competitors' lost a race to buy the target. Also the use of "first rumor" as an event may create similar problems of interpretation. We also indicate how the event-study methodology may be adapted to identify competitive effects and thus, the welfare consequences for consumers.Mergers & Acquisitions; Event Studies; Antitrust; In-play; Coalition Formation

Anti- versus Pro-Competitive Mergers

In a framework where mergers are mutually excluding, I show that firms pursue anti- rather than (alternative) pro-competitive mergers. Potential outsiders to anti-competitive mergers refrain from pursuing pro-competitive mergers if the positive externalities from anti-competitive mergers are strong enough. Potential outsiders to pro-competitive mergers pursue anti-competitive mergers if the negative externalities from the pro-competitive mergers are strong enough. Potential participants in anti-competitive mergers are cheap targets due to the risk of becoming outsiders to pro-competitive mergers. Firms may even pursue an unprofitable and anti-competitive merger, when alternative mergers are profitable and pro-competitive.Anti- and Pro-Competitive Mergers; Consumers' Welfare; Coalition Formation; Endogenous Split of Surplus

Fines, Leniency, Rewards and Organized Crime: Evidence from Antitrust Experiments

Leniency policies and rewards for whistleblowers are being introduced in ever more fields of law enforcement, though their deterrence effects are often hard to observe, and the likely effect of changes in the specific features of these schemes can only be observed experimentally. This paper reports results from an experiment designed to examine the effects of fines, leniency programs, and reward schemes for whistleblowers on firms' decision to form cartels (cartel deterrence) and on their price choices. Our subjects play a repeated Bertrand price game with differentiated goods and uncertain duration, and we run several treatments different in the probability of cartels being caught, the level of fine, the possibility of self-reporting (and not paying a fine), the existence of a reward for reporting. We find that fines following successful investigations but without leniency have a deterrence effect (reduce the number of cartels formed) but also a pro-collusive effect (increase collusive prices in surviving cartels). Leniency programs might not be more efficient than standard antitrust enforcement, since in our experiment they do deter a significantly higher fraction of cartels from forming, but they also induce even higher prices in those cartels that are not reported, pushing average market price significantly up relative to treatments without antitrust enforcement. With rewards for whistle blowing, instead, cartels are systematically reported, which completely disrupts subjects' ability to form cartels and sustain high prices, and almost complete deterrence is achieved. We also analyze post-conviction behavior, finding that there is a strong expost deterrence (desistance) effect. Moreover post-conviction prices are on average lower than before even though the average prices within cartels are the same. Finally, we find a strong cultural effect comparing treatments in Stockholm with those in Rome, suggesting that optimal law enforcement institutions differ with culture.Anti-trust; Collusion; Experiment; Leniency

Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment

In this paper we investigate the effects of risk preferences and attitudes towards risk on optimal antitrust enforcement policies. First, we observe that risk aversion is negatively correlated with players’ proclivity to form a cartel, and that increasing the level of fines while reducing the probability of detection enhance deterrence. This confirms that the design of an optimal law enforcement scheme must keep risk attitudes into account, as suggested by Polinsky and Shavell. We also notice that players' ’propensity towards communication drops right after detection even if the collusive agreement was successful, and it declines as the sum of the fines paid by a subject increases. This effect could be explained by availability heuristic, –a cognitive bias, where people’s perception of a risk is based on its vividness and emotional impact rather than on its actual probability. Our results also confirm the crucial role of strategic risk considerations (analogous to risk dominance for one shot games) in determining the effects of leniency programs. Indeed, we show that the effectiveness of leniency programs in deterring cartels is mostly due to the increased risk of a cartel member being cheated upon when entering a collusive agreement, while the risk of a cartel being detected by an autonomous investigation of the Authority seems to play a less important role.Collusion; Leniency; Experiments; Risk Aversion; Availability Heuristic; Strategic Risk

Trust, Salience and Deterrence: Evidence from an Antitrust Experiment

We present results from a laboratory experiment identifying the main channels through which different law enforcement strategies deter organized economic crime. The absolute level of a fine has a strong deterrence effect, even when the exogenous probability of apprehension is zero. This effect appears to be driven by distrust or fear of betrayal, as it increases significantly when the incentives to betray partners are strengthened by policies offering amnesty to “turncoat whistleblowers”. We also document a strong deterrence effect of the sum of fines paid in the past, which suggests a significant role for salience or availability heuristic in law enforcement.Betrayal; Collusion; Corruption; Distrust; Fraud; Organized Crime; Whistleblowers