This presentation by Korea was prepared for the break-out Session 1, “The role of economists in merger teams and qualitative evidence review”, in the discussion “Economic Analysis in Merger Investigations” at the 19th OECD Global Forum on Competition on 9 December 2020. More papers and presentations on the topic can be found at http://oe.cd/eami. This presentation was uploaded with the author’s consent.

1. The role of economists in merger teams
and qualitative evidence review
Economic Analysis Division in KFTC

2. Contents
• Economists in KFTC
• Overview
• Case: Linde/Praxair merger
• Closing remarks
2

3.  KFTC has ten economists.
 Five economists belong to Economic Analysis Division led by a
chief economist.
 The other five are assigned to investigation divisions that need
economic analysis.
 Economists are used for
 Collecting data and Attending interviews with stakeholders.
 Constructing markets for the market definition and Proving
anti-competitiveness for mergers, cartels, abuse of dominant
firms.
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Economists in KFTC

4.  Why is Economic Analysis important in Merger Review?
 If a competition authority performs only simple market share
test or HHI test, there is a concern about overestimating or
underestimating post-merger anti-competitiveness.
 Therefore, Economic Analysis is necessary in Merger Review
and economists play an important role.
 Economists contribute to Merger Review in terms of the
market definition and demonstrating anti-competitive effects.
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Overview

5.  Usually, Economic Analysis refers to Quantitative
Analysis and economists use various methods.
 Critical Loss Analysis (CLA) for Market Definition
 Upward Price Pressure (UPP) for price effect Analysis
 Merger Simulation
 Bidding Analysis for transactions through tender
 Very large econometric methods
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Overview

6.  Quantitative Analysis provides us with concise results by
numerical values.
 However, Quantitative Analysis inevitably contains errors.
 We always have limited access to data.
 It is likely that we choose wrong analysis methods.
 Wrong approach to markets or products by preconception,
prejudice etc.
 There may be not a model that explains adequately markets
or products.
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Overview

7.  Therefore, Qualitative Analysis is essential in Merger Review.
 Then, How to do Qualitative Analysis?
 Economists identify how markets work and economic agents
behave.
 For the purpose, economists take full account of market
conditions by reading documents and attending interviews with
stakeholders.
 We should catch the inconsistency of results from Quantitative
Analysis and facts from documents or economic theories.
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Overview

8.  Case Overview
 Linde and Praxair were major suppliers in global market of
industrial gases.
 After the merger, merging parties would be the leading
company in South Korea’s several gas markets.
 An issue in Merger Review was determining whether
there is the post-merger anti-competitive effect.
 Since the market share of the merged entity was around 40%,
it seemed that the effect of the merger is ambiguous.
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Case: Linde/Praxair merger

9.  We performed Merger Simulation since we did not
have much data.
 To derive proper results from Merger Simulation, it is
necessary to choose proper simulation models.
 At first, we conjectured that firms produce the same products
in terms of quality. We chose Cournot Quantity Model.
 Usually, the price effect of Merger Simulation using Cournot
Model is high, which may be a strong basis for anti-
competitiveness in this merger case.
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Case: Linde/Praxair merger

10.  Before performing Merger Simulation using Cournot
Model, we must check the following relationship.
𝑃−𝐶 𝑖
𝑃
=
𝑠 𝑖
𝜖
⇒ margin rate of firm i =
𝑚𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒 𝑜𝑓 𝑓𝑖𝑟𝑚 𝑖
𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦
 Since Market price elasticity is fixed, the margin rate of firm 𝑖
is proportional to the market share of firm 𝑖.
 However, this proportional relationship was not observed in
this merger case.
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Case: Linde/Praxair merger

11.  Qualitative Analysis was needed to remedy the
problem.
 We considered the market conditions carefully.
 Though gases in the markets seemed to be of the same
quality, there may be differences in equipment size, cost
structure, etc.
 It means that firms may set different prices for the same
product.
 In practice, the variance of average prices among firms was
large to some degree.
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Case: Linde/Praxair merger

12.  We used other Merger Simulation tools, PCAIDS,
based on Bertrand Price Model.
 Since a demand of a product is affected by other products’
prices, generally we should estimate many parameters.
For example, in AIDS model, if n products exist, we should
estimate 𝑛2 parameters. We call this situation, “Curse of
dimensionality.
 In a situation where we don’t have sufficient data, an
alternative is PCAIDS.
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Case: Linde/Praxair merger

13.  We used other Merger Simulation tools, PCAIDS,
based on Bertrand Price Model.
 PCAIDS assumes that when the price of a product increases,
the product is replaced by another product in proportion to
the market share of each product.
 Epstein and Rubinfeld (2001) state that this method is reliable
when applied markets with limited product differentiation, and
it gives us “quick looks” for the range of judgements.
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Case: Linde/Praxair merger

14.  We used other Merger Simulation tools, PCAIDS,
based on Bertrand Price Model.
 Fortunately, the results were close to those from Cournot
Model and we determined that this merger causes an anti-
competitive effect in gas prices.
 However, the result from Cournot Model is always not
consistent with Bertrand Model. If we had not considered
qualitatively numerical results, we would have drawn a wrong
conclusion.
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Case: Linde/Praxair merger

15.  In Merger Review, merging parties tend to expand a
market in question and to reduce post-merger price
effects in order to weaken post-merger anti-
competitive effects.
 Considering carefully the intention of merging parties,
economists should perform Economic Analysis.
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Closing remarks

16.  Meanwhile, economists should avoid accepting the
results of quantitative analysis without careful
consideration.
 Economists should consider carefully why those results
are derived based on a full understanding of markets
through Qualitative Analysis.
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Closing remarks

17. 17
Thank you