Economics 970 – Economics of Merger Regulation

Harvard University Department of Economics

Spring 2016

Class meetings: MW 10:00-11:30

Location: TBD
Course website: https://canvas.harvard.edu/courses/10982
Instructors: Aaron Fix ([email protected]) and Dov Rothman
([email protected])
Office hours: TBD

Course Description
Mergers were in vogue in 2015, particularly in the United States which became the first country in history
to see over $2 trillion in targeted M&A (mergers and acquisitions) volume in one year. Among the many
high profile acquisitions either targeted or proposed in 2015 were a $130 billion deal between Dow
Chemical and DuPont, the sale of Time Warner Cable to Charter Communications for $55 billion, and the
sale of Baker Hughes to Halliburton for $35 billion.

Merger enforcement is a core component of competition policy and consumer protection in the United
States and elsewhere. When large companies decide to merge, they must first report the proposed
transaction to competition authorities. Those authorities evaluate the likely competitive effects of the
merger, and may decide to challenge it in court. In December of 2015 alone, two high profile mergers (the
sale of Bumble Bee Seafoods to Thai Union, and the sale of General Electric’s electrical-appliance
division to Electrolux) were abandoned by the merging parties after the Department of Justice (DOJ)
indicated that it would challenge them. On December 7th the Federal Trade Commission (FTC)
announced that it would challenge the proposed merger between Office Depot and Staples. On December
8th Congress scrutinized the proposed merger between AB InBev and SABMiller, two companies that sell
over 30% of the beer consumed in the world.

This course will introduce students to the economic approaches that economists employ when evaluating
the potential competitive effects of a proposed transaction. This will include discussing approaches to
demand estimation, merger simulation, and claimed efficiencies. We will use examples of actual mergers
that have been challenged and litigated to bring these issues and approaches to life. Our own professional
experience working on actual merger investigations will also inform the course content. Whether you are
interested in competition policy or industrial organization, this class will provide an opportunity to see
how microeconomic tools and empirical methods are applied to important public policy questions.

Prerequisites
Intermediate microeconomics (Ec 1010a or Ec 1011a) and introductory statistics (STAT 100, STAT
104, or STAT 1110) are required. Econometrics or concurrent econometrics (Ec 1123 or Ec 1126) is
recommended.

Evaluation
Your final grade in this course depends on writing assignments, class attendance/participation, and Stata
problem sets.

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Written assignments: 65%
The tutorial includes a variety of written assignments to help you think, read, and write like an
economist. Unless otherwise noted, assignments are due via email by midnight on the due date
(assignments should be submitted double-spaced, in a normal font, with reasonable margins).
Reaction papers (1/2 – 1 page each): 10%. A reaction paper first summarizes the readings(s)
assigned for the next day’s class, and then poses questions for discussion motivated by this/these
paper(s). These assignments help you read actively, write concisely, and contribute to the discussion
in class. All students must submit four reaction papers throughout the semester. The 23 class
meetings will be divided among all students during our first class meeting. Due: before the class
meeting for which the readings were assigned.
Short papers (2-3 pages each): 10%. Two short essays will be assigned, based on readings and class
discussion. These papers will encourage you to relate readings to each other and synthesize different
papers’ findings and class discussions. Due: February 29 and April 4.
Quantitative exercises: 10%. Two quantitative exercises will be assigned. These exercises will
require you to apply the theoretical and empirical tools learned in class to a hypothetical merger.
Due: February 22 and March 30.
Term paper project (15-20 pages, excluding graphs and tables): 35%. A goal of tutorial is to expose
you to the process of doing economic analysis. The term paper accomplishes this task, with a couple
of intermediate deliverables to help you along the way:
Prospectus, Part I (3-5 pages): 10%. A research project’s prospectus provides a roadmap of
the analysis. This first part of your prospectus should pose and motivate the question you
wish to address, and provide a review of relevant literature. The discussion of existing
research should synthesize articles that are relevant to your term paper topic, and explain
your project’s place in, and contribution to, the literature. You should make every effort to
reference and incorporate at least some papers not discussed in class. Due: March 4.
Prospectus, Part II (3-5 pages): 10%. This second part of your prospectus introduces the
data and methodology you will use in your analysis. You should be forthcoming about
potential limitations of the data, and provide preliminary summary statistics if possible. Due:
April 4.
Final Paper (15-20 pages, excluding graphs and tables): 15%. Your final paper should
provide a detailed discussion of a question within the realm of merger analysis. Your paper
should clearly formulate a research question and address that research question using the
tools of economics. Due: May 2.

