1. RBB ECONOMICS
Coordinated effects of
Mergers
NKULULEKO TSHABALALA
2/2/2016

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Coordination effects of mergers
1. Introduction
This paper look at one of the outcomes of a horizontal merger (a business consolidation that
occurs between firms who operate in the same space, often as competitors offering the
same good or service) which is a coordinated effects. The paper will proceeds as follows In
the second section I will define what are coordination effects, and analyse them under
Airtours criteria for the sustainability of tacit collision; in the third section I will do the
assessment of coordination effects using ‘checklist approach’ implied by EC Horizontal
Merger Guidelines, which raises three fundamental questions, the first question is, will the
merged entity and remaining competitors be able to reach a tacit coordination; the second
question is are market characteristics such that any tacit understanding would likely be
sustained?; and the last question is will the proposed transaction make it significant more
likely that tacit coordination will occur or make tacit coordination more effect?. In the
fourth section of this paper I differentiate between the coordinated effects and non-
coordinated effects also known as unilateral effects of mergers; in the fifth section I will
describe the statistical tool which can be used to analyse the situation where the firm is in
difference between colluding and deviation from the collusion, going to the sixth section I
will give empirical analysis on coordinated effects (using the merger between SABMiller and
Molson Coors in the US beer industry). And last section give concluding remarks about
coordinated effects, non-coordinated effects and empirical evidence.
2. Coordinated effects
Coordinated effects it’s one the two outcomes of a horizontal merger. Horizontal merger,
it’s where by two companies with the same distribution/ or supply in the same relevant
market decides to merger.
Coordinated effects arises under certain conditions (e.g. market transparency and product
homogeneity), when the merger increases the profitability of the merging parties can be

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deemed as a coordination effect, and under the coordinated effect both merging parties
and their competitors can be able to coordinate their behaviour in an anti-competitive way,
this behaviour include tacit or express collusion (it’s a situation in which firms set its prices
higher than the market benchmark), which is the non-competitive agreement between the
rivals to disrupt the market equilibrium, therefore coordinated effects arises when the
merger creates a condition that make tacit coordination more likely or more effective. It
may be that after the merger the market structure has changed resulting to lesser firms (e.g.
switching from perfect competition to oligopoly). Under EC horizontal merger guideline
(40), “coordination may take different forms, in some market can be based on prices which
is keeping prices above the competitive level, or may be in the form of limiting the
productivity in the market”.
Coordinated effect is beneficiary when firms engage to tacit collusion respectively rather
competing with one another, as the industry profits are much higher compared to a perfect
competition/or before the merger. On the other hand, tacit collision may create
disequilibrium between constituent firms as one may lower its prices and increase its
production capacity.
Since tacit coordination may result to the greediness of one firm to benefit in expense of the
other firm, therefore, there are three conditions to be met under Airtours Criteria for the
tacit collision to be sustainable both internally and externally. (The first two criteria have to
be maintained internally and the last one is externally).
 Market transparency: “firms must be able to coordinate their decisions over
setting the prices and quantity to be sold in the market”, retaliation can be
much quicker. EC horizontal merger guideline “further the degree of
transparency often depends on how the market transactions take place in a
particular market(e.g. transparency is likely to be high In a market where
transactions take place on a public exchange or in an open auction)i
 Availability of retaliation mechanism: the more effective the credible
retaliation mechanism is, i.e. the greater the losses incurred by the deviation
firm as a result of aggressive completion from the other firms, the easier to
achieve coordinated equilibrium. “Firms must be able to punish the cheater

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by increasing the output or decreasing the prices for a period after a
deviation so as to depress the profit of the deviating firm in a way that makes
deviation unattractive.
 The absence of countervailing forces: coordination have to be sustained
externally in such a way that coordinating firms are not impeded by factors
such as an actual competitive fringe or potential competitors that prevent
the coordinating firms from excising collective market power.
Ceteris paribus, tacit collusion it’s easier and efficiency managed on concentrated market,
because;
 it’s easier to monitor collusive conduct with fewer firms; and
 The gains from deviation are likely to be greater when there is a large number.
3. Assessment of coordinated effects
According to EC horizontal merger guidelines, in assessing the coordinated effects it applies
the “checklist approach”, which requires the consideration of the following three questions,
I. Will the merged entity and remaining competitors be able to reach a tacit
coordination?
 Coordination on prices: one of the coordination that can be reached between the
merging firma and its competitors is to decide on prices, for example setting a price
above competitive level.
 Coordination on non-pricing parameters of competition: “the scope condition on the
non-pricing parameters arises where the outcome of price competition is affected by
previous strategic decisions, e.g. The level of investment in capacity”.
 Customers/market share: effectiveness completion can be reduced if firms can
agree tacitly not to target each other customers. Firstly can be done by allocating
customers amongst various coordinating firms and agree not to expand or enter

