Friday, January 17, 2014

Maverick Theory in Mergers

Maverick Theory

  • Maverick theory explains why a particular merge harms competition.
  • The firm that stops when prices are raised (e.g. in the four corner gas-station example) is the maverick (this implies that the firms have already solved their cartel problems).
Mavericks exist for many reasons:
  • Selling complementary services
  • Relative excess capacity
  • Lower average cost

If two firms merge that doesn't involve the maverick, it shouldn't alter the price, unless it increases the ability of the merged firm to punish the maverick, but if the maverick merges it will presumably increase the maverick’s willingness to increase prices.

Mavericks are not the favored theory in mergers. The predominant theory is that of Judge Posner in Hospital Corp. Nonetheless, FTC v. Arch Coal, Inc. (D.D.C. 2004) acknowledged that a high-cost coal producer could not have restricted increased prices in the industry and denied the FTC’s request for a preliminary injunction denying the acquisition.

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