Class Attendance, Participation, and Presentation: 25%

Attendance is mandatory, as class discussion is an essential component of the sophomore tutorial
experience. You are expected to read all the starred readings before each class (other readings are
optional), and participate fully in our class discussion.
In addition, each student will give a presentation of their term paper topic, discussing the motivation,
relevant literature, and progress so far. Each presentation should last approximately 15 minutes
(exact time will depend on the number of students). Presentation to your peers is a great way to find
holes in your own work – the more thought you put into your presentation, the more useful your
peers’ feedback will be. Note: you are also expected to provide feedback to your classmates when
they present their final projects. Due: presentations will take place the last two class meeting times.

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Stata Problem Sets: 10%
Enrollment in EC 970 requires completion of a Stata mini-course which includes four Stata problem
sets. The mini-course is composed of a mandatory introductory lecture on Tuesday, February 9 from
8:30 - 10:00 AM, followed by four video module “lectures.” More details on the Stata tutorial and
our Stata tutor are available online: https://canvas.harvard.edu/courses/3694. Problem sets due:
February 19, March 4, March 25, and April 8.

Assignment Due Dates

Date Assignment
2/19 Stata Problem Set #1
2/22 Quantitative Exercise #1
2/29 Short Paper #1
3/4 Stata Problem Set #2
3/25 Stata Problem Set #3
3/30 Quantitative Exercise #2
4/4 Short Paper #2
4/8 Stata Problem Set #4
5/2 Final research paper

Course Policies
Expectations for readings: Some of the readings are very technical. You are not expected to be able
to reproduce all mathematical arguments in these readings. However, where the solution of an
algebraic model of competition is central to the author’s findings, you should read with a pen and
paper and make every effort to follow the author’s derivations. You are expected to be able to
explain in words the important question motivating the article, the approach that the author took in
answering that question, and the author’s findings.

We will respond to email as quickly as possible: Always include “Ec 970” in your email title. Our
response time may be greater than 24 hours on weekends and holidays. If you have not received a
response from us on a time-sensitive question, please send us a follow-up email.

Regular on-time attendance is mandatory: This is a discussion-heavy course. The quality of in-class
discussion depends heavily on student presence and participation.
Late assignments are strongly discouraged: You may submit one assignment one day late without
penalty. Thereafter, late assignments will be penalized by one “step” reduction per day of delay (a
“step” refers to the interval in letter grading. For example, a one-step reduction is a change from A
to A-; a two-step reduction is a change from A to B+.

Academic Honesty
Discussion of ideas and work-in-progress with others is an important and desirable part of the
research process. However, in the end, your written work must be your own, written by you, and
ultimately based on your analysis. All written assignments must use appropriate citation practices to
acknowledge your use of books, articles, websites, lectures, discussions, etc. For any questions about
Harvard’s stance on academic honesty, please consult the Academic Information section in the
Harvard College Handbook for Students. You should also read the Harvard Guide to Using Sources
for advice on citing and integrating sources and avoiding charges of plagiarism.

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Schedule and Reading List
Almost all the readings will be available to Harvard affiliates on Google Scholar. You can also
access any article in the journals mentioned below through Hollis on the Harvard library website:
http://library.harvard.edu/.

