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How Effective is European Merger Control? EC Competition Enforcement Data Amsterdam, April 9-10 2008. Tomaso Duso (Humboldt University and WZB) Klaus Gugler ( University of Vienna ) Burcin Yurtoglu ( University of Vienna ). Introduction. - PowerPoint PPT Presentation
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Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 11
How Effective is EuropeanHow Effective is European Merger Control? Merger Control?
EC Competition Enforcement DataEC Competition Enforcement Data Amsterdam, April 9-10 2008
Tomaso DusoTomaso Duso(Humboldt University and WZB)
Klaus GuglerKlaus Gugler(University of Vienna)
Burcin YurtogluBurcin Yurtoglu(University of Vienna)
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 22
IntroductionIntroduction
Economic evaluation of EU merger control decisions.
Research questions: Did merger control achieve the objective of
restoring effective competition? Are remedies the best instrument?
We use stock market reactions as an (ex-ante) independent assessment
of the concentration as well as the merger control procedure.
Identification assumption: anti-competitive rents generated by the
merger should be dissipated by the commission’s decision, if this is
effective.
We apply this approach to a sample of 151 mergers scrutinized by the
European Commission between 1990 - 2002.
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 33
Measuring EffectivenessMeasuring EffectivenessIdea & MethodologyIdea & Methodology
Each merger has two possible effects:
Market power increase (positive for both merging firms and rivals).
Efficiency gains (positive for merging firms, negative for rivals).
An effective antitrust decisions should maintain the benefits to consumers generated by increased efficiency and, at the same time, reduce the market power effects of the merger, i.e. all rents generated by a market power increase should be reversed by an effective antitrust decision.
Hence, we measure antitrust effectiveness by:
1. Measuring the rents generated by the merger and by the antitrust decision.
2. Relate the two by means of regression analysis. We expect a negative relation between the two. This relation should change depending on the kind of decision.
Main results: Prohibitions perfectly restore competition. Remedies are not always effective.
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 44
1. Measuring Rent I 1. Measuring Rent I
We use information from the financial markets to measure the
profitability of a merger as well as the effect of the Commission’s
decision.
The event study methodology looks at how stock prices of firms
involved in the merger (merging firms and rivals) react to a particular
event (e.g. merger announcement, commission‘s decision etc.).
We measure abnormal returns as the exceptional returns (compared
to the market) that a firm realizes around a particular event. These
measures should capture the market’s valuation of the event’s effect.
Which events do we use?
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 55
1. Measuring Rent III1. Measuring Rent IIIThe EU Merger ControlThe EU Merger Control
EU Merger Control
Merger’s effectAntitrust decision’s effect
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 66
1. Measuring Rent II1. Measuring Rent II Correcting for ExpectationsCorrecting for Expectations
The observed abnormal returns entail the real merger/decision effect
but also the market’s prior/update about the antitrust action.
In a first step we estimate the probability of an action by using
observable mergers’ characteristics.
We then use these probabilities to correct the estimated abnormal
returns in order to obtain clean measures of the merger/decision
effect : :
effect ent)(announcemmerger Pr1*Aj
Aij
Aij Iaction
effect decision Pr1*Aj
Dij
Dij Iaction
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 77
Suppose the agency does not make mistakes. All anticompetitive rents
should be eliminated by an effective decision (rent reversion).
To measure policy effectiveness we run a basic linear regression of
announcement effect on decision effects for merging firms (i=M) and
rivals (i=R):
2. The Empirical Implementation2. The Empirical Implementation
ijjid
Aijjid
djid
Dij Xgdbda
jj
**
The a and b-coefficients measure the degree of market power
reversion due to the Commission’s decision.
ijjiAijjiB
Aijjis
Aijjio
AijjicjiBjisjiojic
Dij XgBbSbObCbBaSaOaCa *****
constant slope
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 88
2. Predictions: Rivals2. Predictions: Rivals
D*
A*
A1 A2
- (anticomp + efficiencies)- (anticomp)
- (anticomp)
(anticomp + efficiencies)
( 0) ( 0)
anticomp efficiencies
( 0) ( 0)
anticomp efficiencies
B2
R2
R1
BLOCK
REMEDIES = B1
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 99
2. Predictions: Summary2. Predictions: Summary
Effective Merger Control
Rivals Merging firms
a b a b
Blocking 0 -1 0 -1
Remedies(other remedies and structural)
<0 (-1,
0) 0 (-1, 0)
Clearance 0 0 0 0
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1010
The DataThe Data
151 mergers analyzed by the EU Commission between 1990 and
2002. We identify 544 different firms involved in these mergers
either as merging entities or rivals.
Almost all Phase II cases (71) and a random sample of Phase I cases
(80).
Sources:
– EU decisions (rivals, decisions and merger-specific information)
– Dow Jones Interactive (announcement date)
– Datastream (stock market reactions)
– Compustat Global (accounting data)
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1111
Results: Full SampleResults: Full Sample
1. Prohibitions restore on average effective competition (bRB=-0.88 for
rivals and bMB=-0.72 for merging firms, not statistically significantly
different from -1).
2. Blockings are a significant cost for merging firms (aMB=-0.21,
significant) .
