Invigorating Coordinated Effects Analysis Webinar Recap

On September 29, 2023, the ABA Antitrust Section Economics Committee hosted the webinar “Invigorating Coordinated Effects Analysis” featuring Professor Nathan Miller of Georgetown University and moderated by Dr. Isabel Tecu of Charles River Associates. The speakers discussed coordinated effects generally, how merger activity may impact coordinated effects, and compared coordinated and unilateral effects.

Prof. Miller began by providing a general overview of coordinated effects and collusion. Behavior that is nonsensical at the individual level, for example output suppression or increasing prices may prove profitable when undertaken in coordination with others. However, this creates a tense dynamic in which individual parties have an incentive to undermine collusion for their own gain. An example of such behavior is an OPEC member increasing output beyond agreed-upon targets by the cartel.

A merger may affect the stability and magnitude of coordination in an industry, which is highlighted in the existing and draft Merger Guidelines. The guidelines include a checklist of six characteristics indicating a market may be vulnerable to collusion: previous collusion attempts, easily observable competitive initiatives by rivals, small and frequent sales, a high cost for deviating from coordination, low demand elasticity, and few mavericks (firms unlikely to agree to coordination). Prof. Miller also discussed the ease of entry into a market as a factor affecting the longevity of collusion. As an example, he cited the delayed entry into the generic prescription drug market resulting from FDA regulations, resulting in a delay of entrants to disrupt collusion in that market.

The discussion also addressed whether explicit and tacit collusion differ. Prof. Miller does not believe this to be the case, pointing out that, per a thought experiment by Louis Kaplow, whether the same information was obtained from an illicit meeting or a series of revealing press releases does not change a firm’s course of action. Economists treat such situations similarly, though this is in part due to the fact that research into collusion is informed by explicit cartels that were caught, prosecuted, and subsequently studied. Merger enforcement is intended to prevent and both explicit and tacit collusion, as consolidation may result in either type of coordination. There is no clear legal remedy to pre-existing tacit coordination, though, and this underscores the importance of thorough merger review, preventing tacit collusion before it occurs.

This led to a discussion on how antitrust authorities view coordinated effects and unilateral effects in merger review and their different underlying economics. Prof. Miller believes that the rigor of merger reviews generally prevents mergers that could give rise to coordinated effects. In practice, however, he also pointed out, unilateral effects are more extensively studied in merger review. A recent example is the Simon & Schuster/Penguin Random House merger litigation, centered around the concern that a merger would suppress author pay. Both the expert testifying on behalf of the DOJ and the judge focused their efforts on concerns regarding unilateral effects. In fact, the last merger limited to coordinated effects concerns, between Arch Coal and Triton Coal Company, dates from 2005.

Concerns around unilateral effects typically arise around mergers between firms with large market shares. At least in theory, the merged entity commands market power so great that it need not collude with other firms to benefit from price increases, output restriction, or other anti-competitive behavior. Thus, upward pricing pressure, which takes into account diversions and markups, is the go-to measure in studying unilateral effects. On this topic, Prof. Miller spoke about the proposed merger between AT&T and T-Mobile. Had the merger been between AT&T and a larger competitor like Verizon, the resulting firm would have been significantly larger than its competitors, and therefore could have profitably increased prices absent collusion with smaller competitors. Instead, because T-Mobile is a much smaller firm than AT&T, the merger was flagged as an instance in which a large firm sought to acquire a rival with the incentive to act aggressively to increase its lesser market share.