law360, washington (september 29, 2015, 7:18 pm edt) -- federal trade commission chairwoman edith ramirez said tuesday that the agency closely considers whether a potential merger will provide new. The 1997 revision more precisely defined the efficiency defense. With respect to merger specificity, the court found that Anthem's arguments that the combined company could introduce new products incorporating Cigna's attractive programs and Anthem's lower rates was not merger-specific The last condition seems the most challenging as many environmental benefits can be difficult to quantify . Advantages of a Merger 1. We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. The policy debate shows that one of the key arguments put forward when supporting potential mergers is the possibility of realization of merger efficiency gains, specifically in the transport industry. As the Guidelines explain, the efficiency must be sufficient to result in no predictable post-merger price increase, thereby making "pass-through" effects the focus of the . Agency reviewing the merger will assess whether the likely magnitude of the claimed efficiencies is sufficient to offset any anticompetitive harm posed by the merger. A merger of such firms may lead to pro-competitive efficiencies by (1) allowing the firms to combine complementary assets and (2) eliminating double marginalisation, thereby lowering costs for the vertically integrated firm and potentially leading to lower prices and other benefits for consumers. Generally, for a given firm-specific cost reduction, the reduction in price will be greater the less elastic the firm-specific demand. Cognizable efficiencies are merger-specific efficiencies that have been verified and do not arise from anticompetitive reductions in output or service. Ticketmaster must demonstrate that efficiencies are: (1) merger-specific; (2) cognizable and verifiable; and (3) sufficient in magnitude to reverse the anticompetitive effects of the merger. Indeed, she already has properly rejected Penguin's efficiency defense. to which specific efficiency categories within the merger-control process should be taken into account. First, it makes assumptions about efficiencies in determining where the line for prima facie illegality should be drawn. If these efficiencies are merger-specific, then this merger should still be applauded because consumers benefit from lower prices and greater output. A horizontal merger is a merger between companies operating in a similar line of business or the same industry. - Is trade spending a barrier? For instance, a merger-specific increase in productive efficiency (synergies) effectively leads to a reduction in variable costs. Contrary to Federal Trade Commission (FTC) argued that the firms failed to distinguish between industry-wide and firm-specific cost reductions, and that only the latter were relevant for estimating the pass-through rate for merger-specific efficiencies. We include merger-specific cost efficiencies in a tractable manner in the model and extend the standard UPP formulation to account for these efficien-cies. Big data" has become one of the hottest subjects for antitrust enforcers around the globe. The "clear showing" rebuttal standard of proof has been eased by the. We exploit the industry setting to employ a difference-in-differences methodology evaluating the effect of the merger on operating costs of merging transport groups. As a result, the agencies have required merging parties to submit rigorous proof of the efficiencies that a transaction is likely to produce and to establish that the efficiencies are 'merger-specific'. Sign up now. Second, it recognizes an efficiencies defense once prima facie illegality has been established, with the burden of proof on the defendant. Konstanze Kinne. Efficiency gains of category II are merger-specific synergies between merging firms' assets. If mergers of competitors never produced effi- ciency gains but simply reduced the number of competitors, a strong pre- sumption against them would be warranted. One of the major problems plaguing our healthcare system is that. The first major widening of the defense occurred in 1984 when the Department, under the leadership of J. Paul McGrath, completely rewrote the efficiency section of the Merger Guidelines in a way that transformed efficiencies from a defense, like the failing company doctrine, into an integral part of the competitive effects analysis. CVS Health-Aetna The CVS Health-Aetna merger offered substantial efficiencies, including efficiencies driven by data integration. If at least one firm could be expected to grow in the absence of the merger these claimed efficiencies are not merger-specific. Competition Policy International (CPI) is an independent knowledge-sharing organization focused on the diffusion of the most relevant antitrust information and content worldwide. Cognizable efficiencies are merger-specific efficiencies that have been verified and do not arise from anticompetitive reductions in output or service. In the revision, efficiencies would be considered "cognizable" if they were merger-specific, verifiable, and did "not arise from anticompetitive reductions in output or service." These changes were made so that mergers with a net pro-competitive effect could go through. The efficacy of the new UPP formulations is analyzed using Monte . An example of efficiencies at the level of the industry is cost-savings due to a reallocation of production from the merging firms to their competitorsa common effect of mergers (see below). being verifiable and merger-specific). We evaluate whether a merger between two major transport groups may give rise to merger efficiency gains. Increases market share. