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Ex-post Assessment of Merger Remedies – KWOKA – December 2023 OECD discussion

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OECD Directorate for Financial and Enterprise Affairs
OECD Directorate for Financial and Enterprise Affairs

This presentation by John E. Kwoka, Neal F. Finnegan Distinguished Professor of Economics, Northeastern University, was made during the discussion “Ex-post Assessment of Merger Remedies” held at the 22nd meeting of the OECD Global Forum on Competition on 8 December 2023. More papers and presentations on the topic can be found out at oe.cd/eamr. This presentation was uploaded with the author’s consent.

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Methodology and Substance in Ex Post Remedies Assessment John Kwoka Northeastern University OECD Global Forum of Competition Roundtable Paris, 8 December 2023
Ex Post Assessments of Mergers and Remedies • Value of ex post assessments of mergers and merger policy is well established • Merger retrospectives have provided important insights into merger outcomes and the effectiveness of merger control • They have also highlighted some issues about methodology that apply to remedies assessment as well • Remedies retrospectives are very important • Ineffective remedies can undermine merger policy itself • Use of remedies quite frequent in major jurisdictions • In US, of approximately 50 merger investigations each year, more than half historically have concluded with consent order and remedy • Methodological as well as substantive issues have been illuminated by studies of remedies
Ex post studies of U.S. merger remedies • (1) FTC study (1999) based on interviews with buyers of 37 divestitures • Found that in 28 cases, the divested assets remained viable and in market • Concluded that divesting entire line of business, rather than selected assets, important in viability • Comments: • Viability is necessary but not sufficient for competition • Even by that standard, one-quarter of divestitures failed
• (2) Second FTC study (2017) covered 89 remedy orders • Of 50 case studies, 69% reported to have preserved competition in 3 years • Cases with incomplete divestitures persisted, and continued to show high failure rates • 39 other cases assessed either by questionnaires or by agency’s own internal records • “Success” for these others redefined as asset viability or by simply whether assets in fact were transferred • Reported higher rates of “success” by these lower standards (91%, 75%) • Comments: • Used three different methodologies and three definitions of “success” • By criterion of preservation of competition, almost one-third failed
• (3) Statistical analysis of effectiveness of remedies (Kwoka, 2017) • Matched actual outcomes from retrospectives on mergers with information on type of remedy (if any) employed in each merger • Found that mergers approved subject to divestitures resulted in significant net price increases • Mergers resolved with behavioral remedies resulted in yet higher prices • Comments: • Too few observations for statistical confidence in certain conclusions • Contributed to increasing skepticism about remedies, especially behavioral remedies
U.S. agencies increasingly skeptical of remedies • This evidence together with experience with particular remedies have made DOJ and FTC more skeptical about remedies • Ticketmaster/Live Nation merger • Comcast-NBCU • Teva-Allergan merger • Retail merges (supermarkets, drug stores) • DOJ antitrust chief Delrahim (2017) quoted directly from my study in criticizing behavioral remedies • Expressed determination that DOJ would avoid them. • FTC Chair Joe Simons (2018) noted unacceptable failure rates in FTC studies and set goal of reducing if not eliminating them • Established protocol and practice for merger retrospectives at FTC
• DOJ’s Jonathan Kanter (2022) has said: • “Merger remedies short of blocking a transaction too often miss the mark. Complex settlements, whether behavioral or structural, suffer from significant deficiencies. When the division concludes that a merger is likely to lessen competition, in most situations we should seek a simple injunction to block the transaction.” • FTC’s Lina Khan (2022) on agency negotiations on remedies: • “This is not work that the agency should have to do. That’s something that really should be fixed on the front end by parties being on clear notice about what are lawful and unlawful deals. We are going to be focusing our resources on litigating rather than settling.”
