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Merger control (and more): Direct and indirect effects
Chief economist Lars Sørgard
The Norwegian Competition Authority
Conference in Brussels September 17-18, 2015
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These are my views, and not necessarily the views of the Norwegian Competition Authority
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1
The outline
• The basic approach
– Direct vs indirect effects
– Applied on mergers (and cartels and abuse)
• Implications for measurements and incentives
– What to measure?
– Getting the incentives right
• Some concluding remarks
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The total effect
• Every action will have two types of effects:
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Total effect = Direct effect + Indirect effect
• Enforcement as such, or not – Banning a merger
– Detect a cartel
– A decision of no action
• A change in behaviour – Merger ban leads to other mergers
being cancelled (deterrence)
– No action towards rebates may lead to more rebates (more aggressive behaviour)
Indirect effect – two examples
• Electricity market in Norway – Two merger bans towards Statkraft in 2002/03 – No mergers after that in the Norwegian el. market
• Telecom market after a ban of abuse rule (a la art. 102) was introduced in Norway in 2004 – Complaints from small rivals on rebate schemes – But all cases closed – The small rivals got the signals – Then fewer complaints – What happens to the two large players? – More aggressive with rebates, or ….?
Sørgard - Brussel 17.09.2015
4 0
1
2
3
4
5
2005 2006 2007 2008 2009 2010
Complaints in Telecom
The total effect cont.
• In principle, should take into account both direct and indirect effects for all decisions
• In reality very difficult, and may end up with only considering the direct effects
• Systematic differences between various cases
– Some have a large direct effect, other a large indirect effect
• A distorted allocation of resources?
• A multiplier to find deterrence effect?
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Merger control
• Case by case; effects-based approach
• If mergers investigated, likely that those most harmful for society are banned
• If so, a substantial deterrence effect
– No one risk to propose merger to monopoly?
– If proposed, very likely that it will be banned
• But then the direct effect is limited
– Proposed mergers are good or in the grey area
– Can risk banning good mergers (type I errors)
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Notified mergers – adverse selection
• Mergers not proposed, since high risk of a ban
Net gain for society of mergers
0 Mergers
• Mergers not challenged by NCA
• Mergers challenged by NCA, and can be banned
• Can ban good mergers (type I error)
• Direct effect zero/negative?
Merger: Direct + indirect effect
• Merger enforcement must take into account the interaction between the two effects
– Direct effect: Enforcement as such
– Indirect effect: Deterring others from merging
• Direct effects leads to indirect effects, see Seldeslacht on the deterrence effect
• Optimal merger control; not adding up effects
– Enforecment until direct effect is zero (or in theory even negative), because positive deterrence effect
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Cartel detection
• Violation by object and no effects-based approach
– Makes sense based on economic theory
– Fine not affected by the overcharge (which is unknown)
• Direct effect varies a lot
– From zero to 60-70 % overcharge
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• On average a substantial overcharge
• See the average we can read from the figure
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Cartel detection – direct effect
Net gain for society from cartels
Karteller
• Cartels detected by NCA
0
• Green areas the gains from detection
• Those not detected are the yellow/red areas
• But what about deterrence? – Worst cartels are
deterred?
0
Cartel detection - deterrence
• Large variation in overcharges may indicate that some of the worst cartels are not deterred?
• Or even worse – worst ones not deterred?
– Maximum fines, and not based on overcharge
– Overcharge not reduced over time?
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• Limited indirect effect?
– Not always deterrence of the worst ones?
– Those with low overcharges are deterred?
Abuse of dominance
• Most in common with merger control? – Case by case; effects-based approach
• If so, adverse selection? – Most harmful action deterred?
– Substantial deterrence and limited direct effect (as with merger control)
• But larger uncertainty? – Court decisions on rebates etc
– Large scope for both type I and II errors?
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From direct to total effects
• Hard to decide on the optimal allocation – Direct effect an argument for cartel detection? – But indirect effect show that merger and abuse cases can be
important?
