Why vertical merger challenges are hard to win

In 2016, the Antitrust Division of the US Dept of Justice (DOJ) challenged the vertical merger of Time Warner (movies) and ATT which owned DirectTV, a cable provider.  It was the first litigated vertical merger case in 40 years.

The DOJ used a "foreclosure" theory, arguing that the vertically integrated firm (movies + distribution) would give ATT the incentive and ability, via increased bargaining leverage, to raise the price of Time Warner movies to rival distributors, like Comcast. As a result, Comcast would raise its subscription price and some Comcast customer would shift from Comcast to ATT's DirectTV. 

The government argued that these anticompetitive costs outweighed the well-documented procompetitive benefits of vertical integration (Cooper et al., 2005), namely the better incentive alignment of Time Warner and ATT, e.g., that post-merger markups on TimeWarner movies shown by ATT, would fall. 

The Antitrust Division lost its case in court because they couldn't prove all the assertions of the theory, that: (i) ATT would raise the price of Time Warner content to rival distributors, (ii) Comcast would raise its subscription price, (iii) that Comcast customers would switch to ATT, and (iv) these anticompetitive costs outweighed the merger's procompetive benefits. 

After DOJ lost the case, the merger was consummated.  But ATT just sold its remaining stake in DirecTV, undoing the merger the DOJ fought so hard to challenge. 

The expert witness for the parties, Dennis Carlton et. al. (2022), weighed in on the failure of the merger:

That the previous integration did not work out as AT&T hoped represents a firm's decision regarding what risks to take in the market, not an indication that the government's alleged harms came to pass. Indeed, the disintegration is evidence that the alleged harms, such as supracompetitive pricing or other exercises of market power, did not occur. The reasoning is straightforward: if the mergers had created significant market power as the government alleged, AT&T would have been incentivized to retain ownership, which would make the subsequent spinoffs less likely (see, for example, Hazlett 2021).

ChatGPT on why Vertical merger cases are hard to win:

• Pro-competitive Justifications: Companies often argue that vertical mergers can create efficiencies, such as reducing costs, improving supply chain coordination, and enhancing product quality. These claims can be compelling in court, making it harder for the government to prove that the merger would harm competition. 
• Better incentive alignment between ATT and TimeWarner, e.g., on price, called "the elimination of double marginalization."
•  Lack of Established Precedent: There is less legal precedent and fewer clear guidelines regarding vertical mergers compared to horizontal mergers (where firms in the same market merge). Courts and regulators may have less confidence in assessing potential competitive harms in vertical mergers. 
• Market Definition Difficulties: Defining the relevant markets can be complex in vertical mergers. Regulators must consider not only the direct competitors in the market but also how the merger affects suppliers and distributors, which often involves nuanced economic analysis. 
• Is the market defined at the upstream content level or the downstream distribution level or at both?
• Indirect Effects: The potential anti-competitive effects of vertical mergers are often indirect, making it harder to demonstrate harm. For instance, a merger may not lead directly to higher prices but might reduce competition over time or create barriers for new entrants, which can be more difficult to quantify.
• Dynamic Nature of Markets: Many industries are dynamic, and the competitive landscape can change rapidly. Regulators and courts must consider not only the current state of competition but also future market developments, which adds uncertainty. 
• The advent of streaming. 
• Economic Theories: There are differing economic theories about how vertical mergers can affect competition.  Some economists argue that these mergers are typically beneficial, while others highlight potential risks. This divergence in expert opinion can complicate litigation. These factors contribute to the difficulty in successfully challenging vertical mergers in legal and regulatory contexts.
•  For example, see Boshoff et al (2021), who show that how and over what parties bargain, namely one- or two-part prices, determine whether a merger will raise price. 

REFERENCES

• Boshoff, Willem H. and Froeb, Luke M. and Minnie, Roan and Tschantz, Steven T., Bargaining Competition and Vertical Mergers (March 31, 2021). SSRN
• Dennis W. Carlton , Georgi V. Giozov, Mark A. Israel and Allan L. Shampine, 'A Retrospective Analysis of the AT&T/Time Warner Merger' (2022) 65 JLE S461
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. SSRN 
• i) Comment by John Comanor, Frederick Scherer, and Robert Steiner 
• ii) Reply by John Comanor, Frederick Scherer, and Robert Steiner 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, A Comparative Study of United States and European Union Approaches to Vertical Policy, George Mason Law Review, 13:2 (Winter, 2005) 289-308. SSRN 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Restraints and Antitrust Policy: What about the Evidence? Competition Policy International, 1:2 (Autumn, 2005) 45-64. SSRN 
• i) Comment by Frederick Scherer (2005) 
• ii) Comment by Ralph Winter (2005) 
• iii) Reply by authors (2006) 
• iv) Rejoinder by Ralph Winter (2006)
• Thomas Hazlett, “Antitrust Activists Want to Go Full Throttle. Here's a Lesson. They Should Consider First.” Barron's, July 29, 2021,.