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). Significant merger-specific efficiency gains are more likely for targets than for buyers. As Section 10 of the Merger Guidelines recognizes, mergers can generate efficiencies that lead to "lower prices, improved quality, enhanced service, or new products." However, any efficiency benefits must be weighed against potential anticompetitive effects of the merger. Most companies going for such a merger are competitors operating in the same industry. Merger-Specificity Of Quality And Cost Efficiencies In Hospital Merger Cases CPI - July 17, 2017 By David J. Balan - A key factor in the analysis of hospital merger efficiencies is whether a claimed efficiency is "merger-specific," meaning that it would likely be achieved with the merger under review, but not without it. Explanation. This section was revised in 1997 to clarify the efficiency defense, and allows for "merger-specific" efficiencies to be taken into account, i.e. Firms will often pass merger-specific benefits on to consumers in the form of lower prices, better products, or more choices. In other words, it happens when companies that offer the same or similar products or services come together under single ownership. Second, Oliver Williamson's seminal article on efficiencies and antitrust policy towards mergers appeared at the same time as the early drafting of Canada's new Competition Act.4 Williamson introduced the idea of a trade-off between the dead weight loss that could be expected from a merger and any efficiency gains that were specific to the . Merger Efficiencies and Remedies EU merger control has evolved in several important ways in recent years. We develop a model in which two firms that have proposed to merge are privately informed about merger-specific efficiencies. The district court also expressly concluded that the claimed efficiencies were not merger-specific. Merger Efficiencies, Heinz 220B, spring 2008 Heinz "3 to 2" among major baby food suppliers - Gerber biggest, and everywhere - H, B mostly separately side-by-side vs G Competition to be 2ndbrand? The Department of Justice introduced "quasi-safe harbor" (i.e., not-anticompetitive) enforcement presumptions into the 1982 Merger Guidelines, presumptions that the agencies have updated over time. Efficiencies likely to be obtained through a merger may increase the competitiveness of the merged firm and improve (or not impair) the competitive performance of the market (s) in which it operates, ultimately resulting in lower prices, increased output, and/or higher quality goods or services for consumers and other buyers. Importantly, the Ninth Circuit held that even if the claimed efficiencies were merger-specific, the defense would still fail because the efficiencies did not make the market more competitive. By efficiency gains of category I we mean that a merger brings the individual capital of the merging firms within the see of a single larger resulting firm. The WFI is well defined . for a given merger-specific efficiency to affect the merged firm's prices. This distinction is important since it is mainly about the first category that the merging firms have an informational advantage over competition authorities. 1 Merger with Williamson Tradeoff to substantial efficiencies. However, the FCA arrived at the same conclusion, finding that any merger-specific efficiencies were "negligible" (amounting to less than the "yearly remuneration of a half-time junior . Are merger-specific, that is, directly caused by the transaction itself and not achievable by less anti-competitive means. This enables the firms to influence the merger control procedure by strategically revealing their information to an antitrust authority. This paper introduces the WerdenFroeb Index (WFI) to assist in evaluating mergerspecific efficiencies in horizontal mergers. Specifically, the court noted Intereconomics is a platform for the publication of policy relevant aspects of economic research. Proving an efficiency defense. Which translates, in economic terms into the question, which "welfare standard" is valid. Efficiencies Defence. The index measures the weighted average reduction in marginal costs required to restore premerger equilibrium prices and quantities after the (full or partial) merger is consummated. Although the information improves upon the quality of the authority's decision, the . Efficiencies must be merger specific to be creditedwhich often means that they cannot be achievable by contractyet standard analysis does not draw on relevant fields of economics on the theory of the firm and organizational economics, which are associated with a number of Nobel prizes. First, the court found that Anthem's plan to introduce products incorporating Cigna's customer wellness plans and Anthem's lower rates was not "merger specific." In other words, those savings could be accomplished without the merger. Thus, in those cases acknowledgement of efficiencies is simply dicta. Moreover, mergers of firms that mainly operate in the same segment are likely to generate efficiency. Second, it recognizes an efficiencies defense once prima facie illegality has been established, with the burden of proof on the defendant. 