Inefficient Offers to an Agency Subject to Judicial Review: an econometric test of remedy agreement in EC merger regulation Luke Garrod Bruce Lyons Andrei Medvedev
Dec 26, 2015
Inefficient Offers to an Agency Subject to Judicial Review: an econometric test of remedy agreement in EC merger regulation
Luke Garrod
Bruce Lyons
Andrei Medvedev
Bargaining theory suggests mutually beneficial early agreement
If both parties are rational and have complete information, mutually beneficial agreement will…
Definitely be reached andBe reached immediately
Incomplete information can explain some delay…Screening for other’s typeSignalling of own type
Evidence from…Experiments Labour bargaining
EC remedy agreements involve…Bargaining strategy from firmsMore passive competition agency
Merger remedies are agreements over the line between good and harmful parts of a merger
ECMR allows merger unless it impedes competitionFirms self-select mergers to avoid proposals that would certainly
fail this testNearly all merger proposals either cannot be shown to impede
competition or can be modified to this effect
Agency (DG Competition) has power to either Prohibit merger orAccept an offer to remedy harmful parts of merger (e.g.
divestment)Cannot make counter-offers
The institutions of EC remedy agreement provide a natural experiment to test theory of strategic offers
Two partiesCompetition agency and merging firms
Discrete ‘rounds’ (2-phase investigation)More information gathered in second roundAllows early or late agreement (or no agreement)
Legally specified… Time limits to each phase (i.e. limited evidence gathering)Order of who can make offers and who can accept/reject
Administrative system with judicial reviewAgency decision must be based on evidence
No signalling in offers – would not stand up to JRStrategic behaviour only on one side
Isolates strategy of firms – agency more passive
29% of remedies accepted only after delay
7% qualifying mergers are remediedAs opposed to either no competition problem (89%) or
withdrawn during proceedings (3%) or complete prohibition (0.6%)
Given remedies are agreed (in either Phase I or Phase II)……Probability of Phase I = 71% (1998-07)
1998 ECMR revision formalised Phase I remedies; modest upward trend in early agreement
0%
10%
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100%
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Ph.I/(Ph.I+Ph.II) remedies
The EC procedure lends itself to simple modelling: assumptions
Timing of movesPhase I remedy offer αO (firms) accept or Phase II (agency)
Phase II remedy offer αOO (firms) accept or prohibit (agency)
Representation of remedies where higher αT means more of merger is OK
Information Common knowledge of variance of agency’s evidence:
uniform with range 2σ ; but only firms know αT
Agency More evidence in Phase II: σ2 < σ1
Evidence supports agency estimates:
JR-robust decision rule: accept Phase I offer iff: αO < α1 (or αOO < α2)
Objective of merging firms
1,0T
KMax OOOOOO
IIPh.inApp.Pr*Ph.IinApp.Pr1IPh.inApp.Pr,
111 , TT
Phase I approval probabilities and expected decision errors are directly related
Probability of approval
If offer accepted in Phase IType 1 error (too much remedy) if αO < αT Type 2 error (too little remedy) if αO > αT
1
21 1PrPr
TO
OIPhaseinApproval
Optimal offers and consequent probability of delayed agreement are determined by same factors
Offers depend on whether firms find it optimal to make ‘for sure’ acceptable offer or risk disagreement
3 ranges depending on whether play completely safe in both phases, or only in Phase I, or to risk Phase II prohibition
Example of intermediate case:Optimal offer and Type of error if agreement in Phase I
Probability of failure to agree in Phase I
Same factors determine: (1) optimal offers; (2) type of error in Ph.I approvals; and (3) probability of failure to agree in Ph.I
11
212
1* 1
KT
11
24
1* 3Pr1
K
Empirical predictions from the model
Delay to Phase II more likely ifComplex or imprecise merger appraisal (high σ1)
High number of markets raising concernInexperienced agency (few previous cases)Vertical issues, coordinated effects, entry barriers, …?
