The Right Policy at the Right Time

Competition policymakers are often challenged when assessing whether a forthcoming business conduct will be of public interest or, on the contrary, socially detrimental. For instance, a merger might be socially desirable if the in costs translates into a price cut, but a merger might also entail a social loss if the firm makes use of its market power to raise prices. The consequences of the operation being uncertain, policymakers have the difficult task of determining the optimal timing of regulatory controls. On one hand, regulators can choose a "wait and see" approach in order to acquire additional information about the consequences of the activity. Indeed, when intervening after completion of the business operations, policymakers base their decision on more accurate information about the social outcome and desirability of such operations. On the other hand, challenging a business operation after the fact results in some irreversible damage to customers as well as in reversal costs. For that reason, regulators might prefer to regulate ex ante, before the firm has begun undertaking the activity, based on little information. Marco Ottaviani (Department of Economics and Northwestern University) and Abraham Wickelgren (University of Texas School of Law) analyze how antitrust authorities should optimally resolve this trade-off between ex ante and ex post controls.

In their recently published paper entitled Ex Ante or Ex Post Competition Policy? A Progress Report (International Journal of Industrial Organization, volume 29, 2011, doi: 10.1016/j.ijindorg.2011.02.004), the authors use a toy model of merger control to identify the conditions under which ex post enforcement increases efficiency. They first study the case in which the amount of market power generated by the merger becomes known to both the firm and the antitrust authority once the merger is closed. In this case, ex post reviews might have the undesired effect of deterring firms from undertaking socially desirable mergers. In fact, once the regulators are able to picture the actual repercussions of mergers, they only allow socially harmless mergers, i.e. the ones generating limited market power and low payoffs to firms. Therefore, by only clearing the less profitable mergers, ex post controls might discourage mergers which are, ex ante, socially beneficial. This chilling effect would be eliminated if the authority were to commit not to undo mergers ex post.

In the second case analyzed by the authors, the merged firm privately learns how the merger impacts market power after the merger is consummated. However, the competition authority is able to infer the effect of the merger from the pricing policy of firms. By choosing high prices, the merged firm signals the regulator a large increase in market power, which makes the merger socially undesirable. Therefore, in so doing, profitable firms run the risk of getting the operation challenged by the competition authority. The threat of ex post review disciplines firms to lower their price, hence mitigating the anticompetitive effect of socially detrimental mergers. In turn, this pricing strategy also dissuades the regulator from undoing the merger, an operation which would incur a sizable social cost. The authors therefore conclude that ex post control might be optimal in case of asymmetric information when the threat of ex post review disciplines the firms' market conduct by preventing them from fully exercising their market power.

Given that the tradeoff between ex ante and ex post control is relevant for many other competition policy decisions, this result can be easily applied to a wide array of regulatory approval processes characterized by a considerable degree of uncertainty about the social consequences of private actions. A general theory of the optimal combination of ex ante and ex post regulation is presented in the authors' working paper titled Approval Regulation and Learning, with Application to Timing of Merger Control.