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5 Econ. Comm. Newsl. 24 (2005)
Post-Merger-Blockage Strategic Product Design Changes

handle is hein.journals/ecoconw5 and id is 24 raw text is: Economics Committee Newsletter Post-merger-blockage Strategic Product Design Changes Sencer Ecer* LECG, LLC In the summer of 2000, ZDNet.com and Cnet.com were competing head-to-head. These companies provide news and information related to high-technology products, such as hardware and software reviews and price comparisons. Imitating each other in virtually every aspect of the business, their products converged to virtually the exact same service. In October 2000, the two companies merged in a $1.6 billion deal.' Given the minimal likelihood of an antitrust challenge for these online companies, it is not hard to imagine that these two companies were anticipating the merger in that previous summer. Indeed, the product design changes they were engaging in, i.e., making their products more and more substitutable, are consistent with the equilibrium strategies under the expectation of a merger according to the economic 2 theory. In contrast, firms expecting price competition would make their products more differentiated.3 Modeling product designs as functions of the expectations of firms about the future market structure has an interesting implication in merger policy. The U.S. antitrust authorities seem to be making their merger approval decisions based on pre-and post-merger price, that is, consumer welfare, comparisons.4 The results discussed in this paper imply that a more correct comparison would be between post-merger and post-merger-blockage prices. This implication follows from the considerations that product designs are functions of the expectations of firms about the future state of competition, and product differentiation is often an effective way of sustaining higher prices after learning that a merger is unlikely. The main conclusion is that post-merger-blockage strategic product differentiation (or, in general, after the introduction of a stricter merger policy) may undo the benefits to consumers of the merger-blockage. Thus, the antitrust authority may be overestimating the benefits to consumers of a merger blockage by using a wrong benchmark. This result is reminiscent of the famous critiques of the Chicago school, for example, the Lucas Critique5 or the Peltzman Critique6 of safety regulations - e.g. people driving less carefully obeying mandatory seat belt rules, but neutralizing its effect. As such, it is a policy- irrelevance result. However, much remains to be explored, as the literature in this area is very recent. In the rest of the article, I first discuss the standard results related to the strategic usage of product designs in price competition and price collusion or merger. Then, I link these results to the strategic usage of product designs in anticipation of a merger, and present the implications of such a link in merger policy both at the general level and for a specific merger decision. Strategic Product Designs The literature addressing the role of product design in price competition is extensive. As illustrated by the two seminal papers in the area, the result that firms differentiate their products to soften price competition is very robust. 7 Moreover, under important conditions product differentiation is excessive relative to the social optimum.8 Volume~~~ 5,Nmbr Srng20 Volume 5, Number I Spring 2005

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