• Cannot just multiply up the direct effect to find the indirect effect
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Cartel
Abuse
Merger
Direct effect
++
+/-
+/-
Indirect effect
+?
+?
++
The outline
• The basic approach
– Direct vs indirect effects
– Applied on mergers, cartels and abuse
• Implications for measurements and incentives
– What to measure?
– Getting the incentives right
• Some concluding remarks
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Measurements and incentives
• Counting the # of decisions clearly wrong
– Should ideally deter firms from violating the law
– Few decisions can be good!
• Since total effect unknown, measuring and incentives are of importance
– NCA adapt to the chosen measurements?
– Problematic to measure only direct effect
• Must detect the overall effect of NCAs
– How will the firms’ decisons be affected?
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Merger control – direct effect
• Can ex post evaluation influence NCAs incentives?
• Problematic to evaluate accepted mergers
– Incentives to be aggressive, since then fewer harmful mergers are proposed?
• Even worse to evaluate banned mergers?
– Merger policy too lenient, since then a banned merger is more likely to be a harmful merger?
• If we observe large direct effect, a too lenient merger policy?
– A large direct effect can be bad news!
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Merger control – total effect
• Important to show the deterrence effect – Ask competition lawyers/firms about mergers that are
modified/dropped – Do empirical studies across countries, see Seldeslacht’s
and Duso’s talks
• Combine it with a check of direct effect – Check both banned and accepted mergers – Not quantify, but rather check whether these are
correct decisions (few type I and II errors)?
• Should not simply assume that merger bans are correct, and use merger simulations – Deterrence not a multipler of direct effect
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Cartels – total effect
• The direct effect overestimates the (potential) overcharge for a deterred cartel?
• Very hard to estimate the indirect effect? – Asking competition lawyers will not help much?
• If measuring # of cartels detected, what about incentives to prevent cartels from being formed?
• Important for cartel policy to understand why no cartel in an industry – I: Not profitable (participation constraint)? – II: Not stable (incentive constraint)?
• II is the binding one for those with high overcharges?
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Cartels and direct effect
• Measuring direct effect of cartels will not help to deter the worst cartels? – Will not in itself deter the cartels with the highest
overcharges
– But can direct NCAs investigation towards those industries with the potential for a high overcharge?
– Leniency can undermine such a targeted policy?
• Cartel policy formulation to violate the incentive constraint (to stop cartels with high overcharges) – High fines combined with private litigation
– Leniency for both fines and (at least partly) damages?
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The outline
• The basic approach
– Direct vs indirect effects
– Applied on mergers (and cartels and abuse)
• Implications for measurements and incentives
– What to measure?
– Getting the incentives right
• Some concluding remarks
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Some concluding remarks • Very hard to exactly measure the total effect
– Indirect effect especially difficult to quantify for cartels?
• But helpful to have a systematic understanding of direct vs indirect effects
• Measurement of direct effect, or using a multi-plier, can lead to distortion of NCAs resources – Too few resources to merger control? – Low direct effect of mergers can be a good sign!
• A systematic reasoning can help us to understand what we should not measure – Understand how measuring may affect incentives
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Selected references
• Harrington, J. Jr. (2011): ’ "When is an Antitrust Authority not Aggressive Enough in Fighting Cartels?," International Journal of Economic Theory, 7, 39-50.
• Jensen, S. and L. Sørgard (2015): ’Enforcement with heterogeneous cartels’, Journal of Competition Law & Economics, forthcoming.
• Katsoulacos, Y. and D. Ulph (2009): On optimal legal standards for competition policy’, Journal of Industrial Economics, 57, 410-437.
• Neven, D. and H. Zenger (2008): ’Ex post evaluation of enforcement: A principal-agent perspective’, De Economist, 156, 477-490.
• Schinkel, M. P. and J. Tuinstra (2006): ’Imperfect competition law enforcement’, International Journal of Industrial Organization, 24, 1267-1297.
• Sørgard, L. (2009): ’Optimal merger policy: Enforcement vs deterrence’, Journal of Industrial Economics, 57, 438-456.
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