David R. Henderson  

Was Bork Right About Mergers?

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In a just-published NBER study, "Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers," NBER Working Paper 19939, economists Orley C. Ashenfelter of Princeton, Daniel Hosken of the Federal Trade Commission, and Matthew C. Weinberg of Drexel University write:

In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork's views on merger policy from The Antitrust Paradox. Many of Bork's recommendations have been implemented over time and have improved merger analysis. Bork's proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.

Actually, though, they don't show that, by an efficiency measure, Bork's proposed policy was too permissive.

Let me explain.

Bork thought that allowing mergers even in allegedly oligopolistic markets would not harm consumer well-being. Ashenfelter et al, survey "49 distinct studies examining mergers taking place in 21 industries published over the last 30 years." Here's the paragraph that comes closest to summarizing their findings:

The empirical evidence that mergers can cause economically significant increases in price is overwhelming. Of the 49 studies surveyed, 36 find evidence of merger induced price increases. All of the airline merger studies find evidence of price increases, although the magnitude of the price increases appears to be more modest following recent mergers (2-6%) when compared to the mergers that took place in the 1980s. Similarly, most of the banking (6 of 7), hospital (5 of 7), and "other industry" (13 of 18) studies find evidence that mergers have resulted in price increases.

So, if the evidence is good, this is evidence against Bork's view. (By the way, they do credit Bork for a more liberal policy toward mergers. The three authors, like Bork and like most economists in industrial organization who studied the government's merger policy before economists, lawyers, and judges changed it in the 1980s, think that merger policy before the 1980s was way too restrictive, the 1960s Von's Grocery case being one of the most egregious.)

Why, then, do I say that they do not show that merger policy was too permissive? Because Ashenfelter et al, like Bork, abjure Oliver Williamson's insight in his classic 1968 article, "Economies as an Antitrust Defense." Here's what I wrote about that insight in my Wall Street Journal article, "A Nobel for Practical Economics," after Williamson and the late Elinor Ostrom won the Nobel Prize in economics:

Although the Nobel committee did not highlight Mr. Williamson's classic 1968 article, "Economies as an Antitrust Defense," I will. Mr. Williamson showed that horizontal mergers of companies in the same industry--even those that increase market power and even those where the increase in market power leads to a higher price--can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price.

Bork accepted Williamson's insight, as, apparently, do Ashenfelter et al. So they don't abjure it in the sense of repudiating it. But they do ignore it. So if we judge mergers using an efficiency standard, that is, a standard that takes account of increased producer surplus as well as reduced consumer surplus, we can't say, even if the all the evidence they cite on price increases following mergers is solid, that Bork's proposed merger policy was too permissive.

HT to Mark Thoma.


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COMMENTS (12 to date)
Kevin Erdmann writes:

There is an old joke, "How do you become a millionaire in the airline business? A: You start out as a billionaire."

Considering this, I am always bemused when bankrupt or nearly-bankrupt airlines attempt to merge and the main reason for opposition is that it might increase producer surplus.

The anti-producer bias is unfortunately universal.

David R. Henderson writes:

@Kevin Erdmann,
Well said. I recall that Bob Crandall, not the Brookings economist but the former CEO of American Airlines, said that he never invested in airline stock because he didn’t think it was a good investment.

MikeP writes:
The empirical evidence that mergers can cause economically significant increases in price is overwhelming.

This strikes me as an insane standard to determine whether a merger was good for the economy or not.

Horizontal mergers happen precisely because there are too many players in the market. Of course prices will rise. If they didn't merge or otherwise collude, then the players would die off as unprofitable, one by one, losing all that organizational capital in the process. Whatever arises from the ashes would look more like the would-be merged entity than the prior entities, and it would surely charge those higher prices. Be thankful for the foresight of the merger that saves all the pain and costs of that process!

Insight writes:

MikeP good argument but not quite far enough. You have to show that the merged entity is more efficient than the one that would otherwise rise from the ashes. Given the obvious survival pressure toward at least some forms of efficiency, that is not a given.

Andrew_FL writes:

If the price increases from recent mergers are less than those in earlier mergers, how is this evidence the policy is too permissive?

Canadian courts expressly use a total surplus standard in horizontal merger cases, while American courts focus on consumer prices. Reason #7,129,880 you should all emigrate to the great white north.

mike davis writes:

The real question that needs answering, of course, is what. would have happened to prices had the merger not happened. None of these studies do that. The airline studies, for example, don't tell us what would have happened had a debt-ridden, bankrupt or near bankrupt airline not merged. The banking studies are similarly flawed since the product mix bought by customers of the merged bank is different that what they had before the merger. Sure, some commercial customers may pay a few extra basis points on a line of credit, but is the LOC the same as it was before? And what kind of deal are they getting on, say, treasury services?

Here's an even better counterfactual: had no economist even written a word on merger policy, would merger policy be any different than it is today?

a carraro writes:

I don't really understand the point to be honest. Are you arguing that monopsony is better than monopoly? That makes no sense to me. I would think that a merger which doesn't increase prices but increases profit through monopsony is still bad for society... It's still an unfair bargaining advantage... Maybe you are arguing that unions are extracting too much from producers and you need monopsony on the other side to achieve more balance, but frankly it seems a pretty ridiculous positions given the evolution of wages in the recent past. I grant you that there are some specific examples (London underground workers come to mind), but in general I don't see it...

David R. Henderson writes:

@a carraro,
I’m not saying anything about monopsony. The Williamson argument, as I noted, is that cost savings from a merger, all else equal, increase producer surplus. This needs to be compared to the loss in consumer surplus from a price increase after the merger. Ashenfelter et al do not do that. Williamson shows that the cost savings do not have to be large in order to offset the loss in consumer surplus.

D K writes:

So is the argument that in the absence of these mergers, prices would rise higher than otherwise? And how do we measure this, or the additional efficiencies being created?

David R. Henderson writes:

@D K,
So is the argument that in the absence of these mergers, prices would rise higher than otherwise?
No. That’s not my argument or Ashenfelter et al’s argument. I’m taking at face value their evidence that the majority of mergers increased prices.

Sebastian H writes:

This assumes that profits to the owner are just as good for the economy as savings to the consumer. That depends on what happens to the profits. It used to be assumed that they would be reinvested or the rich would trickle it down. Both assumptions seem potentially dubious given recent experience, especially at a consumer dollar=producer dollar level.

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