Delay is relatively less costly to the firms (K/π)Large proportion of markets raising concern
Model does not predict any effect ofObvious harm of the merger (αT)
Combined market shares; rival sharesPolitical impact
Merger size per seNationality of merging parties
Data
SampleEU remedied mergers 1999-2006
N = 133i.e. all remedied mergers except 27 due to lack of reported data or predominantly vertical
Unit = mergerAggregated from many markets per merger
Mean 13; max 142Variables expressed as:
Market count (e.g. 13 markets under review)Share of markets (e.g. 52% markets created ‘concern’)Average across markets (e.g. mean combined market share = 64%)
Treatment of potential reporting bias
Different style of reports in Phase I and IIReporting of barriers to entry more likely in Phase IISelection of markets for which market shares are reported seems
higher in Phase I
To derive a consistent figure for markets under review, we applied a market share filter
Only count markets for which combined market share >25%
Consistent with EC ‘checklist’ filter
Applying filter drops more Ph.I than Ph.II markets
25% supported by sensitivity analysis
The filter removes more markets in Phase I, thus supporting our worry of reporting bias
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0.1
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0.9
0 5 10 15 20 25 30 35 40
Merged Entity's Market Share Filter (%)
Pro
port
ion
of M
arke
ts R
emov
ed
Phase I
Phase II
0.667
0.333
The market share filter mainly removes markets without concern
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0 5 10 15 20 25 30 35 40
Merged Entity's Market Share Filter (%)
Num
ber
of M
arke
ts R
emov
ed
Markets with concern
Markets without concern
As predicted, Phase II mergers are more complex and have higher share of controversial markets
Variable Phase I Phase II
Markets 12.7 16.8
Mkts with concern 6.1 (53%) 10.5 (72%)
High barriers 2½ (25%) 8 (45%)
Vertical concern 12% mergers 28% mergers
Also as predicted, only negligible differences relating to size and mkt share
Variable Phase I Phase II
Combined revenue €40b €38b
Combined mkt share 59% 63%
Share of leading rival & concern
21% 16%
Share lead rival & no concern
25% 27%
Probit regression results to look out for
Delay if…
Complexity of appraisal by agency
many markets to appraise
Lower opportunity cost of delay for forms
high proportion of merger under scrutiny
dependent variable: Phase II = 1
(1) (2)
coefficient(standard error)
marginal effects
coefficient(standard error)
marginal effects
constant -0.8527 -1.0628
(0.5391) (0.6900)
number of markets (non-coordinated) 0.0148** 0.0046 0.0145** 0.0045
(0.0070) (0.0069)
number of markets (coordinated) -0.0986 -0.0307 -0.0979 -0.0305
(0.0713) (0.0716)
coordinated effects† 0.8801 0.3166 0.9331 0.3365
(0.6208) (0.6329)
merger number -0.0002* -0.0001 -0.0003* -0.0001
(0.0001) (0.0002)
% markets with concern 1.4407*** 0.4484 1.4180*** 0.4412
(0.4333) (0.4354)
US only† 0.0789 0.0251 0.0533 0.0168
(0.4624) (0.4658)
EEA and US† -0.7222* -0.1828 -0.7001* -0.1783
(0.3999) (0.4025)
merged entity’s mean market share - - 0.0039 0.0012
(0.0080)
R-squared 0.1636 0.651
Market Share Threshold 0% 20% 30%
Dependent variable: phase II (1) (2) (1) (2) (1) (2)
constant -0.7230 -0.9704 0.8127 -1.0708 -0.7306 -1.2481*
(0.5013) (0.6654) (0.5226) (0.6808) (0.5763) (0.7582)
number of markets (non-coordinated) 0.0092* 0.0093* 0.0122* 0.0122* 0.0171** 0.0164**
(0.0054) (0.0537) (0.0063) (0.0063) (0.0079) (0.0078)
number of markets (coordinated) -0.0891 -0.0878 -0.0860 -0.0852 -0.1154 -0.1186
(0.0590) (0.0592) (0.0656) (0.0658) (0.0897) (0.0920)
coordinated effects 0.9633 1.0249 0.7653 0.8331 0.8795 1.0061
(0.6537) (0.6665) (0.6091) (0.6226) (0.6013) (0.6216)
merger number -0.0003* -0.0003* -0.0003* -0.0002* -0.0002 -0.0002*
(0.0002) (0.0002) (0.0001) (0.0001) (0.0001) (0.0001)
% markets with concern 1.5903*** 1.5681*** 1.5057*** 1.4837*** 1.0795*** 1.1167**
(0.4084) (0.4102) (0.4290) (0.4307) (0.4484) (0.4518)
US only 0.1106 0.0752 0.1037 0.0705 0.0756 0.0356
(0.4651) (0.4699) (0.4634) (0.4674) (0.4529) (0.4575)
EEA and US -0.6839* -0.6627* -0.7226* -0.6985* -0.7129* -0.6657*
(0.3970) (0.3991) (0.3973) (0.3997) (0.3914) (0.3950)
merged entity’s mean market share - 0.0045 - 0.0047 - 0.0083
(0.0080) (0.0079) (0.0079)
R-squared 0.1853 0.1873 0.1669 0.1691 0.1327 0.1396
Conclusions
Delay in reaching agreement arises when competition issues are complex and delay is costly to the firms
Firms act strategicallyNot just greater potential harm merger (e.g. high shares)
Remedies agreed in Phase I are likely to beInsufficient (Type 2 error) if competition issues are complex
and/or much for the firms to fight forBut too stringent (Type 1 errors) if competition issues are
relatively straightforward and/or delay is costly to firms
Issues on which we would particularly welcome discussion
Any improvements on this paper!
Consistency of Ph.I and Ph.II reports as data sourcesE.g. our market share filter, reporting of entry barriers
Appropriate econometric techniques for our datasetIncluding when we move to direct use of market data
c150 mergers * ave.14 markets per merger = >2,000 obs.