8. 10 Cleary Gottlieb Steen & Hamilton LLP Merger Efficiencies and Remedies not surprisingly, as could be understood from reading the decision of the french competition authority, efficiency gains were the key argument put forward by the merging parties to approve the merger. (Guidelines on the Simon Genevaz Robbert Snelders. - Contrary to usual "anyone can easily compete" Anthem's efficiencies evidence as not merger-specific and not verifiable. Such efficiencies would have to benefit consumers, be merger-specific and be verifiable. Many industries are seeing an increase in concentration, leading to a discussion on the effectiveness of horizontal merger enforcement. Moreover, firms can offer remedies to the competition authority. If the passing-on requirement is intended to ensure that the merger does not produce a price increase, then it is misconceived. The FTC estimated that the actual historical firm-specific pass-through rate was on the order of 15%. Moreover, if scale economies were indeed merger specific, there is reason to doubt that they will be both large enough and sufficiently passed through that consumers will benefit (Farrel and Shapiro 2000, 3). efficiencies that "are likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means of having comparable . The integrated merger analysis should give efficiencies more weight if the profitability of a failing industry can be improved by the merger (e.g., by lowering fixed costs) even if the price effects are not immediate. This provision allows for a trade-off analysis between anti-competitive effects and efficiencies resulting from a transaction. 16 Yet, the formal inclusion of other effects into the simulation process as well as the cumulation . The difficulty is even greater with respect to dynamic efficiencies. Yet, there exists little empirical evidence on the actual . We include merger-specific cost efficiencies in a tractable manner in the model and extend the standard UPP formulation to account for these efficiencies. of the efficiencies accrue to the products that fall outside the market. anthem put forth an efficiencies defense, arguing that the combined company would realize $2.4 billion in medical cost savings through, among others, the straight pass-through of its rates to cigna consumers and its ability to renegotiate provider rates to the best of the merging parties' rates, and argued that those savings would outweigh any Anthem's efficiencies evidence as not merger-specific and not verifiable. The Merger Guidelines require that efficiencies be "merger-specific" and will not count when a "less restrictive alternative" is available. An impediment would be significant if the deterioration were not offset by efficiencies. The dispute involves PRH's claims that its acquisition of Simon & Schuster would create "cognizable merger-specific efficiencies." But according to previous court filings, PRH's expert . - Barriers to entry/expansion? merger-specific efficiencies. A vertical merger occurs when companies operating in the same industry, but at different levels in the supply chain, merge. When companies merge, the new company gains a larger market share and gets ahead in the . While vertical mergers can lead to efficiencies, they also can lead to anticompetitive effects. For efficiency claims to win the day, antitrust precedent and the joint DOJ-FTC Horizontal Merger Guidelines require that. Efficiencies in Merger Analysis. Furthermore, these efficiencies would seem, in many cases, to satisfy easily the Guidelines' test for "cognizable efficiencies" - i.e., they are merger-specific; they are verifiable; and they don't flow from anticompetitive output restrictions. Our results show that, no matter the specification considered, we cannot conclude that the merger resulted in any merger specific efficiency gains for the merging parties. 6. Secondly, who is meant to benefit when weighing the relative advantages and disadvantages of a merger. Merger specific means they must be "likely to be accomplished with the proposed merger and unlikely to be accomplished in absence of either the proposed . Merger to Proceed on Efficiency Grounds Tests Set for Merger Review On January 22, 2015, the Supreme Court of Canada (SCC) reversed a decision of the Federal . Key changes include the adoption of a new . Cognizable efficiencies are assessed net of costs produced by the merger or incurred in achieving those efficiencies." The Efficiencies Defense in the 2010 Horizontal Merger Guidelines 61 _MC, = AC, MC2 = AC2 Fig. The dissent also found that the efficiencies were merger-specific (because they would flow directly from Anthem's increased bargaining leverage stemming from the merger) and adequately verified (by Anthem's expert and integration planning team, healthcare providers and an independent consulting firm). Whether the merger is actually required to bring about the efficiency (or whether the efficiency was likely to have occurred absent the merger - for example, as a result of an acquisition by a competing purchaser); only "merger specific" efficiencies are cognizable. What are some examples of cases where merger-specific efficiencies were, in fact, realized or not realized? 