How much do mergers raise price?

The answer--about seven percent for a 3-to-2 merger-- comes from a natural experiment constructed from prices of rental cars at different airports.

Table 6.―Predictions from Natural Experiments Compared with Benchmarks

Number of Firms	Increase in HHI	Predicted Market-Wide Average Percentage Price Increase
		Our Prediction	Cournot Benchmark	Bertrand Benchmark
2	.500	16.1	20.0	12.0/15.6
3	.222	7.1	8.9	4.9/5.4
4	.125	4.0	5.0	2.7/2.7
5	.080	2.6	3.2	1.6/1.7

Each row in the table above shows how the estimated merger effects relate to the predicted merger effects from standard theoretical merger models (Cournot and Bertrand).  So for example, the first row denotes a 2-to-1 merger (2 firms going to 1, or merger to monopoly) which leads to a 16.1% price increase.  The second row is our aforementioned 3-to-2 merger which leads to a 7.1% price increase.

Because the estimated effects are close to those from the models, the authors interpret their results as lending "some support to reliance on model-based tools for predicting merger effects." 

DISCLAIMER:  I am one of the authors.

Before you start a war against poverty, ...

..., gather  information to help figure out how to win.

The folks at MarginalRevolution University have a nice set of short videos on poverty.  My favorites are on the value of randomized control trials. 

• Randomized Controlled Trials, Part One
• Randomized Controlled Trials, Part Two

Vertical Relationships for Google

As Google enters new areas, occupiers of that space worry about Google's referrals within that space. Over at Marketplace, coauthor Luke Froeb weighs in on the potential FTC settlement with Google:

“I can’t believe that Google would accept a remedy that would slow things down or not get consumers what they wanted,” Froeb says.

Also, if you have not heard yet, Luke has reconsidered his opposition toward government subsidies of broadcasting ;-)

Are Software patents a tax on innovation?

Another good episode from Planet Money that is making me rethink my opposition to government subsidies to NPR.  Highlights a hold-up problem with software patents:

Big companies that should be focused on inventing the next great thing are instead spending billions of dollars buying up patents and suing each other. Small companies have to worry that someone with some random patent is going to sue them and shut them down.

This is why Southern Europe is a mess

This episode from Planet Money almost made me forget my opposition to government subsidies for NPR.  It is the story of one manager's struggle to reduce absenteeism in his pasta plant in Southern Italy. 

Despite good reporting of the facts, it was amazing to me how the reporters managed to miss the elephant in the room--Italy's labor laws.  

Barbie discrimination

Magician Barbie costs $12.99 but Doctor Barbie costs $32.99. Emily Ostler does a great job explaining why over at Slate. Essentially, its indirect price discrimination. While most families value professional role models for girls, wealthier families are willing to pay more than poorer families to provide one.

Hat tip: Martin Gaynor

REPOST: consult an economist before buying a wedding dress

When Stephanie (her name has been changed to avoid embarrassment) went shopping for a wedding and bridesmaid dresses, she found valuable advice from an unusual source, Chapter 23 of her favorite economics text.  And it was not about sleeve options, figure flattery, or bustles.

She was puzzled that over half of the stores that sell wedding dresses do not permit photos, and do not have tags in the dresses that would identify the manufacturer and style type.  

These retail stores want to prevent customers from "free riding" on their fitting and display services:

I just spoke with someone who had all her bridesmaids sized in the store only to go online and buy them from a discount site. I would assume many of the brides are doing this as well.

Note that this is not just a problem for the store, but also a problem for the dress manufacturer: if stores cannot prevent free-riding, they will invest less in point-of-sales fitting services, and dress sales will suffer.  See our earlier post about golf club manufacturer PING, who faced a similar problem,

The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option.

PING wanted to set a minimum retail price (called "retail price maintenance") to address the problem.  The minimum price meant that discount retailers could not undercut full service retailers.  The antitrust laws prevented this until the Supreme Court changed the case law.

For the wedding dresses, the no-photos policy created a problem for Stephanie because she wanted to photograph her bridesmaids in each of the dresses to make sure that they choose the best dresses for the wedding. So she chose to purchase from a large retail chain, like J. Crew, BCBG, Ann Taylor, or Nordstrom’s because they had solved the free riding problem, using exclusives, where only one chain carries the style.

For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists (I am one of the 24.)

UPDATE:  Amazon just made free riding a lot easier.

Bargaining: President vs. Congress

Robert Frank (game theorist) has a column in the NY Times applying John Nash's non-strategic (Chapter 16) or axiomatic theory of bargaining to the standoff between Congress and the President. He correctly notes that it is the alternatives to agreement that determine the terms of agreement, and tells a funny story of Warner Brothers bargaining with Tony Bennett to sing the closing song in their hit comedy, "Analyze This."

With the film almost completed — and with Mr. Bennett already an integral part of the plot — the studio finally got around to approaching the crooner with an offer of $15,000 to sing “I’ve Got the World on a String” in the movie’s closing scene. But as Danny Bennett, the singer’s son and business manager, later explained, the executives made a fatal mistake by not scheduling this conversation sooner: “Hey, they shot the whole film around Tony being the end gag and they’re offering me $15,000?”

It would have cost the studio a lot more than $15,000 to rewrite the script and get someone else to do it (the alternative to reaching agreement), which gave Mr. Bennett a lot of bargaining power.  The studio eventually paid him $200,000.

The rest of Professor Frank's analysis depends on his assumption that going over the fiscal cliff would hurt Republicans more than Democrats. If he is right, then his prediction is that the Republicans will cave on the issue of tax rates, will likely come true.

But lower tax rates is the one theme that has united Republicans, at least since the Presidency of Reagan, so I am not sure they can give this up without severe damage to the party. If so, this alternative may be even worse for Republicans which would predict that they would hold fast to their insistence on closing tax loop holes (making for a "flatter" more efficient tax), rather than raising rates.

Why are rich Chinese Leaving the country?

It looks like 70%!of the rich are emigrating

When the rich pin the hope of their children’s education and retirement on other countries, it means that they have a pessimistic view regarding the improvement of their country’s education and social security. When people flee a country just to protect their assets, it’s further proof that they do not hold too much hope for the country’s rule of law.

So what should the government do to reverse this talent exodus?

If (China can)...improve public services, accelerate the process of the rule of the law and put an end to corruption as fast as possible, China will become a pleasant country to live in. And then, I’m convinced that the rush to exile by the rich will come to a halt

.

REPOST: Will resale price maintenance return?

In 2007, the Supreme Court removed the blanket prohibition against retail price agreements between manufacturers and retailers. PING (the golf club manufacturer) submitted an amicus brief in the case that detailed how difficult it is to prevent discount retailers from free riding on the custom fitting services of full service retailers. The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option. [For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists--full disclosure: I am one of the 24].

Now PING has another option, minimum resale price maintenance. The federal legality of these agreements will now be determined under a rule of reason. However, it is likely that those states more inclined towards regulation, like California and New York, will try to "repeal" the Supreme Court decision with state legislation, setting up a conflict between state and federal antitrust laws.

This just in: some manufacturers are suuing retailers who sell merchandise on eBay at a discount.