Remedies studies show that methodology matters • Breadth of conclusions depends on number of studied cases • Single case experience may suffice if that is sole focus of inquiry • Broadest conclusions are based on larger number of cases (FTC study 2) • Strength of conclusions depends on study technique • Case studies provide detail but cannot readily control for other factors • Difference in difference does so much better (Kwoka) • Conclusions about effectiveness depend on criteria • More stringent criterion—”preservation of competition”—associated with lower success rate • Methodology affects what substantive conclusions are possible
Implications for best practices in remedies assessment • Step 1: Identify exact question to be addressed • Remedy in uniquely important case (e.g., Sprint/T-Mobile) • Remedies generally used in particular market (e.g., pharma) • Remedies of specific type (structural vs. behavioral) • Entirety of agency remedy program • Step 2: Establish study criterion • Preservation of competition is stated goal of remedies, and true meaning of “success” • Viability of assets within short period of time is useful information • Successful transfer of assets or IP is lowest bar
• Step 3: Selection of case or cases that illuminate the question • If a particular case experience is focus, no need to go farther • If case comparison and difference-in-difference is required, important to identify correct comparison case or group • Should be similar to the treatment case in all respects except for remedy • Sometimes can control for one or two factors that are not the same • If full comprehensive conclusion sought, many cases both in the treatment group and control group are required • Step 4: Selection of technique capable of answering question • If only interest is viability of assets, it may be sufficient simply to check post- remedy market, and use interviews or questionnaires • If criterion is preservation of competition, further analysis of pre and post state of competition is required • Statistical analysis offers more precise and objective conclusions
• Step 5: Examine any “second-order effects” • Insights into circumstances where remedy might be more vs less effective • Even if remedies are on average not effective, useful nonetheless to determine if they may be effective with particular type of remedy, or provision of remedy, or in certain industries, or with particular product • For example, my work found that behavioral remedies least likely effective • When the problematic behavior is not visible to third parties • When the behavior can be quickly and strategically altered by the firm • When technology moves quickly • When the problematic behavior is key to profitability • Step 6: Integrate conclusions into updated policy • FTC study 2 reported continuing use of incomplete asset divestiture and continued high failure rate, despite same finding 20 years earlier
Methodological issues to be aware of • Selection: Choice of cases to be examined should not be skewed • Any disproportionate attention to industry, time period, etc. may compromise soundness of study—or at least, the appearance of soundness • Best if choice is a sizeable group of “random” cases • Risk of “bias” greatest in examining single case • Causation: Distinguishing the effect of merger from effect of remedy • Can be difficult to isolate remedy effect from effect of merger itself • For example, If comparison shows no effect, it could be either a merger that is not anticompetitive in which case the remedy is unnecessary and irrelevant, or an anticompetitive merger subject to a completely effective remedy • If comparison shows price rise, merger must be anticompetitive but the remedy could either be completely ineffective, or partially effective • Possible to disentangle by finding comparable merger without remedy • DID analysis of merger, paired with DID on merger-plus-remedy will isolate effect of remedy
Other issues and conclusions • Cost of conducting remedies assessment may not be trivial • But incremental costs after merger assessment may not be too large • Can compel on-going data from merging parties when remedy put in place • Important that conclusions must match study • Conclusions of FTC study 2 controversial, partially disavowed • Important that conclusions be implemented • Assessments have great potential to improve policy • Better design of remedies: Examine ability and incentive to defeat • Limiting reliance on remedies altogether