 

Who Works From Home?

Work From Home (WFH) opportunities were dramatically broadened during, and after, the COVID-19 pandemic, but they existed pre-pandemic. Emanuel and Harrington (and ungated here) take advantage of when WFH went to voluntary to mandatory due to the pandemic to investigate which call center workers had selected WFH. Workers switching to WFH due to office closures during the pandemic were not as productive as before but those switching to remote work pre-pandemic were even less productive. The authors infer that those choosing WFH were adversely selected. Not only did they complete fewer calls, but they had higher customer hold times and more customer call-backs indicating that call quality suffered.

Interestingly, the voluntary nature of both pre- and post-pandemic WFH choices may limit its appeal.

Our model suggests that call-center firms were trapped in a prisoner’s dilemma with a low provision of remote work before the pandemic. All call-center firms would have been better off offering remote work jobs at similar wages as on-site ones — since the costs of remote work’s negative treatment effect would be offset by savings in office real-estate costs. Yet an individual firm hesitates to offer remote and on-site jobs at similar wages, due to concerns about attracting less productive workers into remote jobs.

Finally, the reduced worker productivity could be worth it due to offsetting reduced real estate costs. However,once you factor in the adverse selection, it may no longer make economic sense.

Fabulous essay on the history of trying to regulate technology

Grumpy Economist via MarginalRevolution: AI, Society, and Democracy

Highly recommended, but loved the spread of "misinformation" by Gutenberg

...Gutenberg’s moveable type arguably led to the Protestant Reformation. Luther was the social influencer of his age, writing pamphlet after pamphlet of what the Catholic Church certainly regarded as “misinformation.” The church “regulated” with widespread censorship where it could. Would more censorship, or “regulating” the development of printing, have been good? The political and social consequences of the Reformation were profound, not least a century of disastrous warfare. But nobody at the time saw what they would be. They were more concerned with salvation. And moveable type also made the scientific journal and the Enlightenment possible, spreading a lot of good information along with “misinformation.” The printing press arguably was a crucial ingredient for democracy, by allowing the spread of those then-heretical ideas. The founding generation of the U.S. had libraries full of classical and enlightenment books that they would not have had without printing.

What would be the effects of VP Harris' housing plan?

Here is the plan:

•  expand rental assistance for veterans and other low-income renters, 
•  increase housing supply for people experiencing homelessness, 
•  enforce fair housing laws, 
•  hold corporate landlords accountable [for charging high prices?]. 
•  provide up to $25,000 in down payment assistance for first-time homebuyers 
•  First-generation homeowners – those whose parents did not own homes – would receive more generous assistance.

WSJ Analysis:

• The law of supply and demand dictates that an increase in demand without a commensurate increase in supply will result in higher prices.
• As of August, the overall supply of homes for sale was 3.7 months’ worth. For houses in lower price tiers, that number drops to 2.4 months. Sellers’ markets create upward price pressure on home prices, which grows more powerful when demand is further stimulated. Ms. Harris’s policy would do just that, boosting demand by giving buyers more spending money.

My take is that the real barrier to increasing housing supply is not money but rather the restrictive zoning (see Nice Summary of the Affordable Housing Crisis) but, politically, restrictive zoning is very popular.  

The WSJ is right to point out that increasing demand will exacerbate the very problem VP Harris says she wants to address.  She can begin by listening to her economists, if she has any.  

Removing rent control ==> more supply ==> lower rents!

WSJ:

The Argentine capital is undergoing a rental-market boom. Landlords are rushing to put their properties back on the market, with Buenos Aires rental supplies increasing by over 170%. While rents are still up in nominal terms, many renters are getting better deals than ever, with a 40% decline in the real price of rental properties when adjusted for inflation

Milei’s move to undo rent-control regulations has resulted in one of the clearest-cut victories for what he calls “economic shock therapy.” He is methodically taking apart a system of price controls, closing government agencies and lifting trade restrictions built up over eight decades of socialist and military rule in an effort that has upended the lives of many Argentines.

