Final Report Summary - HM-PP (Advances in Horizontal Merger Policy and Selected Public Policy Topics) Advances in Horizontal Merger Policy and Selected Public Policy TopicsAdvances in Horizontal Merger Policy (First Part)Horizontal merger control policy of a competition authority is said to be conducted under the consumer welfare standard if the effect of a proposed horizontal merger on consumer welfare is the main focus of the analysis in making the decision whether to approve that merger. Consumer welfare standard is widespread and used by major jurisdictions like the USA and the EU. The Project improves the accuracy of implementation of the consumer welfare standard in horizontal merger control. Current merger control policies typically do not consider the strategic reactions of firms to policy. The main model in the Project is, in contrast, a game theoretic model which argues that firms are not passive subjects of policy both before and after the merger or merger attempt. In this more sophisticated model, firms take into account merger control policy in their strategic price and non-price decisions, particularly product positioning. In this setting, firms may react to a merger blockage by increasing product differentiation. Such an increase in differentiation softens price competition hence merger blockage does not result in as low prices as expected. Thus, merger control policy as implemented currently may not be optimal, and the Project finds optimal merger policy in a series of game theoretic models that get increasingly sophisticated. To advance horizontal merger control policy, the model renders optimal (consumer welfare maximizing) merger control policy as a function of both the highest and lowest willingness to pay for the product in question and the average variable cost of production, which can all be empirically estimated. The Project shows that optimal merger policy becomes laxer with increasing average variable costs but stricter with increasing minimum and maximum willingness to pay. Policy-makers at competition authorities can use this model to revise their existing policies. The history of merger approval rates in a given industry roughly renders the current merger control policy as a reduced probability of merger approval (e.g. 15 mergers approved out of 50 imply a 30% chance of approval). The model in the Project can be used to estimate the optimal policy using willingness to pay and cost estimates. As such, if an optimal rate estimated from data is below the actual rate of approval then this may be a contributing factor in tilting the decision towards rejection, and vice versa. Using this model, consumer groups can also follow merger approval decisions and detect deviations from the optimal.Selected Public Policy Topics (Second Part)A second objective in this Project is to carry out an empirical research program in Selected Public Policy topics. The goal is to address Social and Economic Policies in Europe and globally. Specific results include: • Formal v. Informal Care: Using SHARE - Survey of Health, Ageing and Retirement in Europe data and panel data techniques, formal nurse long term care in Europe is mainly found to be a complement to informal care, hence policies towards improving the nurse labor market are as important as policies subsidizing informal care.• Moral Hazard in Health Insurance: Ex post moral hazard (“price effect”) in health insurance is decomposed into two using a zero-inflated regression model and taking into account adverse selection. The first part relates to the initial decision to pursue medical care, the second part concerns the quantity demanded. The magnitudes of each part are different across medical services leading to different policy measures. In the US, 7% of physician visits is attributable to the first part of moral hazard, which can be reduced with better information provision. Health data in Europe and Turkey are investigated, access to Eurostat is obtained, and data for Turkey are obtained and cleaned, and data collection is ongoing for Europe. Initial estimations indicate significant moral hazard in hospital services in Turkey. Governments and private insurance companies can use these results in designing health insurance.• Social Enterprises: Using a Tobit regression on US data, social enterprises are found to be more efficient in managing their overhead, administrative and fundraising expenses compared to traditional philanthropic nonprofits. This result is relevant for non-profits and governments throughout the world.• IMF Catalytic Effect: Taking into account both the maturity and the interest rate of public and publicly guaranteed private debt, it is shown using a two-stage least squares method (to avoid selection bias) that countries have access to loans with better conditions after an International Monetary Fund (IMF) agreement. The catalytic effect is likely to lower the level of commitment, political will, and “ownership” of the IMF program of the borrower country. The borrower countries should consider the catalytic effect in determining the amount of financial assistance from the IMF. • Venture Capital: Differences exist by stages of venture capital (VC) investment and across industries. In particular, the importance of the number of VC led IPO transactions as the main driver of VC investment decreases with the level of technology involved in the sector. IPO transactions are particularly important in software, networking and equipment, and business products and services industries. These results can help investors plan their exit strategies.• Career Choices of Doctoral Students: More interaction with industry at a university is typically associated with more of the university's (science and engineering) doctoral students choosing industry employment. Also, there is a positive relationship between universities’ licenses and startups and their graduates’ post-doctoral study choices. University administrations and education policy-makers can benefit from these results especially in planning for future supply in academia.• Defense Spending: Using regression analysis and the most recently released American National Election Survey data, this paper evaluates the role political party identification and other relevant variables have played in defense spending preferences. In general, during the 1980s, political party identification played a large role in an individual’s defense spending preferences. In the 1990s, this trend seemed to begin to dissipate as politics took a back seat to other less partisan factors such as education, marital status, and other demographic factors. In the 2000s, the pendulum swung back and politics became an even stronger determinant of defense spending preferences then it had been in the 1980s. Political Analysts can use these results to understand the impact of public opinion.• Collusion and Competition Policy: Using a game theoretical model, it is shown that vertical contact (simultaneous operation in both upstream and downstream markets) of firms facilitates collusion. Thus, if vertical mergers are suspected to lead to subsequent vertical mergers in an industry, then they should receive higher antitrust scrutiny relative to single isolated vertical mergers.The full list and text or link of papers can be found at Clicking on Horizontal Mergers (Public Policy filters the papers from the first (second) part of the project).