The US Department of Justice (DoJ) Antitrust Division is taking steps to make economic merger analysis more accessible to attorneys and other stakeholders, according to the agency’s top economist.
Last Friday [5 June] at Concurrences Review’s Global Antitrust Economics Conference, at NYU’s Stern School of Business, opening keynote speaker and DoJ’s Deputy Assistant Attorney General for Economic Analysis, Luke Froeb emphasized that in a time of increasing complexity and importance of economic models, the most successful antitrust attorneys need to be trained in economics.
To this end, Froeb revealed that his colleagues at the DoJ have released an economic model to the public designed to help the layperson learn how economists think, allowing attorneys to provide push back by asking probing questions of their expert economic witnesses.
The model is not found on any official DoJ website but rather at Competitiontoolbox.com, and is meant to serve as a basic training tool with actual models used in merger reviews. The model measures consumer harm and other helpful metrics including how much marginal costs must decrease to offset incentives to raise prices.
One of the models creators, the DOJ’s Charles Taragin, co-authored a recent October 2017 paper entitled, “Simulating Mergers in a Vertical Supply Chain with Bargaining.”
When asked about the AT&T [NYSE:T]/Time Warner [NYSE:TWX] USD 85bn merger that was challenged by the DoJ in November 2017 and is awaiting a district court decision that is expected on 12 June, Froeb shared insight into the evolution of competition economics and how vertical mergers are now assessed.
Froeb noted that traditional bargaining models gave all of the bargaining power to the upstream firm resulting in double marginalization (a mark-up of an input above the marginal cost by producer and then again by the final manufacturer), which would be eliminated by a vertical merger to the benefit of consumers. Modern models, however, challenge the assumption that double mark-ups are eliminated, finding instead that there are incentives to split the gains of trade between the upstream and downstream firms, according to the value of their outside options and to the detriment of consumers.
Froeb, a DoJ staffer from 1986 to 1992, said he is thrilled to see increasing complex economic analysis take center stage in merger cases by “providing a mapping from evidence in the case to the opinion.” Now Froeb wants to “help make transparent the kind of tools behind the expert opinions” in order to help those that don’t have the model-building expertise glean the intuition surrounding the economics of a merger.
A teacher at heart, Froeb told the audience that he will be returning to his prior position Vanderbilt’s Owen Graduate School of Management in the fall.
After his presentation, Froeb remained in the audience and, during a healthcare sector panel, asked about how the increase in high deductible health insurance plans has impacted sector competition. According to the CDC, the prevalence of working age Americans with high-deductible plans increased from 26.3% in 2011 to 39.3% in 2016.
Two large vertical mergers involving health insurers are currently being reviewed by the DoJ: Cigna[NYSE:CI]/Express Scripts [NYSE:ESRX] and CVS Health [NYSE:CVS]/Aetna [NYSE:AET].
Carnegie Mellon Professor Martin Gaynor explained that high-deductible plans allow for lower premiums, which should lead to increased shopping.
Despite the large market share gains in high-deductible plans over recent years, the possible consumer gains from shopping may be minimal though.
A paper co-authored Gaynor points out that “the majority of health spending is driven by a relatively small number of individuals with very high expenses. These individuals have expenses that put them well beyond the cost-sharing features of even a high deductible insurance plan,” mitigating the effects that would lead to shopping.
Even that research, which shows some pro-consumer gains, is somewhat controversial as other recent research has concluded that spending reductions from high-deductible plans is not due to consumer shopping at all.
Outside of Froeb’s question, the healthcare panel primarily focused on limitations of economic modeling in assessing important non-price competitive effects of mergers among hospitals, physician services and health insurers. These sectors were the subject of the United States’ written contribution to the OECD’s roundtable discussion on the non-price effects of mergers, which will be held tomorrow [6 June] in Paris.
The panel seemed to focus primarily on hospitals, as many are exhibiting signs of monopsony power in certain markets remarked Gaynor. Small “creeping” acquisitions that fall under the merger review notification thresholds were also seen as problematic in the space, according to Beau Buffier, Chief of the Attorney General’s Antitrust Bureau of New York State.
Gaynor also noted that price cap regulation in dominated markets was seen as a possible legislative solution where antitrust is seen as ill equipped to address anti-competitive effects.
by Justin Zacks in New York