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within rivals home, and lastly by separating market each firms target the certain
region and risk of entry controlled by the retaliation mechanism.
II. are market characteristics such that any tacit understanding would likely be
sustained?; and
The second consideration of the coordination assessment is whether collusive agreement
would be sustained. Firstly can be done internally in which coordinating firms have
incentive to sustain the collusive agreement, they can ensure sustainability of the collusion
by retaliation mechanism, punishing the firm deviate from tacit agreement. Therefore each
firm have to monitor each firm’s behaviour which requires transparency in the market.
Lastly the external sustainability, the behaviour of the colluding firms must not be
undermined by the action of the other agents, be they non-coordinating rivals, potential
competitors or customers.ii
Below are few market characteristics which lead to a likelihood of coordination conduct:iii
 it has to be a concentrated market;
 barriers to entry;
 homogeneous product and cost ;
 transparency of conduct;
 multi-market interaction;
 no existence of maverick firms.
III. Will the proposed transaction make it significant more likely that tacit
coordination will occur or make tacit coordination more effect?
Coordinated effects arises if a merger brings a change to the market structure, after the
post-merger, which makes it easier for merging firm and its competitors to coordinate or
makes the coordination more effective. “Assessing the specific industry changes that will

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result from a merger is therefore a crucial element of any assessment of coordinated
effects.”
These three questions have to be asked and answered affirmatively when assessing the
coordinated effects.
4. The difference between unilateral and coordinated
effects
Both unilateral (also known as non-coordinated effects) and coordinated effects are the
result of horizontal merger; in this section I will highlight the key different between the two.
Non-coordinated or unilateral effects:
A merger gives rise to unilateral effects, when the elimination of the existing competitors
leads to an increase in the prices above pre-merger levels without a need for a co-operative
response from its competitors (no need for tacit agreement) or maybe a conduct of
decreasing the quality and innovation of the products. Such competitive constrains derived
from the extent to which each party regards the other as a likely alternative for its existing
customers.
Unilateral effects are conducts that decrease competition in the market and tend to harm
the consumers, and are most likely to occur in the market of differentiated product,
whereby the product are close substitute and are different to eyes of the consumers in
terms of technology, innovation or branding. Non-coordinated effects depend on the
central parameters employed by the firm (i.e. prices or quantity) and whether the firms
produce homogeneous or differential products.
 Price competition with homogeneous product
“In an oligopolistic market for homogeneous product in which firms engage in price
competition, the short-run, non-coordinated Nash equilibrium is characterised by a prices
equal to marginal costs, the outcome which would hold in a perfect market, therefore the
merger of would not affect the market outcome, unless it give rise to a monopoly”.iv

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Therefore the merger has no adverse effect to the remaining competitors, and prices,
quantity and quality will be the same as before the merger
 Quantity competition with homogeneous product
The overall outcome of this principle is the quantity supplied by the merged firm will
decrease relatively to an increase in its prices, but the quantity produced by the remaining
firms will increase.v
 Price competition with differential product
Price completion with homogeneous product result to a same situation with perfect market
conditions, inversely in the market of differentiated products. Firms charge prices above
the market equilibrium; because they would not lose all their customers immediately due to
the fact that there are consumers who are willing to pay for the hire product resulting to
their preference. Furthermore the switching by consumers between competing firms
depends on whether the product has a close or distant substitute, with close substitute I
price increase will result to a switch of consumers between firms as the product are deemed
identical and with distant substitute the price increase will be less significant to consumers.
 Quantity competition with differential product
In the market of differential product whereby firms compete primarily on quantity, the out
is it is more the same with the market of homogeneous products the slight different is that
instead of perfect substitution there imperfect substitution. The reduction of firm’s quantity
will affect its prices and any of those with close substitution. Therefore the merger of firms
that produces close substitute will have minor effect in the market outcome, this leads to a
higher demand for goods that are considered less close substitute.
5. Comparing payoff for tacit collusion and defection
One standard dynamic strategy that can sustain equilibria of the dynamic game is known as
a “grim strategies.” This approach assumes that if the firm defect from a cartel (tacit
collusion), the market will return to the equilibrium in all successive periods. If firms follow
grim strategies, the only way in which the tacit collusion can be sustained, it is when there