Nepotism makes it hard for China's middle class to get ahead

 Economist:

...people in China once accepted glaring inequality, remaining optimistic that with hard work and ability they could still succeed. But now they are more likely to say that connections and growing up in a rich family are the keys to success, ...

IRONY: the "peoples' republic" has less income/social/class mobility than the US.

Why does China win at individual but not team sports?

Spectator:

...China uses an intensive and disciplined bureaucratic system modelled on the Soviet Union, scouting for children at an early age and plucking them out for full-time training at elite government-run sports schools. It’s a method which relies on rigid routine and repetition, meaning it excels in individual, not team-based, sport. In essence it is a machine with the single purpose of turning out other machines to win medals.

But, 

Football doesn’t work like that. As a team sport, it requires creativity and innovation; authoritarianism seems almost guaranteed to destroy it. Football is an open and free-flowing game of countless permutations, relying on the brain as much as, if not more than, physique.  

BOTTOM LINE:  interesting link between a top-down, authoritarian regime and creativity/innovation.  

Arbitraging Luxury Brands

The WSJ reports that China is the world’s most expensive major market for the purchase of luxury goods, commanding the highest markups.

When price differentials become really large, not only will arbitrageurs enter, but a whole arbitrageur industry will emerge.

China’s daigou trade, which roughly translates as “buying on behalf of,” is an $81 billion business that specializes in parallel imports of everything from European luxury goods to Korean cosmetics, and even high-tech Japanese toilet seats. Regional price and tax differences make it cheaper to buy some goods outside China, which creates an arbitrage opportunity.

This is probably not sustainable. While stock prices are skyrocketing elsewhere, "Europe's luxury stocks are down 24% on average this year." Unless this arbitrage leakage can be stemmed, cross-country price differences will likely converge.

Betting Markets show President Trump's probability of winning fell by 3% after debate

Are heavy trucks a Nash Equilibrium?

Economist: America's love affair with big cars is killing them.

In America the average new car weighs more than 4,400lb (2,000kg) compared with 3,300lb in the European Union and 2,600lb in Japan. In 2023 vehicles weighing more than 5,000lb accounted for a whopping 31% of new cars, up from 22% five years earlier. As a London cyclist I find these numbers staggering—and scary. Our analysis shows that—aside from posing a risk to pedestrians and cyclists such as myself—the inflated weight is becoming a growing risk to the drivers of other, smaller cars. The fatality rate is roughly seven times higher when colliding with a heavy pickup truck than with a compact car.

Conservation of momentum also suggests that if you are driving a heavy pickup truck, your fatality rate is much lower. By analogy to a prisoners' dilemma, it appears that the equilibrium is to drive as heavy a vehicle as likely. 

 BOTTOM LINE: if you drive a heavy truck, I do better by driving a heavy truck, and vice-versa. In other words, we are in a Nash Equilibrium.

UPDATE: Why American Cars are so Big

Today the law mandates 40mpg. To increase efficiency, manufacturers had to use more complex engines, which made their cars costlier. To ease the burden on small businesses that relied on big vehicles, the government exempted “light trucks”, any vehicle that could be used off road and weighed less than 8,500lb (3855kg). That meant SUVs—typically among the biggest and least-efficient cars—were swept into the category and avoided the new fuel standards.

Because making light trucks held to lower environmental standards was more profitable than building small clean cars, automakers marketed big models, including SUVs, enthusiastically. They portrayed them as quintessentially American, embodying freedom, strength and adventurousness. By 2002 light trucks made up a bigger share of light-duty vehicle sales than cars.

Rent control, really?

 WSJ:  

By limiting supply, rent control leads to "housing shortages, underinvestment, tenant discrimination or falling property values." The most recent evidence comes from Argentina.

Since the law’s repeal, supply has reportedly rebounded and prices have fallen by double digits.

As Swedish economist Assar Lindbeck observed, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” No matter how many times we try, we can’t outsmart economic first principles.

BUT,

Rent control is in vogue among Democrats. President Biden in July proposed capping landlords’ annual increases at 5%, and Kamala Harris vowed to “take on corporate landlords and cap unfair rent increases.”

Marin residents say they care about affordable housing but don't act like it

Housing prices are prohibitively expensive because we enact strict zoning that prevents other people from building more of it. These restrictions on new supply drive up the price of housing. No where is this more evident than in Tiburon, just north of San Francisco, with its own temperate micro climate and beautiful views of all three bridges across the Bay. When owners tried to develop a property to create 43 single family homes, the project was stalled for decades by lawsuits filed by neighbors.  Recently the county purchased the property under the pretext that it would "preserve open space."

