6.4. MERGER CONTROL IN MEDIA MARKETS
There are numerous examples of intervention by antitrust authorities toward mergers in
media markets. It turns out, though, that in many cases the chosen approach differs sub-
stantially from what we would recommend based on the perspectives presented earlier in
this chapter. To see this, we will first explain the method used in merger control by anti-
trust authorities and then discuss some cases and empirical studies of mergers. When dis-
cussing cases and empirical studies, we distinguish between price effects and non-price
effects of media mergers.
6.4.1 The Method Used by Antitrust Authorities
In a majority of cases, antitrust authorities have applied what we call a traditional
approach. This approach does not take into account the possible two-sidedness of media
markets. To see the consequences of this, we first explain the traditional approach in
detail, and show how this fails to consider the special features of two-sided media markets.
We then explain an approach where the two-sidedness is taken into account, in line with
the approach discussed in the previous sections of this chapter.
Note that the method, even the one extended to take the two-sidedness into account,
typically starts by considering possible price effects of a merger. Then, at a later stage,
other probable effects are considered, such as responses from rival firms, repositioning
of the merging firms’ products, and potential for entry.
18
We follow this approach by
first focusing on possible unilateral price effects of the merging parties and then go on
to consider other potential effects, in particular repositioning. Repositioning is com-
monly considered as perhaps the most important issue in media markets, so it is worth
noticing at the outset that the procedure used by antitrust authorities does not necessarily
focus directly on repositioning of products. In this respect, the approach that is used
might be biased.
6.4.1.1 The Traditional Approach
Market definition is crucial to the decision that is made in most merger cases.
19
It is plau-
sible that this is the case also for the sub-group of media mergers. The main idea in the
antitrust authorities’ approach is that if the products of two merging firms are close sub-
stitutes, then a merger might lead to higher prices. The 1982 US merger guidelines intro-
duce the SSNIP approach—Small but Significant Non-transitory Increase in Prices. The
approach starts out with a candidate market, and asks whether a hypothetical monopoly
firm would find it profitable to raise prices by 5–10%. If the answer is yes, it indicates that
18
For a description of the competition authorities’ procedure in merger control cases, see DG Comp (2011)
concerning the EU and DOJ/FTC (2010, Sections 6.1 and 9) concerning the US.
19
See, for example, Baker (2007), who claims that market definition has been more decisive in competition
cases in the US than any other issue.
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Handbook of Media Economics
this product does not have many very close substitutes and the relevant market is defined.
If the answer is no, a new product is included and the SSNIP test is performed for the
candidate market consisting of these two products. This procedure continues until the
relevant market is defined, and it is then possible to calculate the merging firms’ market
shares. It turns out that in many merger cases antitrust authorities use market share as an
important input for estimating the possible anticompetitive effect of the potential merger
in question.
The SSNIP test can easily be formulated formally, which was first done in
Harris and
Simons (1989)
. Let us consider one particular product which is produced by more than
one firm. The question is whether a hypothetical monopoly firm would find it profitable
to increase the price of this product. Let α denote the relative price increase, and β the
relative reduction in sales that leads to zero change in profit following the price increase.
Furthermore, q denotes sales before the price increase and c denotes the marginal cost
(assumed to be constant). If the following condition holds, then profit is identical or
higher after the price increase:
1+αðÞp c½1 βðÞq p cðÞq: (6.1)
To simplify, let L denote the relative price-cost margin prior to the price increase;
L ¼ p cðÞ=p. If we solve
(6.1) with respect to β, we have the so-called critical loss
β ¼α= α + LðÞ. This tells us the quantity of sales that the hypothetical monopoly firm
can afford to lose without facing lower profits after the price increase. The critical loss
must be compared to the actual loss. This can be defined as α
$
ε
ii
, the (negative of
the) own-price elasticity of demand for this product (ε
i
) multiplied by the price increase.