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are no incentives to defect from the coordination, which requires that the expected benefit
from collusion be higher than the expected benefit from defection.vi
Formally the firm’s incentives compatibility constraint can be written as follows “Friedman
(1971):
 𝑉𝑓
𝑐𝑜𝑙𝑙𝑢𝑠𝑖𝑜𝑛
=
𝜋 𝑓
𝑐𝑜𝑙𝑙𝑢𝑠𝑖𝑜𝑛
(1−𝛿)𝑁
> 𝜋 𝑓
𝑑𝑒𝑓𝑒𝑐𝑡𝑖𝑜𝑛 +
𝛿𝜋 𝑓
𝑐𝑜𝑚𝑝𝑒𝑡𝑖𝑡𝑖𝑣𝑒
1−𝛿
= 𝑉𝑓
𝑐ℎ𝑒𝑎𝑡
Where, N is the number of firms (since an individual’s firm’s profit is declining in N, this
relationship suggest that generally mergers, falls in N, will make coordination easier to
sustain), 𝜋 𝑐𝑜𝑙𝑙 𝑢 𝑠𝑖𝑜𝑛 is the profit for colluding firms, 𝜋 𝑑𝑒𝑓𝑒𝑐𝑡𝑖𝑜𝑛 is the profit for the firm who is
assumed to successfully to cheat for one period, 𝜋 𝑐𝑜𝑚𝑝𝑒𝑡𝑖𝑡𝑖𝑣𝑒 represent the profit to a firm
under static Nash behaviour and 𝛿 the discount factor for future revenue streams.vii Where
(𝑓) represent the specific firm. This inequality it follows from the “subgame perfection”
which states that in collusive equilibrium firms must prefer to coordinate whenever they
have a choice or not to., and Davis and Huge (2008) estimate the firm’s discount factor (δ)
using the working average cost of capital (WACC), which in turn is computed using the debt
equity structure; cost of capital; and interest cost of their use to debt finance, WACC can be
computed as follows:
 𝛿 = 1
1+𝑊𝐴𝐶𝐶
 𝑊𝐴𝐶𝐶 = 𝐾𝐸. 𝑊𝐸 + 𝐾 𝐷 ∗ (1 − 𝑡𝑎𝑥). 𝑊𝐷 & 𝐾𝐸 = 𝑟𝑓 + 𝛽( 𝑅 𝑚 − 𝑟𝑓)
Where, 𝐾𝐸 : cost of capital
𝐾 𝐷 : cost of debt
𝑊𝐸 : Weight of equity
𝑊𝐷 : Weight of debt
𝑟𝑓 : Risk free rate
𝛽 : Beta (market systematic risk)

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𝑅 𝑚 : Market return
𝑡𝑎𝑥: Corporate tax
Therefore for the collusion to be an equilibrium, the incentive compatibility constrain must
hold for every single firm active firm, and for mergers to generate a strengthening of
coordinated effects, the inequality must hold /or be more easily for all or some firms after
the merger than it did before the merger.
6. Empirical evidence
For empirical analysis I will focus on the U.S Brewery Industry, an industry with three top
breweries namely Anheuser-Bush Inbev (ABI); SABMiller; and Molson Coors respectively and
part of the top five is Modelo Group and Heineken. “Breweries compete in prices, new
product introduction, advertising and periodic sales, the beer industry differ from typical
retail consumer product industries in its vertical structure, because of the state law
regulating the sales and distribution of alcohol”.viii This is how the brewery industry looks
like for U.S. In 2008 SABMiller and Molson Coors became a joint venture MillerCoors, which
significantly had an effect on the overall industry’s in term of: market share; retail prices;
and industry concentration.
U.S. Beer industry with top three firms ABI; SABMiller; and Molson Coors, an outcome of
the merger between SABMiller and Molson Coors let to a change in market through both
coordination effects which are price increases and reduction in the quantity supplied
between the three top firms in the industry.ix After the merger, the merging entity
MllerCoors and its close rival had a tacit collusion which increased prices by 6 per cent and
led to a reduction in quantity supplied, the coordination agreement was between
MillerCoors and ABI. The merger also result to a significant change in the share price/or
change in the dominance of the merging entity in the industry
Table: 1 market share before and after the merger.