Jenny Silva of Sausalito, a volunteer pro-housing watchdog who's been monitoring the creation of housing elements in Marin, said ... "there’s a housing crisis, not an open-space crisis." She noted that 31% of respondents to the county’s 2023 Community Survey said housing should be the No. 1 priority, ... Silva called it “frustrating” that Marin’s latest budget then dedicated more than twice as much to open-space expenditures than to its affordable-housing trust: $11.23 million versus $5 million.

BOTTOM LINE:  Marin residents say they care about housing but don't act like it. Instead, they have "revealed a preference" for open space which increases their own property values. But they are not the only ones (see previous blog posts on housing).  

NFL Teams as Franchisees

The NFL had been the only large US sports league to prohibit private equity firms from owning teams. Beaton and Gottfried at the WSJ report that this prohibition is slowly being removed.

The National Football League, the most lucrative league around, has long barred firms from owning a piece of its teams. Its policy was simple: team owners should be actual people, not corporate entities. That meant eschewing the free-flowing cash infusions from institutions that now line the pockets of owners in the National Basketball Association, the English Premier League and Major League Baseball, among others.

Now, after years of discussions, that’s finally changing.

At a meeting Tuesday afternoon, NFL owners passed a new policy that will allow them to sell up to 10% of their teams to a select group of preapproved firms. It removes the last major hurdle to the flood of private capital sweeping through the sports landscape, which now has firms circling the college game and others amassing portfolios of pro franchises.  

Why such severe restrictions on private equity ownership? Possibly, this is a way to keep franchisees interested in maximizing league profitability and not just club profitability. It has long been suspected that club owners are willing to sacrifice some of their profits to generate more wins and, perhaps, a championship. (An exception that still chaffs me is the McCaskey's dismantling of the 1985 Bears immediately following their Superbowl victory, but I digress.) This seeming "over-investment" in team quality improves quality of play throughout the league enhancing fan engagement across the board and so makes all the teams more profitable. It is feared that private equity firms would be too interested in the club's bottom line to keep up these investments.

 

America innovates while Europe regulates

NYTimes reluctantly admits that "overregulation and weak governance in Europe may undermine the continent’s future."

Europe softened the harshest edges of capitalism, provided safety nets and in important ways has exceeded the United States in well-being. European infants are less likely to die than those in America, childbirth is less dangerous in Europe than in the United States, and Europeans live longer.

But

...Europe is struggling today. The U.S. economy last year grew six times as fast as in the European Union, 2.5 percent to 0.4 percent.

[NOTE: Using rule of 72: US income will double in 29 years; EU income will double in 180.]

...The United States abounds with tech successes like Apple, Google and Meta, but there isn’t a single European company on one recent list of the world’s top 10 tech companies by market capitalization.

Related: Why are there so few unicorns in the EU?

Rents fall ==> new supply falling ==> rents will increase

 WSJ:

Apartment Construction Is Slowing, and Investors Are Betting on Higher Rents 

For more than a year, apartment renters in many cities have been getting some relief from price increases because of the enormous amount of new supply being delivered by developers.

Now, big investors are betting that downward pressure on rents from new supply is coming to an end and the market is shifting back in landlords’ favor. At the heart of their reasoning: the critical metric of new construction starts, which began slowing last year and now are falling even further.

Apartment developers are stepping on the brakes, especially compared with the building frenzy in the early years of the pandemic. Across the country some rental-construction projects are getting stalled, as developers struggle to obtain the financing needed to complete them. Other investors are pivoting to more lucrative alternatives.

...

Most apartment developers today build high-end units for middle- and upper-income households, which have little impact on the affordable-housing shortage. Lower-cost rentals—the kind most in need by low- and moderate-income households—remain scarce and are rarely built without a government subsidy.

Social Security and Medicare are screwing our grandkids

NYTimes:

Under almost every president since 1980, 80 percent of the real growth in domestic spending has gone to Social Security and ... Medicare.

For Example: 

...A 65-year-old couple with average life expectancy and average household income (about $90,000 in 2023) who retires in 2025 would require $1.34 million to finance their benefits, even though they had paid only $720,000.

Younger workers are paying taxes to support generous benefits to retired ones.

So ..., younger generations are more likely to fall into lower-income classes than their parents or grandparents. Nearly a half century ago, it was the reverse. ...

As a result, "...older folks parading in golf carts [while] twentysomethings [are] paying onerous student loans and living with their parents This is F***ed up. 

[Note: this blog limits profanity to this topic.]