The government allowing a merger with high concentration to proceed

This activity is appropriate for a Principles of Microeconomics course. The students will need to be familiar with mergers, market power and and calculating the HHI. The students will need approximately 25 minutes to complete this assignment.
This activity works well up to 40 students.

Overview

In this activity, students evaluate the consequences of a merger between 2 firms with significant market share. According to antitrust theory, markets with a high HHI typically draw a lot of scrutiny if there is a proposed merger between firms with significant market share.
This activity is most effective to be taught after the instructor has covered oligopoly, and antitrust regulation, focusing on the Sherman Act, and horizontal mergers.

Expected Student Learning Outcomes

In this exercise, students will examine the conditions under which a merger in a highly concentrated industry might be allowed to proceed.

Information Given to Students

Texts students will see:

You are economic analysts who advise antitrust attorneys at the Department of Justice (DoJ) regarding enforcement. The DOJ has received a filing which states that AB and SABMillerCoors want to merge. You have used the industry HHI value as the reason to deny previous mergers. However, in this case, the Administration in power is reluctant to thwart mergers but is open to imposing conditions on the merger. You also have the market share data for each firm in the industry.

Which of the following would be the best condition to impose on the merged firm to protect consumers from the undue exercise of monopoly power?

A.        Require the newly merged firm to keep prices at their current levels. 

B.        Require the merged companies to price their product at marginal cost.

C.        Prohibit the merged firm from starting or continuing practices that interfere with the ability and incentives of independent beer distributors to sell and promote rival beers. 

D.        Prohibit the newly merged firm from selling Coors or any other Miller Coors brands in the U.S.

E.         Limit the number of additional independent breweries that the company can buy.

Handout for merger assignment (Microsoft Word 2007 (.docx) 11kB Aug31 22) 
Market share handout (Microsoft Word 2007 (.docx) 12kB Aug31 22) 

B

Companies will also make certain promises about competitive behavior, but given the changing competitive landscape, companies can always find a way to "break" these promises! The first two choices would not be realistic. With regard to the first choice, unless the good is vital during an emergency, public institutions tend to stay away from price controls. For choice b, a regulated monopoly firms such as a utility might be required to price their product at marginal cost but this condition is not imposed on other firms.

Choices c, d, e were actual conditions set forth by the Department of Justice in order for them to allow the merger to go through.

I like to remind my students that high prices have been a mainstay in the news and a disruption in their lives. Students are concerned with higher prices for many products. Even if they do not drink beer, they may be very aware of people who do. Monopolies and market power have been discussed in previous chapters in the class, and students are also aware of the potential decrease in consumer surplus when market power increases.There is no need for the instructor to be directly involved with the discussions. The instructor's role would be to walk around and check in on students, answer questions and help them to stay on task!
In terms of having students defend their answers, the students have to remember that using the HHI will not be useful here. The administration is giving permission for this merger to occur, even though the resulting industry will be highly concentrated. After students have discussed their answers, the instructor can reveal that this merger was actually approved in real life. But only after some strict conditions were met. Students will be made aware that when some mergers happen, it is about the global market, not just the domestic market. The instructor can also point that political views can have an influence on whether a contested merger can be approved or not. 
The instructor will inform the students of the conditions that were imposed in order to approve the merger.
1)SABMiller was required to sell its MillerCoors brand
2) "Independent distributors that sell AB InBev's) beer were given the freedom to sell and promote different variety of beers without financial recriminations from AB InBev
3) AB InBev must also allow federal review of future acquisitions of brewers or distributors

Students are tasked with looking at the Jet-Blue Spirit merger, or the Penguin Random House and Simon & Schuster. They must provide a page report on why they think the merger should go through.