Date Topic Readings

Feb 1 Welcome; overview • Syllabus
of course
• “Mergers and Antitrust in America: Pushing the Limits,” The
Economist, December 12, 2015,
http://www.economist.com/news/business/21679810-frenzy-deals-
awakening-americas-antitrust-regulators-pushing-limits.
I. Institutional Background
Feb 3 History of the U.S. • William Kovacic and Carl Shapiro, “Antitrust Policy: A Century of
antitrust laws; Economic and Legal Thinking,” The Journal of Economic
evolution of legal and Perspectives 14, no. 1 (2000): 43-60.
economic thought http://www.jstor.org/stable/pdf/2647050.pdf.
regarding mergers;
roles of different • “The Antitrust Laws,” Federal Trade Commission Guide to
regulatory agencies Antitrust Laws, https://www.ftc.gov/tips-advice/competition-
guidance/guide-antitrust-laws/antitrust-laws.
• “The Enforcers,” Federal Trade Commission Guide to Antitrust
Laws, https://www.ftc.gov/tips-advice/competition-guidance/guide-
antitrust-laws/enforcers.
• “Mergers,” Trade Commission Guide to Antitrust Laws,
https://www.ftc.gov/tips-advice/competition-guidance/guide-
antitrust-laws/mergers.
II. Introduction to the Economics of Mergers
Feb 8 Horizontal; vertical; • U.S. Department of Justice and Federal Trade Commission,
monopoly; “Commentary on the Horizontal Merger Guidelines,” (2006),
monopsony; http://www.justice.gov/atr/file/801216/download.
unilateral effects;
coordinated effects; • U.S. Department of Justice and Federal Trade Commission,
efficiencies; remedies “Horizontal Merger Guidelines,” (2010),
https://www.ftc.gov/sites/default/files/attachments/merger-
review/100819hmg.pdf.
• George Stigler, “Monopoly and Oligopoly by Merger,” American
Economic Review 40, no. 2 (1950): 23-34,
http://www.jstor.org/stable/pdf/1818020.pdf.
Feb 10 • U.S. Department of Justice, “Antitrust Division Policy Guide to
Merger Remedies,” (2011),
http://www.justice.gov/sites/default/files/atr/legacy/2011/06/17/272
350.pdf.
• Steven Berry and Ariel Pakes, “Some Applications and Limitations
of Recent Advances in Empirical Industrial Organization,” The

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 American Economic Review 83, no. 2 (1993): 247-252.
• Luis Cabral, “Horizontal Mergers with Free Entry: Why Cost
Efficiencies May Be a Weak Defense and Asset Sales a Poor
Remedy,” International Journal of Industrial Organization 21, no.
5 (2003): 607-623.
• Johan Lagerlof and Paul Heidhues, “On the Desirability of an
Efficiency Defense in Merger Control,” International Journal of
Industrial Organization 23, no. 9-10 (2005), 803-827.
Feb 17 Cournot; Bertrand; • Gregory Werden and Luke Froeb, “Unilateral Competitive Effects
auctions; negotiations of Horizontal Mergers,” in Handbook of Antitrust Economics, ed.
Paolo Buccirossi (MIT Press), 2008.
• Robert Willig, Steven Salop, and F. M. Scherer, “Merger Analysis,
Industrial Organization Theory, and Merger Guidelines,” Brookings
Papers on Economic Activity, Microeconomics (1991): 281-332,
http://www.jstor.org/stable/pdf/2534795.pdf
Feb 22 • Gregory Werden and Luke Froeb, “Unilateral Competitive Effects
of Horizontal Mergers,” in Handbook of Antitrust Economics, ed.
Paolo Buccirossi (MIT Press), 2008.
• Robert Willig, Steven Salop, and F. M. Scherer, “Merger Analysis,
Industrial Organization Theory, and Merger Guidelines,” Brookings
Papers on Economic Activity, Microeconomics (1991): 281-332.
http://www.jstor.org/stable/pdf/2534795.pdf
III. Economic Approaches to Merger Evaluation
Feb 24 Structure-Conduct- • U.S. Department of Justice and Federal Trade Commission,
Performance “Horizontal Merger Guidelines,” (1982),
http://www.justice.gov/sites/default/files/atr/legacy/2007/07/11/112
48.pdf.
• Joe Bain, “The Impact on Industrial Organization,” The American
Economic Review 54, no. 3 (1964): 28-32.
• Leonard Weiss, “The Structure-Conduct-Performance Paradigm
and Antitrust,” University of Pennsylvania Law Review 127 (1979):
1104-1140.
• George Stigler, “A Theory of Oligopoly,” Journal of Political
Economy 72, no. 1 (1964): 44-61,
http://www.jstor.org/stable/pdf/1828791.pdf .
Feb 29 Market definition • Jonathan Baker, “Market Definition: An Analytical Overview,”
Antitrust Law Journal, 74, no. 1 (2007): 129-173
• Ira Horowitz, “Market Definition in Antitrust Analysis: A
Regression-Based Approached,” Southern Economic Journal 48,
no. 1 (1981): 1-16, http://www.jstor.org/stable/pdf/1058591.pdf.
Mar 2 • David Scheffman and Pablo Spiller (1987), “Geographic Market
Definition under the U.S. Department of Justice Merger
Guidelines,” Journal of Law & Economics 30, no. 1 (1987): 123-

