Journal of Competition Law and Economics Advance Access originally published online on June 20, 2008
Journal of Competition Law and Economics 2008 4(3):697-751; doi:10.1093/joclec/nhn019
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EVALUATING MARKET POWER WITH TWO-SIDED DEMAND AND PREEMPTIVE OFFERS TO DISSIPATE MONOPOLY RENT: LESSONS FOR HIGH-TECHNOLOGY INDUSTRIES FROM THE ANTITRUST DIVISION'S APPROVAL OF THE XM–SIRIUS SATELLITE RADIO MERGER
Correspondence: E-mail: jgsidak{at}aol.com
Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions. In the proposed XM–Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by "dynamic demand." We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities—that is, without evidence of buyer substitution between the two products in response to a relative change in prices—then market definition is unbounded. The XM–Sirius merger also follows a recent trend of prosecutorial inaction in merger reviews. The Antitrust Division's use of a higher standard for intervention than the incipiency standard in Section 7 of the Clayton Act increases the risk of false negatives. Finally, the XM–Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate postmerger rents to influential third-party intervenors. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the premerger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as "à-la-carte." These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies. To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission and the Department of Justice lack the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the "à-la-carte" offering would not hold constant other nonprice factors, consumer surplus could fall.
* Founder, Criterion Economics, L.L.C.; President, International Institute for Competition Law and Economics.
** President, Criterion Economics, L.L.C. E-mail: hal{at}criterioneconomics.com. We have served as economic consultants to the Consumer Coalition for Competition in Satellite Radio, which has opposed the proposed merger of XM and Sirius and has received funding from the National Association of Broadcasters. This article draws from declarations filed before the Federal Communication Commission in the XM–Sirius merger proceeding. We have updated that analysis to take into account the Antitrust Division's rationale for not challenging the merger. Copyright 2008 by J. Gregory Sidak and Hal J. Singer. All rights reserved.