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Ex-post Assessment of Merger Remedies – KWOKA – December 2023 OECD discussion

  • 1. Methodology and Substance in Ex Post Remedies Assessment John Kwoka Northeastern University OECD Global Forum of Competition Roundtable Paris, 8 December 2023
  • 2. Ex Post Assessments of Mergers and Remedies • Value of ex post assessments of mergers and merger policy is well established • Merger retrospectives have provided important insights into merger outcomes and the effectiveness of merger control • They have also highlighted some issues about methodology that apply to remedies assessment as well • Remedies retrospectives are very important • Ineffective remedies can undermine merger policy itself • Use of remedies quite frequent in major jurisdictions • In US, of approximately 50 merger investigations each year, more than half historically have concluded with consent order and remedy • Methodological as well as substantive issues have been illuminated by studies of remedies
  • 3. Ex post studies of U.S. merger remedies • (1) FTC study (1999) based on interviews with buyers of 37 divestitures • Found that in 28 cases, the divested assets remained viable and in market • Concluded that divesting entire line of business, rather than selected assets, important in viability • Comments: • Viability is necessary but not sufficient for competition • Even by that standard, one-quarter of divestitures failed
  • 4. • (2) Second FTC study (2017) covered 89 remedy orders • Of 50 case studies, 69% reported to have preserved competition in 3 years • Cases with incomplete divestitures persisted, and continued to show high failure rates • 39 other cases assessed either by questionnaires or by agency’s own internal records • “Success” for these others redefined as asset viability or by simply whether assets in fact were transferred • Reported higher rates of “success” by these lower standards (91%, 75%) • Comments: • Used three different methodologies and three definitions of “success” • By criterion of preservation of competition, almost one-third failed
  • 5. • (3) Statistical analysis of effectiveness of remedies (Kwoka, 2017) • Matched actual outcomes from retrospectives on mergers with information on type of remedy (if any) employed in each merger • Found that mergers approved subject to divestitures resulted in significant net price increases • Mergers resolved with behavioral remedies resulted in yet higher prices • Comments: • Too few observations for statistical confidence in certain conclusions • Contributed to increasing skepticism about remedies, especially behavioral remedies
  • 6. U.S. agencies increasingly skeptical of remedies • This evidence together with experience with particular remedies have made DOJ and FTC more skeptical about remedies • Ticketmaster/Live Nation merger • Comcast-NBCU • Teva-Allergan merger • Retail merges (supermarkets, drug stores) • DOJ antitrust chief Delrahim (2017) quoted directly from my study in criticizing behavioral remedies • Expressed determination that DOJ would avoid them. • FTC Chair Joe Simons (2018) noted unacceptable failure rates in FTC studies and set goal of reducing if not eliminating them • Established protocol and practice for merger retrospectives at FTC
  • 7. • DOJ’s Jonathan Kanter (2022) has said: • “Merger remedies short of blocking a transaction too often miss the mark. Complex settlements, whether behavioral or structural, suffer from significant deficiencies. When the division concludes that a merger is likely to lessen competition, in most situations we should seek a simple injunction to block the transaction.” • FTC’s Lina Khan (2022) on agency negotiations on remedies: • “This is not work that the agency should have to do. That’s something that really should be fixed on the front end by parties being on clear notice about what are lawful and unlawful deals. We are going to be focusing our resources on litigating rather than settling.”
  • 8. Remedies studies show that methodology matters • Breadth of conclusions depends on number of studied cases • Single case experience may suffice if that is sole focus of inquiry • Broadest conclusions are based on larger number of cases (FTC study 2) • Strength of conclusions depends on study technique • Case studies provide detail but cannot readily control for other factors • Difference in difference does so much better (Kwoka) • Conclusions about effectiveness depend on criteria • More stringent criterion—”preservation of competition”—associated with lower success rate • Methodology affects what substantive conclusions are possible
  • 9. Implications for best practices in remedies assessment • Step 1: Identify exact question to be addressed • Remedy in uniquely important case (e.g., Sprint/T-Mobile) • Remedies generally used in particular market (e.g., pharma) • Remedies of specific type (structural vs. behavioral) • Entirety of agency remedy program • Step 2: Establish study criterion • Preservation of competition is stated goal of remedies, and true meaning of “success” • Viability of assets within short period of time is useful information • Successful transfer of assets or IP is lowest bar
  • 10. • Step 3: Selection of case or cases that illuminate the question • If a particular case experience is focus, no need to go farther • If case comparison and difference-in-difference is required, important to identify correct comparison case or group • Should be similar to the treatment case in all respects except for remedy • Sometimes can control for one or two factors that are not the same • If full comprehensive conclusion sought, many cases both in the treatment group and control group are required • Step 4: Selection of technique capable of answering question • If only interest is viability of assets, it may be sufficient simply to check post- remedy market, and use interviews or questionnaires • If criterion is preservation of competition, further analysis of pre and post state of competition is required • Statistical analysis offers more precise and objective conclusions
  • 11. • Step 5: Examine any “second-order effects” • Insights into circumstances where remedy might be more vs less effective • Even if remedies are on average not effective, useful nonetheless to determine if they may be effective with particular type of remedy, or provision of remedy, or in certain industries, or with particular product • For example, my work found that behavioral remedies least likely effective • When the problematic behavior is not visible to third parties • When the behavior can be quickly and strategically altered by the firm • When technology moves quickly • When the problematic behavior is key to profitability • Step 6: Integrate conclusions into updated policy • FTC study 2 reported continuing use of incomplete asset divestiture and continued high failure rate, despite same finding 20 years earlier
  • 12. Methodological issues to be aware of • Selection: Choice of cases to be examined should not be skewed • Any disproportionate attention to industry, time period, etc. may compromise soundness of study—or at least, the appearance of soundness • Best if choice is a sizeable group of “random” cases • Risk of “bias” greatest in examining single case • Causation: Distinguishing the effect of merger from effect of remedy • Can be difficult to isolate remedy effect from effect of merger itself • For example, If comparison shows no effect, it could be either a merger that is not anticompetitive in which case the remedy is unnecessary and irrelevant, or an anticompetitive merger subject to a completely effective remedy • If comparison shows price rise, merger must be anticompetitive but the remedy could either be completely ineffective, or partially effective • Possible to disentangle by finding comparable merger without remedy • DID analysis of merger, paired with DID on merger-plus-remedy will isolate effect of remedy
  • 13. Other issues and conclusions • Cost of conducting remedies assessment may not be trivial • But incremental costs after merger assessment may not be too large • Can compel on-going data from merging parties when remedy put in place • Important that conclusions must match study • Conclusions of FTC study 2 controversial, partially disavowed • Important that conclusions be implemented • Assessments have great potential to improve policy • Better design of remedies: Examine ability and incentive to defeat • Limiting reliance on remedies altogether