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 147, http://www.jstor.org/stable/pdf/725394.pdf.
• Daniel Rubinfeld, “Market Definition with Differentiated Products:
The Post/Nabisco Cereal Merger,” Antitrust Law Journal 68 (2000):
163-186.
Mar 7 Reduced Form • Richard Schmalensee, “Inter-Industry Studies of Structure and
Analysis Performance,” in Handbook of Industrial Organization, ed. Richard
Schmalensee and Robert Willig (MIT Press), 1989.
• Keith Cowling and Michael Waterson, “Price-Cost Margins and
Market Structure,” Economica 43, no. 171 (1976): 267-274,
http://www.jstor.org/stable/pdf/2553125.pdf.
Mar 9 Upward Pricing • Joseph Farrell and Carl Shapiro, “Antitrust Evaluation of Horizontal
Pressure Mergers: An Economic Alternative to Market Definition,” BE
Journal of Theoretical Economics 10, no. 1 (2010): Article 9,
http://faculty.haas.berkeley.edu/Shapiro/alternative.pdf.
Mar 21 • Serge Moresi, “The Use of Upward Price Pressure Indices in
Merger Analysis,” The Antitrust Source, February 2010: 1-12,
http://www.americanbar.org/content/dam/aba/publishing/antitrust_s
ource/Feb10_Moresi2_25f.authcheckdam.pdf.
Mar 21 Full Merger • Roy Epstein and Daniel Rubinfeld, “Merger Simulation: A
Simulation Simplified Approach with New Applications,” Antitrust Law
Journal 69, (2001): 883-920,
http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=236
2&context=facpubs.
• Gregory Werden and Luke Froeb, “The Effects of Mergers in
Differentiated Products Industries: Logit Demand and Merger
Mar 23
Policy,” Journal of Law, Economics, & Organization 10, no. 2
(1994): 407-426.
IV. Analysis of Horizontal Mergers
Mar 28 Railroads: Staggers • Ernst Berndt, et al., “Cost Effects of Mergers and Deregulation in
Act and end of the U.S. Rail Industry,” Journal of Productivity Analysis 4 (1993):
regulation, Norfolk 127-144.
Southern (1982), CSX
Transportation • John Kwoka and Lawrence White, “Manifest Destiny? The Union
(1986) Union Pacific Pacific-Southern Pacific Merger,” New York University Center for
and Southern Pacific Law and Business Working Paper #CLB-98-012, 1997.
(1996) • Clifford Winston, et al., “Long-Run Effects of Mergers: The Case
of U.S. Western Railroads,” Journal of Law and Economics 54, no.
2 (2011): 275-304.
Mar 30 Airlines: 1986-1987 • Craig Peters, “Evaluating the Performance of Merger Simulation:
wave, recent (Delta- Evidence from the U.S. Airline Industry,” Journal of Law and
Northwest, United- Economics 49, no. 2 (2006): 627-649.
Continental,
Southwest-Airtran), • Severin Borenstein, “Airline Mergers, Airport Dominance, and
Market Power,” American Economic Review 80, no. 2 (1990): 400-
404.