3. In particular, if the Bureau's review concludes that the efficiencies likely to arise from a transaction are greater . However, in practice, along with proving efficiencies. Request PDF | The Merger Specificity of Efficiencies in Merger Review: A Succinct International Comparison | Mergers and acquisitions can lead to anti-competitive structural change in the market . Subscribe to our newsletter. Cognizable efficiencies are assessed net of costs produced by the merger or incurred in achieving those efficiencies.12 With the adoption of the Hart-Scott-Rodino Antitrust Improvements The acceptability of efficiency defense should rest on a showing that the merger will produce a more . Slide 15 WEIGHING EFFICIENCY EFFECTS IN DECLINING INDUSTRIES The Guidelines can be read to support a "failing industry" defense: A FRAMEWORK FOR MERGER ANALYSIS 6.2 C ALCULATING M INIMUM R EQUIRED E FFICIENCIES (MRE S ) 6.2.3 Minimum Required Efficiencies based on Specific Models of Competition The Commission considers any substantiated efficiencies as part of its overall assessment of the impact of the transaction. 2 (integrating efficiencies approach): Alternatively, one could define the notion of significance as to comprise both, the degree of competitive deterioration as well as the amount of efficiencies generated by the merger. We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. It provides up-to-date . Can be verified and quantified with reasonable certainty. There was a time when courts and competition enforcement agencies tended to view merger efficiencies as either irrelevant or as a basis for blocking transactions. What types of claimed efficiencies and other benefits appear more likely to be realized? Concept No. Merger analysis today takes efficiencies into account in two ways. Such mergers happen to increase synergies, supply chain control, and efficiency. Our results show that, no matter the specification considered, we cannot conclude that the merger resulted in any merger specific efficiency gains for the merging parties, a result robust to a great number of robustness checks as well . Nevertheless, attitudes toward mergers are heavily driven by assump- tions about efficiency gains. Analysis of ex post entry often engages in Mergers . both the courts and the antitrust enforcement agencies often assert that merger-related efficiencies should not be recognized formally as an offset to likely anticompetitive effects unless the merger proponents demonstrate that the efficiencies (1) are "merger specific," i.e., equivalent or comparable savings achieved by the merging firms cannot Incorporating static efficiencies into merger reviews in a rigorous way has proven to be difficult, though. Hence, the possibility of improved efficiency needs to be checked and post-merger marginal costs must be adapted. Intereconomics is published by ZBW - Leibniz Information Centre for Economics and CEPS - Centre for European Policy Studies. efficiencies have been taken into account for many years in us merger review, a formerly-implicit approach that has now been explicitly codified to some extent in the us horizontal merger guidelines (' a primary benefit of mergers to the economy is their potential to generate significant efficiencies which may result in lower prices, improved . First, it makes assumptions about efficiencies in determining where the line for prima facie illegality should be drawn. Merger analysis today takes efficiencies into account in two ways. The VMG Mistakenly Downplayed Analysis of Accommodating Price Increases When a vertical merger raises input foreclosure concerns, there are inherent adverse horizontal effects. The efficacy of the new UPP formulations is analyzed using Monte . Efficiencies Many mergers produce savings by allowing the merged firms to reduce costs, eliminate duplicate functions, or achieve scale economies. There is concern that large tech companies are amassing ciencies from a horizontal merger. Section 96 of the Competition Act is commonly known as the efficiencies defence. 12 they argued that the transaction would result in merger-specific efficiency gains through, on the one hand, the realization of cost savings in Limited competition: access limits? The Generalized Leontief cost formulation will generate higher merger-specific efficiencies than those generated through the Quadratic cost formulation, which allows for a comparison between mergers that are likely to generate more substantial merger efficiencies and those that are not. We include model-based, merger-specific cost efficiencies in a tractable manner and extend the standard UPP formulation to account for these efficiencies.