CBR Briefing #57

Apr 02, 2018

Sections Economics

Why antitrust regulators underestimate competition
Increases in market power can raise incentives for rivals to offer new products

Markups would have increased by only 10–20 percent because of rivals’ new product offerings, in sharp contrast to a 70 percent increase, as the current approach predicts.
  • Regulators are more likely to block a merger or support a bailout if they fear that remaining companies will gain substantial market power and increase prices. Yet according to research by Chicago Booth’s Thomas Wollmann, the current approach that regulators use to evaluate these policies overstates their impact because it fails to account for their effect on product offerings. As prices rise, so do rivals’ incentives to introduce competing models, he argues.
  • Wollmann considered the impact of the 2009 US government rescue of General Motors and Chrysler on the commercial truck market. Without a bailout, these companies may have been liquidated or acquired, leaving some remaining truck makers with a near-monopoly in certain product segments.
  • If GM and Chrysler had been acquired by Ford or been liquidated, the current approach predicted that markups over costs would have increased by 70 percent. However, Wollmann finds this would have pushed rival firms to launch new models (see chart). As a result, markups would have increased by only 10–20 percent.
  • If instead the troubled companies had been acquired by a company that did not previously offer similar products to GM and Chrysler, such as PACCAR, prices would have stayed competitive even without new offerings.