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 • Severin Borenstein, “Hubs and High Fares: Dominance and Market
Power in the U.S. Airline Industry,” RAND Journal of Economics
20, no. 3 (1989).
Apr 4 Video and Cable: • Tasneem Chipty and Christopher Snyder, “The Role of Firm Size in
AT&T-DirecTV, Bilateral Bargaining,” Review of Economics and Statistics 81, no. 2
Comcast-Time (1999): 326-340.
Warner, Charter-
Time Warner • AT&T-DirecTV public interest statement.
https://www.fcc.gov/proceedings-actions/mergers-transactions/att-
and-directv-mb-docket-14-90.
Apr 6 Whole Foods-Wild • Michaela Draganska, Michael Mazzeo and Katja Seim, “Addressing
Oats, Oracle v. Endogenous Product Choice in an Empirical Analysis of Merger
Peoplesoft (2004) Effects,” mimeo,
http://www.kellogg.northwestern.edu/faculty/mazzeo/htm/dms_mer
gers.pdf
• Oliver Budzinski and Arndt Christiansen, “The Oracle/Peoplesoft
Case: Unilateral Effects, Simulation Models, and Econometrics in
Contemporary Merger Control,” Marburger Volkswirtschaftliche
Beitrage 2007, no. 2,
https://www.econstor.eu/dspace/bitstream/10419/29860/1/5255528
12.PDF.
• American Antitrust Institute, “Whole Foods Proposed Acquisition
of Wild Oats: The FTC Has Earned its Day in Court,” July 7, 2007,
http://www.antitrustinstitute.org/files/aai-
%20Whole%20Foods,%20Wild%20Oats%20white%20paper%207-
7-7_070720070842.pdf

Apr 11 Staples-Office Depot • Jonathan Baker, “Econometric Analysis in FTC v. Staples,” Journal
(1997 and 2015) of Public Policy & Marketing 18, no. 1 (1999): 11-21.
http://www.jstor.org/stable/pdf/30000504.pdf
• Frederick Warren-Boulton and Serdar Dalkir, “Staples and Office
Depot: An Event-Probability Case Study,” International Journal of
Industrial Organization 19 (2001): 460-481.
• Luis Cabral, “Horizontal Mergers with Free-Entry: Why Cost
Efficiencies May be a Weak Defense and Asses Sales a Poor
Remedy,” International Journal of Industrial Organization 21, no.
5 (2003): 607-623.
V. Analysis of Vertical Mergers
Apr 13 Brown Shoe (1962), • Michael Salinger, “Vertical Mergers and Market Foreclosure,”
Ford Motor Company Quarterly Journal of Economics 103, no. 2 (1988): 345-356.
(1972)
• John McGee and Lowell Bassett, “Vertical Integration Revisited,”
Journal of Law and Economics 19, no. 1 (1976): 17-38,
http://www.jstor.org/stable/pdf/725311.pdf.
• William Comanor, “Vertical Mergers, Market Powers, and the
Antitrust Laws,” The American Economic Review 57, no. 22

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 (1967): 254-265, http://www.jstor.org/stable/pdf/1821626.pdf.
Apr 18 Comcast and NBC • William Rogerson, “Vertical Mergers in the Video Programming
and Distribution Industry,” (unpublished manuscript, 2012).
http://faculty.wcas.northwestern.edu/~wpr603/Comcast-NBCU.pdf
• Tasneem Chipty, “Vertical Integration, Market Foreclosure, and
Consumer Welfare in the Cable Television Industry,” American
Economic Review 9, no.1 (2001): 428-453.

Apr 20
Student Presentations
Apr 25