3. We cannot reject the hypothesis of full profit reversion for blocking
decisions: This constitutes a consistency check for our approach.
4. On average, remedies are not completely successful in restoring
effective competition. Our predictions for the merging firms are met,
yet they are only partially met for rivals.
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1212
Results: QualificationResults: Qualification
1. Remedies are, though only partially, effective when they are applied in phase 1.
2. In phase 2, remedies seem less effective. Structural remedies might be seen as a rent transfer from merging firms to rivals.
3. Anticompetitive mergers that are cleared in phase 1 are good news for the rivals. There is no effect for merging firms: Type II errors benefit rivals and don’t hurt merging firms.
4. (Structural) remedies (correctly) applied to anticompetitive mergers have a strong and significantly negative effect on rivals are more effective
5. Remedies applied in pro-competitive mergers have negative and significant effect on merging firms and no effect on rivals: (weak) type I error constitute a cost for merging firms
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1313
Results: RobustnessResults: Robustness
1. The results remain qualitatively the same also excluding mergers with vertical and/or conglomerate effects.
2. The results are robust to merger wave arguments (1990-96 vs. 1996-2002, merger wave industries vs. non merger wave industries).
3. The remedies’ effectiveness is substantially increased in remedies-intensive industries. This suggests that the Commission has learnt over time and in certain industries to implement effective remedies.
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1414
Results: Robustness IIIResults: Robustness IIIEx-Post EvaluationEx-Post Evaluation
We use balance-sheet data and compare actual profit levels two years
after the merger with a counterfactual given by the development of
profits in the same 3-digit industry as the merging firms or their rivals
(Gugler et al., 2003).
We find a significantly positive relationship between the ex post profit
effects and the announcement CAARs and total CAARs.
We then relate the profit effects for the rivals to the merging firms’
profit effects. We do not find a significant relation between the two
effects for mergers cleared unconditionally or blocked. We find a
significant positive relation for those mergers that were cleared with
commitments.
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1515
ConclusionsConclusions
Financial market information (event studies) are useful to assess competition policy effectiveness:
They allow to measure both the merger’s and antitrust decision’s effects separately.
They are easy to implement and require a limited amount of information.
Important to correct for the market’s prior about the antitrust action.
Crucial is to look how these effects are related.
Methodology produces consistent and robust results:
Blockings indeed restore the pre-merger situation.
Remedies are on average only partially effective.
Remedies are more effective when applied in phase 1 and when applied to anticompetitive mergers
Our results are robust to several sub-sampling and they are supported by an alternative methodology based on ex-post evaluation methods.
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1616
Back-up slides
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1717
Correcting for Market ExpectationsCorrecting for Market Expectations
• The observed abnormal return around the announcement day (ΠA)
entails the real merger effect times the market’s prior about the
probability of clearance:
.Pr | ***
Aj
AijA
ijADij
Aij
Aij
IclearIE
• The observed abnormal return around the decision day is the
market update of the expected value of the Commission’s action:
• In a first step we estimate the probabilities of clearance and action
by using observable mergers’ characteristics.
.Pr1 ***
Aj
DijD
ijADij
Dij
Dij
IactionIE
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1818
Predictions: Merging firmsPredictions: Merging firms
D*
A*
A1 A2
- (anticomp + efficiencies)
- (anticomp)
- (anticomp)
(anticomp + efficiencies)
B2
R2
R1
BLOCK
REMEDIES
B1
-(anticomp + efficiencies)
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 1919
The Main VariablesThe Main Variables
Ai Long run (50 days) cumulative abnormal returns around
the merger’s announcement day.
Di Sum of the cumulative abnormal returns around the Phase
I and Phase II decisions (50 days for Phase II and 5 days
for Phase I).
Decision: Clearance, Divestitures, Other remedies, Block.
Controls: Year and industry dummies, conglomerate and
foreclosure dummies.
Anticompetitive: dummy equals 1 if the rivals’ CAARs around
the announcement are positive (Duso, Neven, and Röller, 2007).
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 2020
Results: Full SampleResults: Full Sample
Dependent var.:CARs at decision A
Rivals Merging firms
Coeff St.Err. Coeff St.Err.
CLEAR 0.042 0.061 -0.020 0.093
OTHER REMEDIES 0.013 0.037 -0.095 0.056
STURUCTURAL 0.049 0.028 -0.033 0.045
BLOCK -0.061 0.041 -0.213 0.063
CLEAR * A 0.274 0.076 0.007 0.090
OTHER REMEDIES * A -0.116 0.093 -0.341 0.172
STURUCTURAL * A -0.105 0.091 -0.165 0.077BLOCK * A -0.875 0.100 -0.718 -0.136
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 2121
Results: Phase IResults: Phase I
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 2222
Results: Phase IIResults: Phase II
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 2323
Results: Pro- vs. Anti-competitiveResults: Pro- vs. Anti-competitive
Duso-Gugler-YurtogluDuso-Gugler-Yurtoglu Effectivness of EU Merger ControlEffectivness of EU Merger Control 2424
Results: Remedy-Intensive IndustriesResults: Remedy-Intensive Industries