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Vertical mergers in the technology, media and telecom sector – SHAPIRO – June 2019 OECD discussion

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This presentation by Carl SHAPIRO, Professor at the Haas School of Business and the Department of Economics at the University of California at Berkeley, was made during the discussion “Vertical mergers in the technology, media and telecom sector” held at the 131st meeting of the OECD Competition Committee on 7 June 2019. More papers and presentations on the topic can be found out at oe.cd/vmtm

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Vertical mergers in the technology, media and telecom sector – SHAPIRO – June 2019 OECD discussion

  1. 1. Vertical Merger Analysis: Input Foreclosure in Practice Professor Carl Shapiro University of California at Berkeley OECD Competition Committee 7 June 2019
  2. 2. Proposed Merger Upstream Input Downstream Product or Service Input Foreclosure: Elements of the Analysis Alternative Inputs? Downstream Rivals RRC? Diversion EDM? Final Consumers
  3. 3. AT&T/Time Warner Merger Turner Content DirecTV Input Foreclosure: AT&T/Time Warner Video Content: Viacom, Disney, Fox, NBCUniversal MVPDs: Comcast, Charter, DishDiversion RRC? EDM? Pay TV Households
  4. 4. Input Important? No Clear Yes Diversion Significant? No Clear Yes Margins Significant? No Clear Ability and Incentive to Raise Rivals’ Costs Yes Unilateral Ability and Incentive Analysis Efficiencies?
  5. 5. Ability and Incentive: Three Steps  Input Important?  Loss of Sales by Downstream Rivals if Denied Access to Input, Despite Their Best Response  Diversion Significant?  Share of Those Lost Sales Diverted to Downstream Division of Merged Entity  Margins Significant?  Pre-Merger Price/Cost Margin at Downstream Division of Merged Entity Carl Shapiro Slide 4
  6. 6. Ability and Incentive: AT&T/Time Warner  Turner Content Important?  No Close Substitute; All MVPDs Distribute Turner Content; Used Blackout Estimates  Diversion to DirecTV Significant?  Used Local MVPD Shares to Estimate Diversion, Aggregated Nationally; Cord Cutting Not Directly Relevant to Blackout Diversions  DirectTV Margins Significant?  Substantial Margins on Large Pay TV Package, Hotly Disputed at Trial  Estimated Price Increase for Turner Content Carl Shapiro Slide 5
  7. 7. EDM Sizeable? Yes Clear Synergies Significant? No Yes No Balancing Harms and Benefits EDM > RRC? Yes No Block Merger Full Balancing
  8. 8. Elimination of Double Marginalization  EDM Presumed to Result from Merger  Antitrust Economists Assume Merged Firm is Operated to Maximize Profits  EDM May Not be Merger Specific  Can EDM Be Achieved by Contract? Look at Evidence  EDM Leads to Cost Reduction at Downstream Division of Merged Firm  EDM Equals Gap Between Pre-Merger Price of Input and Economic Cost of Input  EDM is Small if Input is Widely Used by Downstream Rivals – Careful! Carl Shapiro Slide 7
  9. 9. EDM in AT&T/Time Warner Merger  EDM Small Because Turner Content Widely Used by MVPDs  Reduction in Price at DirecTV Does Little to Grow Turner Subscriber Base  Most New DirecTV Subscribers Attracted by Lower Prices Come from Other MVPDs  Almost All Subscribers at Those MVPDs Already Have Access to Turner Content  EDM Was $1.20 Per Subscriber Per Month  Far Less Than the Price Turner Charged for Content  Opportunity Cost to Turner of a New DirecTV Sub Carl Shapiro Slide 8
  10. 10. Comparing RRC and EDM  Downstream Rivals Pay More for Input  Add Up Total Extra Payments = Higher Costs  Downstream Division of Merged Firm Has Cost Reduction Due to EDM  Compare RRC and EDM! Presto!  OK, Not So Easy. Reception in Court?!  Hard to Avoid Balancing if EDM is Credited  Before We Even Get to Synergies  Treat Synergy Claims as in Horizontal Mergers  Very Hard to Do Full Balancing Quantitatively Carl Shapiro Slide 9
  11. 11. Lessons and Pitfalls  Screen for Vertical Mergers: Is the Input Hard for Rivals to Do Without?  Look at Diversion & Margins to Assess Input Foreclosure Danger  Impact on Final Consumers Depends on Balancing of RRC and EDM  Ask Whether EDM is Merger Specific  EDM Small if Input Widely Used Downstream  No Simple Route Based on Market Shares  Apply Usual Standards to Synergy Claims Carl Shapiro Slide 10