demand analysis 1 sogang mba 2007. a practitioner's guide to antitrust: market power merger...
Post on 02-Jan-2016
215 Views
Preview:
TRANSCRIPT
DEMAND ANALYSIS
1Sogang MBA 2007
A PRACTITIONER'S GUIDE TO ANTITRUST:
Market Power
Merger Analysis
Demand Estimation
Patents
2Sogang MBA 2007
The Proposed Merger of Coca-Cola And Dr Pepper (1986)
Sogang MBA 2007
3
The Legal and Procedural Background
Section 7 of the Clayton Act : "where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly.”
The 1976 Hart-Scott-Rodino Amendments to the Clayton Act require that two agencies(DOJ and FTC) be given advance notice of any merger or acquisition that is above a specified size.
The Legal and Procedural Background
Sogang MBA 2007
4
PepsiCo announced its intentions to purchase the Seven-Up Company, which was a subsidiary of the Philip Morris Corporation.
Then the Coca-Cola Company announced its intention to purchase the Dr Pepper Company and merge the operations of the two companies.
These two mergers would have had the consolidation of the first and fourth and the second and third largest sellers of concentrate soft drinks in the US.
Judging Market Concentration
Sogang MBA 2007
5
Market Concentration is a function of # of firms & their respective market shares.
Two popular methods:1. N-Firm Concentration Ratios2. Herfindahl-Hirschman Index (HHI) (Used by FTC for Anti-trust Case)
Herfindahl-Hirschman Index (HHI)
Sogang MBA 2007
6
Calculation: Squaring the market share of each firm in
the market and then summing up. HHI= (S1)2+(S2)2+………..+(SM)2
Previously, Case 1:100*100=10,000 Case 2: (25)2+(25)2+(25)2+(25)2=2,500 Case 3: (40)2+(30)2+(20)2+(10)2=3,000
Spectrum of HHI
Below 1,000 Unconcentrated Market (Unlikely to have adverse effects-No further analysis)
Within 1,000 and 1,800 Moderately Concentrated
Above 1,800 Highly Concentrated (Violate Anti-trust regulation)
Any transaction that HHI by more than 100 points in concentrated markets presumably raise anti-trust concerns.
7
Sogang MBA 2007
Guideline Chart
Sogang MBA 20078
Unconcentrated: < 1000
Moderately Concentrated: 1000 to 1800
Highly Concentrated: > 1800
< 50 50 to 100 > 100
No challenge No challenge No challenge
No challenge No challenge High scrutiny
No challenge High scrutinyPresumed unlawful
Increase in Post-Merger Concentration
Post-Merger HHI
Using HHI: The Soda Business
Market Share
Cumulative Market Share
Individual HHI
Cumulative HHI
Coca Cola 37.4 37.4 1398.76 1398.76PepsiCo 28.9 66.3 835.21 2233.97Phillip Morris (7 Up) 5.7 72 32.49 2266.46Dr. Pepper 4.6 76.6 21.16 2287.62R.J. Reynolds (Sunkist) 3 79.6 9 2296.62Royal Crown 2.9 82.5 8.41 2305.03P&G (O. Crush/Hires) 1.3 83.8 1.69 2306.72Cadbury-Schweppes 0.5 84.3 0.25 2306.97
Sogang MBA 20079
1985 Market Share Figures for Carbonated Soft Drink (CSD) Market
Problems with HHI
Sogang MBA 2007
10
How to define a market?
CSD
or Portable bottle drink including juice, milk, etc
How about coffee and tea?
How to define a market
Sogang MBA 2007
11
Antitrust Market (1982 DOJ, merger guideline)
A market is defined as a product or group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximizing firm, not subject to price regulation, …likely would impose at least a ‘small but significant and nontransitory’ increase in price…
SSNIP, 5% for one year
Sogang MBA 2007
12
Profit maximizing price must satisfy MR = MC
Total revenue is TR (Q) = P(Q) Q
P
P
Q
QP
11
Q
P
P
QP 1
eP
11
Q
PQPMRTherefore
Sogang MBA 2007
13
Therefore, MR = MC becomes
denotes price elasticity of demand
The optimal price is set at a point where price elasticity is larger than 1.
MCe
P )1
1(
e
Measure of the degree of market power
Sogang MBA 2007
14
Lerner index: L =eP
MCP 1
e - price elasticity of demand
• A Firm’s gross margin is inversely proportional to the (absolute value) of price elasticity of demand.
Demand Elasticity
(p – mc)/p = 1/e, e is demand elasticity w.r.t price
Its own price elasticity includes all price elasticity with respect to other prices.
How to estimate demand elasticity, demand function?
Sogang MBA 200715
DEMAND ESTIMATION
16Sogang MBA 2007
How Do You Know Your Demand?
Sogang MBA 2007
17
There are three major ways:
Interviews/surveys/co-investigation with your clients
Experiments
Statistical estimation
1. Interviews/Surveys
Sogang MBA 2007
18
The most direct way to obtain information about demand is through interviews in which consumers are asked how much of a product they would be willing to buy at different prices.
Problems
Consumers may lack information or interest, or be misled by the interviewers.
Their response might be significantly different from the response to hypothetical situation.
2. Experiments/Market Tests
Sogang MBA 2007
19
Special Offers. Firm can offer different prices by
mail and check the responses.
For instance, firm can offer $20 to one hundred household and $25 to another hundred household. Then, check the response rate for each price.
E.g. Britannica did for its CD offering by a direct mail campaign, with prices ranging from $70 to $125.
Are there any drawbacks with experiments as a way to find out price elasticity of demand?
3. Statistical Estimation: Regression Method
Sogang MBA 2007
20
This is a log-log regression equation which estimates the coefficients a, b, b2, b3, c, etc.
Q: demand; P: own price; P2 : price of a substitute; P3 : price of a complement; I: consumers’ income level
Other variables (weather, changes in law, promotional campaigns, public image, etc.)
)log()log()log()log()log( 3322 IcPbPbPbaQ
+ other variables
Problems with Statistical Estimation
Sogang MBA 2007
21
Data are not available.
Simultaneous problemhigh demand expected … high pricelow demand expected … low price
Curse of dimension
Simultaneous problem
Election Campaign spending vs. voting rates No relationship or negative one Not natural experiment
Premium for Tokyo University
Sogang MBA 2007
22
Instrument variables Price correlation, but no correlation with
demand side Fish Market Sugar Market
Sogang MBA 2007
23
Merger Simulation
Sogang MBA 2007
24
eP
MCP 1
1. Estimating demand elasticities2. From observed price, we estimate costs3. After merger, elasticities change.4. From the new elasticities and costs, we predict
new prices.
Why elasticities change?
Full service or self service gas station. Stations providing both services Stations providing only full service
In which stations gas prices are higher? Boston, empirical studies
Beer vs. Soju, Hyundai vs. Kia
Sogang MBA 2007
25
top related