We found a recent article concerning high tech mergers — specifically, the proposed merger of XM and Sirius Satellite Radio — quite interesting and wanted to share it with our blog subscribers/readers. Below is a summary of the article by J. Gregory Sidak and Hal Singer of Criterion Economics, LLC, followed by a link to the article, which can be downloaded for free.
Evaluating Market Power with Two-Sided Demand and Preemptive Offers to Dissipate Monopoly Rent: Lessons for High-Technology Industries from the Proposed Merger of XM and Sirius Satellite Radio
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 exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate post-merger 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 pre-merger 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 non-price factors, consumer surplus could fall.
The above article is posted on the Social Science Research Network (SSRN) and may be freely downloaded at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1088450
