Unilateral Effects Analysis in Merger Review: Limits and Opportunities

Unilateral Effects Analysis in Merger Review: Limits and Opportunities – Malcolm B. Coate (US Federal Trade Commission)

ABSTRACT: Many economists believe that unilateral effects analysis should dominate the merger review process for differentiated products. However, it is far from clear if these theoretical models are broadly applicable, as they impose monopoly-style entry assumptions that constrain the competitive process. By abstracting from the complexities of the market process, the standard unilateral effects analysis gives rise to tractable mathematical equilibriums. Of course, the equilibriums may not offer insights if the key assumptions are not valid.

This paper will explore the limits to and opportunities for unilateral effects analysis, using the Landes-Posner model of a dominant firm as an initial example, before expanding the discussion to Nash-Bertrand models of competition. These Lerner-based modeling structures are problematic, especially when the entry-related assumptions are not credible. Because economic models may remain applicable even when their assumptions are not valid, the discussion addresses various types of effects evidence that could confirm the predictions of a specific unilateral effects model. Court precedent is reviewed, with an emphasis on a current understanding of the structural presumption, along with the applicability of effects evidence to litigation. By focusing the analysis on facts, unilateral effects analysis serves to aid the merger review process.