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ECON 308 (6)
Chapter

308 Williamson Tradeoffs.docx

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Department
Economics (Arts)
Course Code
ECON 308
Professor
Christopher Green

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Williamson: Economies as an Antitrust Defense- the Welfare Tradeoffs - In the occasional case where efficiency and market power consequences exist, can economies be dismissed on the grounds that market power effects invariably dominate? If they can’t, then a rational treatment of the merger question requires that an effort be made to establish the allocative implications of the scale economy and market power effects associated with the merger - The Court took the position in Brown Shoe that not only were efficiencies no defense, but a showing that a merger resulted in efficiencies could be used affirmatively in attacking the merger since small rivals could be disadvantaged - In a concurring opinion to the Clorox (Procter and Gamble case) decision, Justice Harlan provides the first hint that efficiencies may deserve greater standing - It is clear that economies would be an acceptable antitrust defense for only a restricted set of structural conditions. - To disallow trade-offs altogether merely reflects a particularly severe a priori judgement as to net benefits - Inasmuch as they rank efficiency and progressiveness above reductions in market power, an absolute defense would appear to obtain when, for any structural condition present or prospective, it could be shown either that economies haven’t yet been exhausted or that discreteness conditions would not efficiently permit a separation. - Trade-off analysis is designed to cope with these kinds of issues - See equation 3, p 185: if this inequality holds, the net allocative effect of the merger is positive. If it equals 0, it’s neutral. - It is evident that a relatively modest cost reduction is usually sufficient to offset a relatively large price increase even if the elasticity of demand is as high as 2 - If a reduction in average costs is 5-10 percent due to a merger, the merger must give rise to price increases in excess of 20 percent if elasticity is 2 or in excess of 40 percent if elasticity is 0.5 for the net allocative effects to be negative - A merger which yields non-trivial real economies must produce substantial market power and result in relatively large price increases for the net allocative effects to be negative. - Partial equilibrium analysis is defective in that it isolates one sector from the rest of the economy and so it fails to examine interactions between sectors. Certain economic effects may therefore go undetected, and sometimes behaviour which appears to yield net economic benefits in a partial equilibrium analysis will result in net losses when investigated in a general equilibrium context - Whereas partial equilibrium analysis indicates that an increase in the monopoly price in any one sector invariably yields a loss, viewed more generally such an isolated price increase may actually lead to a desireable reallocation of resources. - Other factors that should be taken into account are: 1. Inference and Enforcement Expense - The relevant effects are those that take the form of real rather than pecuniary economies - If economies are to be invoked as a defense, the law might well require clear and convincing evidence that the particular merger would produce substantial economies that could not be achieved in other ways - Economies that have a higher speculative aspect should be required to reach a higher minimum level than those which are more objectively specified. Thus if economies in both production and distribution expenses are claimed, and if the former are better specified than the latter, distribution economies would have to reach a higher threshold than would production economies to be admissible 2. Timing - Significant economies will usually be realized eventually through internal expansion if not be merger. - Although a merger may have net positive effects immediately (cost savings exceed the deadweight loss), when a
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