Efficient Efficiencies Analysis

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I recently spoke about efficiencies analysis at a conference at the American Antitrust Institute. I made two main points in that speech.

First, since the question that we’re really asking is whether a merger or some type of conduct makes consumers better off, we need to (and do) look at all of the effects, positive and negative, and assess their collective impact. Put simply, since pricing depends on marginal costs, if a merger results in lower marginal costs, then that alters the firm’s profit maximizing price. As a consequence, if we’re considering the impact of a merger on prices we really should take into account any impacts on marginal costs, i.e. efficiencies.

A coherent unified framework for thinking about efficiencies and competitive impacts is important. It focuses us on total impacts, provides discipline, and helps us understand better what information/evidence is informative. It also can be very helpful for us in developing new methods for measuring and assessing the impacts of efficiencies.

Second, we can make progress in modeling efficiencies. Economists have made tremendous strides in modeling competitive effects. These improved modeling approaches have enhanced our ability to analyze competitive impacts and formulate appropriate responses. We can also make progress on modeling efficiencies, just as we have with competitive effects.

We can draw on the economic theory and econometrics developed in the 1970s and 1980s to learn about the nature of production and costs, and augment it with some new and potentially useful perspectives. One of those new perspectives that should be useful is the economics of organizations. This is a still somewhat small, but growing area in economics. The economics of organizations goes inside “the black box” and tries to understand why there are differences across firms in productivity and costs by understanding how organizations work and what makes them function better. These sorts of insights can be brought to bear on efficiencies analysis.