Basic Definitions:

Inelastic- consumers are less price sensitive

elastic- consumers are more price sensitive
3-2- Merger to Duopoly
2-1- Merger to Monopoly
Tacit collusion- firms following each other
monopoly profit max- where MR=MC

tools of competition policy (i.e., antitrust and regulation) and their respective purposes,
roles, and use
Antitrust:
Purpose- enforce the rules of the competitive marketplace.
Role- To stop monopolies after they form and charge fines, correct bad laws, set deterrences to
prevent firms from committing the same crime again.
Use- to keep prices low and options available for consumers
Enforcers- federal- FTC, DOJ, state- state attorney generals
Regulation:
Purpose- A competing mechanism with antitrust law to control competition
Role- fix problems before they occur (regulates natural monopolies ex. electricity)
Enforcers- federal- FERC, FCC, SEC, DOT
what antitrust laws deal with which types of concerns
Sherman Act Section 1- Anti Conspiracy (Cartels, illegal agreements, price fixing)
Sherman Act Section 2- Anti Monopoly (Predatory pricing, exclusionary conduct)
Clayton Act Section 7- Mergers that will lessen competition

Concept of market power, including types, measurement of (Lerner Index and IEPR),
models (dominant firm/competitive fringe)
Market Power- ability to control prices, ability to exclude your rivals. (CS- above price below
demand PS- below price above demand)
Types- Oligopoly is small number of firms, Duopoly is 2 firms, Monopoly is one firm.
Lerner Index- tool used to measure market power ( more inelastic, more market power because
firms can get away with larger prices, more elastic, lower the price markup) p-mc/p= -1/Ed
IEPR- Inverse Elasticity Pricing Rule, used to show markups are higher in markets whose
demand curves are less elastic.
Models- dominant firm sets price and competitive fringe take the price that the dominant firm
sets.
Horizontal Merger Guidelines: Preventing the enhancement of market power through a merger.
1. Market Definition: The relevant market for merger analysis so as to determine whether the two
firms compete with each other and the sizes of each of their market shares.
-If the 2 companies acted together could bring about a Small but significant and non
transitory increase in price (SSNIP). 5% non transitory price increase is SSNIP value
that enforcement agencies use to determine if a consumer will have a firm to turn to after
price increase. If the hypothetical monopolist can raise price by 5% then youve defined
the relevant market, if not then you need to add more products.
-Relevant market is one in which market power can be exercised.
-Product and geographic markets are used to show that consumers could or couldnt
switch away to the sellers of other products or in other locations in sufficient numbers to
undermine the price increase.
Critical Loss Analysis- given a percentage increase, how much would quantity have to change to
make it unprofitable. (% P)/(CM+%AP) CM= contribution Margin (P-Cost)
Critical Loss >Actual Loss =Profitable

Critical Loss < Actual Loss= Unprofitable

Critical Loss Value- Percentage loss in sales (Q) that would make % P unprofitable
Diversion Ratio: Determines closest rival

2. Seller Concentration: The level of seller concentration in a relevant market and the mergerinduced change that should raise antitrust concern about a merger. You use HerfindahlHirschman Index to determine this measurement.
HHI- is computed by summing the squared market shares (expressed as percentages) of
all the sellers in the market. Pure Monopoly= 100^2=10,000
Thresholds for competitive concerns- Unconcentrated market: HHI below 1500
Moderately Concentrated: HHI between 1500-2500
Highly Concentrated: HHI above 2500
Thresholds not always followed.
3. Competitive Effects Analysis (theories of competitive harm): The potential adverse effects of
mergers, either through post-merger coordinated behavior among sellers or through the
possibility that the merging firms might unilaterally, post-merger, be able to affect prices and
output. Basically tell the story of how merger will adversely affect competition and consumers
choice.
Theories of Harm-

1. Unilateral effects: single firm acting alone

2. Coordinated effects: firms acting together (Tacit collusion)

How will market power be distributed after merger?

Two requirements to exercise market power
-Ability to set prices and exclude rivals (Control over economic resources)
*Economic/physical withholding to drive up prices
-Incentive- Firm must be able to profit
*Loss= Ppre(Qpre-Qpost)
*Gain= (Ppost-Ppre) Qpost
Unilateral Effects- Differentiated Products
Close substitutes
Merging firms are each other's closest rivals (head to head competitors)
Circumvent Market Definition because there is evidence that there is upward pricing
pressure (UPP). UPP- value of diverted sales, mergers affect on the incentive to raise price
because firm 2 will be getting any lost profits.
Diversion Ratios- fraction of firm 1s sales lost due to a price increase that go to firm 2
(Determines closest rival)

Simulation Model (differentiated products): How do shares of rivels change when prices
of rivals change
4. Entry analysis: The extent and role of entry into the market.
Tension between a market having high profits (Encourages entry) and market structure
(barrier to entry)
3 conditions for easy entry:
Timely: 2 years (innovation=5 years)
Likely: The entry has to occur at minimum viable scale (New entrant can enter and gain
a profit)
Sufficient: Close substitute, be able to steal market share/responsiveness (See graph)
5. Efficiencies: Other characteristics of market structure that might make the post-merger
exercise of market power easier or more difficult and the extent to which merger-related cost
savings and efficiencies that are promised should be allowed as a defense of a merger that
otherwise appears to increase the likelihood of the exercise of market power, and the types of
efficiency evidence that should be considered
-Balancing anti-competitive vs. efficiency enhancing
Conditions:
Merger specific- efficiencies only happen because of the merger
Cognizable- they have to be verified by experts
MC Reductions- Cost savings (Synergies- shifting production)
Consumer benefits- New products, products enter market faster
6. failing firm argument- if one firm is going to fail/bankrupt then they wont take away from
competition.

f. Structural merger remedies: what are they are and why are they important, types (e.g.,
divestiture and network expansion), structuring a remedy to address "ability" or "incentive",
importance of viable buyers.
PRESENTATIONS

Questions on presentations will either be asking you to compare cases, or to identify which case raises a
particular issue (e.g., market definition, etc.)

1. The Proposed Merger of AT&T and T-Mobile

Market definition
3. The Sirius/XM Satellite Radio Merger
Market Definition, Efficiencies
2. The Ticketmaster-Live Nation Merger and the Rock Concert Business
Market Concentration (HHI), Theories of Harm (Closest Competitor)
4. Revisiting a Merger: FTC v. Evanston Northwestern Healthcare
Geographical Market definition
5. Oracle's Acquisition of PeopleSoft: U.S. v. Oracle
Unilateral Effects, Geographic and Product Market, Market concentration,
6. Prices, Market Definition, and the Effects of Merger: Staples-Office Depot
Market Definition