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Does merger control work?

John Kwoka

In late June, the chief exec­u­tives of AT&T and DirecTV made their way to Capitol Hill to lobby on behalf of their pro­posed $48.5 bil­lion merger. AT&T CEO Ran­dall Stephenson claimed that the deal would lower con­sumer prices, telling mem­bers of the U.S. Senate Judi­ciary Com­mittee in a hearing that “there will be down­ward pricing pres­sure in this industry as we become a more viable competitor.”

The public will find out whether his pre­dic­tion comes to fruition early next year, when the Fed­eral Com­mu­ni­ca­tions Com­mis­sion is expected to approve the trans­ac­tion. But if the dele­te­rious effects of past mergers are any indi­ca­tion, AT&T cus­tomers may soon be stuck in a lose-​​lose sit­u­a­tion, either shelling out more money for cable TV and Internet ser­vice or paying a less pricy fee for an infe­rior product.

This is the con­cern of John Kwoka, the Neal F. Finnegan Dis­tin­guished Pro­fessor of Eco­nomics at North­eastern Uni­ver­sity. Over the past 40 years, Kwoka has written and con­sulted exten­sively on issues of market power, mergers, and merger reme­dies. In June, he received the 12th  annual Jerry S. Cohen Memo­rial Fund Writing Award for his paper on the effi­cacy of merger control.

The award, named in honor of the late trial lawyer and antitrust writer, is given annu­ally to the authors of the best antitrust writing of the pre­vious year. The win­ning selec­tions, in the words of the award’s gov­erning body, “reflect a con­cern for prin­ci­ples of eco­nomic jus­tice and the dis­persal of eco­nomic power.”

This honor val­i­dates the research that I have been doing for a very long time,” said Kwoka, adding that pol­i­cy­makers and public interest groups have taken note of his latest work. “My hope is to strengthen merger enforce­ment policy by proving there are good grounds for taking a more skep­tical approach toward mergers.”

Kwoka’s paper, pub­lished in 2013 in the Antitrust Law Journal, eval­u­ated the accu­racy and effec­tive­ness of U.S. merger enforce­ment policy through a com­pre­hen­sive analysis of merger retrospectives.

Specif­i­cally, Kwoka ana­lyzed the details of more than 40 mergers with mea­sured price out­comes, including 1999’s Exxon-​​Mobil merger and Whirlpool’s 2006’s acqui­si­tion of Maytag. He sup­ple­mented this data set with infor­ma­tion per­taining to the actions taken by U.S. antitrust agen­cies with respect to those par­tic­ular mergers—whether they were cleared, opposed, or approved with remedies.

The find­ings showed that about three-​​quarters of the care­fully studied mergers resulted in price increases, with hos­pital and air­line deals leading to 10 to 20 per­cent spikes. But what’s per­haps more sur­prising is that the price increases were con­sid­er­ably greater for mergers that were sub­jected to con­duct reme­dies, poli­cies designed by U.S. antitrust agen­cies to allow mergers to go for­ward with restric­tions on their con­duct. “Con­duct reme­dies,” Kwoka said, “are vir­tu­ally impos­sible to write and enforce in a way that would achieve the intended outcome.”

In his view, the costly effects of poor merger con­trol touch the lives of nearly all Amer­i­cans, the majority of whom have no choice but to deal with their finan­cial impli­ca­tions. “Air­fares are sky­rock­eting, planes are crowded, state attor­neys gen­eral are swamped by hos­pital mergers,” said Kwoka, whose forth­coming book on U.S. mergers will be pub­lished by MIT Press in December. “The average cit­izen may not be able to take direct action, but researchers like myself can help by pulling the evi­dence together and get­ting the antitrust agen­cies to take note.”

– By Jason Kornwitz

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