This product is then defined as a separate market if:
α ε
ii
α
α + L
: (6.2)
To capture the idea that the merging parties do produce differentiated goods, let us con-
sider whether two products—each firm producing one of the two products—are belong-
ing to the same market. We define ε
ij
as the cross price elasticity of demand between the
two products. Assuming symmetry, the condition for these two products belonging to
the same relevant market is the following:
α ε
ii
ε
ij
|fflfflfflfflfflfflfflffl{zfflfflfflfflfflfflfflffl}
Actual loss
<
α
α + L
|fflffl{zfflffl}
Critical loss
: (6.3)
The right-hand side is the critical loss we derived above. On the left-hand side, we take
into account the fact that a price increase on one of the products will lead to a reduction in
sales of this product that will partly be recaptured by increased sales of the other product.
This explains why the price increase is multiplied by the own-price elasticity minus the
245Merger Policy and Regulation in Media Industries
cross price elasticity. Let us define the diversion ratio from product i to product j as
D
ij
¼ @q
j
=@p
i
=@q
i
=@p
i
ðÞ. It is the fraction of the reduction in sales of product i that
is diverted to product j following a price increase on product i.
O’Brien and Wickelgren
(2003)
consider the symmetric case where D
ij
¼D
ji
¼D and L
i
¼L
j
¼L. They impose
structure on the model by assuming that firms behave rationally in their (non-
cooperative) pre-merger price setting. It is rational for a firm to set the price-cost margin
equal to the inverse own-price elasticity of demand:
p c
p
¼
1
ε
i
: (6.4)
This is the Lerner index for one product (product i). Given such a revealed preference
and symmetry, they show that products i and j belong to the same market if:
D
α
α + L
: (6.5)
These two products constitute a relevant market if the actual diversion ratio is higher than
the critical loss derived above. This approach can easily be extended to a situation with
asymmetries, for example one small and one large product.
20
However, the main point is
still that market definition requires information about diversion ratios (or price elastici-
ties) and margins (as well as the imposed price increase α).
Such an SSNIP approach has been criticized by economists. One criticism is that mar-
ket definition is rather binary—either inside or outside the relevant market—and one
should instead focus directly on the potential anticompetitive effect.
Farrell and
Shapiro (2010)
have suggested that one should focus on the possible Upward Pricing
Pressure (UPP) following a merger. They consider a merger between two firms. To
check whether a merger leads to an upward pricing pressure, they combine the first-order
conditions before and after the merger.
To illustrate their approach, let us consider the incentive to increase the price on one
of the two products (assuming that each firm produces one product each before the
merger), called product 1. We allow only for potential reductions in marginal costs of
product 1. Let superscript AM denote after the merger and superscript A before the
merger (where A stands for market A consisting of products 1 and 2). If we insert the
first-order condition for product 1 before the merger into the first-order condition after
the merger, we have the following condition for an upward pricing pressure on product 1
alone:
UPP
1
¼ p
A
2
c
A
2
D
A
12
c
A
1
c
AM
1
: (6.6)
20
See Katz and Shapiro (2003), which is further developed in Daljord et al. (2008).
246
Handbook of Media Economics
The first term on the right-hand side is the value of recaptured sales: the sales that are
recaptured by product 2 (the diversion ratio from product 1 to product 2) multiplied
by the price-cost margin on product 2. Obviously, this gives an incentive for the merged
firm to raise the price of product 1. The second term on the right-hand side is the reduc-
tion in marginal costs, which obviously leads to a downward pressure on the price of
product 1. If we rearrange
(6.6), and let E
1
denote the relative reduction in marginal costs
on product 1, there is an upward pressure on product 1 if:
D
12
> E
1
1 L
2
ðÞ
L
2
: (6.7)
We see that diversion ratios and margins are important inputs to both the method for
market definition and to the latter expression showing the possible upward pricing pres-
sure. It can easily be shown that this is true even if we allow for an endogenous change in
both firms’ prices and for asymmetries between products.
21
The approach we have shown here has been applied in merger control cases in the
media sector. We will explain in more detail below, but for now we note that there are at
least two potential errors. First, the approach does not take into account the two-
sidedness which exists in many media markets. Second, it does not consider any product
differentiation. For example, repositioning of products after a merger is not at all captured
by such an approach. As we will show, the method has been further developed to take
into account the first criticism, but not the second one.
6.4.1.2 An Extension to a Two-Sided Market
Previously, in this chapter, we have explained why the two-sidedness is of importance for
the price setting on both sides of the market. The more general problem of applying one-
market logic to antitrust policy in two-sided markets is discussed in, among others,
Evans
(2003)
and Wright (2004). More specifically, methods for delineating the relevant market
in two-sided markets are discussed in
Evans and Noel (2005, 2008) and Filistrucchi et al.
(2014)
. As noted above, the method for market definition points at margins and diversion
ratios (or price elasticities) as crucial inputs. Let us consider a two-sided market consisting
of two distinct groups of consumers, called consumer groups A and B, respectively. In the
two-sided market model derived by
Rochet and Tirole (2003), the Lerner index equals
(assuming that c denotes the sum of the marginal costs on both sides of the market):
21
As shown in Farrell and Shapiro (2010), although diversion ratios and margins are still the crucial pieces of
information, the formula will differ from the one in Equation
(6.7). Alternatively, absent any cost effi-
ciencies one can estimate GUPPI (Gross Upward Pricing Pressure Index). For a discussion, see
Moresi
(2010)
and Farrell and Shapiro (2010).
247
Merger Policy and Regulation in Media Industries
p
A
+ p
B
c
p
A
+ p
B
¼
1
ε
A
ii
+ ε
B
ii
: (6.8)
This shows that the sum of the margins on the two sides of the market should be set equal
to the inverse of the sum of the own-price elasticities. From this, it is already obvious that
the traditional test for market definition, where the inputs consist of the margin and price
elasticity on just one side of the market (see Equation
6.3), will fail to capture the two-
sidedness. It is well known—as explained in the previous section—that margins can differ
substantially between the two sides. In fact, it can be profitable to have a negative margin
on one side in order to bring on board consumers from whom the other side can benefit.
It is then obvious that applying data from just one side of the market to conduct a critical
loss analysis can lead to major mistakes.
22
This is discussed in detail in Evans and Noel
(2008)
, who also extend the critical loss analysis to a two-sided market.
23
Unfortunately, it is difficult to detect the estimation bias if a one-sided market
approach is applied in a two-sided market. To see this, think about a newspaper market
with readers and advertisers.
24
A “naı
¨
ve” approach could be that we consider a price
increase for a hypothetical monopolist in the advertising market with a corresponding
drop in the volume of ads, ignoring the reader side. We would then ignore the readers’
response to a lower number of ads. If they are ad lovers, then a lower volume of ads would
lead to a lower circulation. If so, the naı
¨
ve approach would lead to a systematic under-
estimation of market size since it failed to take into account the reduction in revenues on
the reader side. On the other hand, the naı
¨
ve approach would overestimate the market
size of readers who dislike advertising.
Alternatively, we could use a more “sophisticated” version of the test where we con-
sider the overall change in revenue resulting from a specific price increase on the adver-
tising market only. Then we account for the change in revenues for readers. However, a
change in advertising prices would make it optimal to change the reader prices as well.
Since two instruments are better than one, it is obvious that allowing for changes in
reader prices would make the price increase on advertising more profitable. A critical loss
analysis with a change in advertising prices only would then underestimate the overall
effect on profits, and therefore imply that the estimated market size would be systemat-
ically larger than the market size obtained by considering the full pricing possibilities.
22
See also Evans (2003) and Oldale and Wang (2004), who both point out that there is not necessarily a
relationship between market power (or no market power) and the price-cost margin on one side of
the market.
23
Hesse (2007) also warns against a one-sided market definition in a two-sided market. On the other hand,
Ordover (2007) is not convinced that there is a need for new tools and new methods for antitrust policy
toward two-sided markets.
24
This distinction between a “naı
¨
ve” and a “sophisticated” approach follows from Calvano and Jullien
(2012)
.
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Handbook of Media Economics
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