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Source: Mergers Facilitate Tacit Collusion: Empirical Evidence from the U.S Brewing industry
Prior to the merger (2001-2008) the market share on average for the top five firms in the
industry (ABI; Miller; Coors; Modelo; and Heineken) had 37%; 19%; 11.%; 9%; and 5%
respectively. Where by the top three firms had a market share of 67% on average the two
lower firms had an average of 14%. The brands of five breweries account almost 80% of the
market revenuex. Miller and Coors had 19% and 11% market share respectively on average,
post-merger, the merging entity (MillerCoors) jointly had 29% of market share on average..
This increased the dominance of merging entity and a slight reduction in the dominance of
its close rival ABI by one basis point to 36% of market share on average. Now the industry is
concentrated with two top firms dominating the market namely ABI and MillerCoor,
therefore the tacit agreement is easily conducted within a concentrated industry and easily
monitored. When a merger result to a concentrated market it increases the likelihood of
tacit coordination, we will analyse tacit coordination in this market by looking at price
differential before after the merger.
The figure below plots the top five brand average regional log retail prices 0f 12-packs, over
the period of 2001-2011, brands are: Bud light; Miller light; Coors light; Corona extra; and
Heineken for ABI; Miller; Coors; Modelo; and Heineken respectively. There is substantial
evidence that the AIB and MillerCoors prices increases are due to tacit collusion in the wake
of the Miller/Coors merger. In most geographic areas, ABI is the share leader and
announcements are transparent and are generally had been matched.xi
Figure: 1 average retail prices for 12-packs

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Source: Mergers Facilitate Tacit Collusion: Empirical Evidence from the U.S Brewing industry
As plotted in the figure we can see that tacit coordination is between the merging entity
(MillerCoor) and its close rival ABI, group Medelo not join the tacit collusion, but adopted a
“Momentum Plan” that was design to grow Modelo’s market share by shrinking the prices
gaps between brands owned by Modelo and Domestic premium brands.xii By observing the
prices of their brands: Bud light; miller light; and Coors light. Before the merger they had a
downward trend in prices until June 30, 2008 (indicated by red vertical line) which signifies
the consummation of the Miller/Coors merger. The prices of ABI (Bud light) follows the
prices of MillerCoors( Miller light and Coors light) which explains the coordination effects
between the merging entity and one of its rival(s).
7. Conclusion
Coordinated effects are mostly formed in the market with the following characteristics:
concentrated markets; barriers to entry; no existence of maverick firms; homogeneous
products and cost; transparency of conduct; and multi-market transaction. And in order for
the tacit collusion to be sustainable, three principles of the Airtours Criteria has to be met,
assessing coordinated effects raises three fundamental questions highlighted by EU
Horizontal merger guidelines. On the other hand non-coordinated effects does not require
any tacit collusion (when the elimination of the existing competitors leads to an increase in
the prices above pre-merger levels without a need for a co-operative response from its

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competitors) and is mostly likely to occur in the market of differential products. Where its
product are close substitute and are different in the eyes of consumers and are different in
terms of quality, technology and innovation or branding. And one of the tools used to
measure the value of collusion is the ‘incentive compatibility constraint by Friedman (1971).
Using the merger between SABMiller and Molson Coors, to provide empirical evidence, that
the merger of the two firms led to an increase in prices of the beer supplied by these firms.
This asserts the existence of tacit collusion and coordination effects those results from the
horizontal merger
i EC horizontal merger guideline par.50
ii EC horizontal merger guideline par.56
iii ACCC (Dr Graeme Woodbridge Economic Adviser 16 February 2012
ICN Mergers Working Group)
iv See the (Law and Economics in European Merger Control) p.ge 175
v See the(Law and Economics in European Merger Control) p.ge 177
vi Quantitative techniques for competition and antitrust analysis, (P.Davis and E.Garce) p.ge 429
vii
Estimating the ‘Coordinated Effects’ of Mergers (P.Davis and C.Huse : 2013: p.ge 2)
viii Mergers Facilitate Tacit Collusion: Empirical Evidence
from the U.S. Brewing Industry( NH miller and MC Weinberg: 25 March 2015: p.ge 5)
ix see EC Horizontal Merger guidelines par.40
x Mergers Facilitate Tacit Collusion: Empirical Evidence
from the U.S. Brewing Industry( NH miller and MC Weinberg: 25 March 2015: p.ge 6)
xi Mergers Facilitate Tacit Collusion: Empirical Evidence
from the U.S. Brewing Industry( NH miller and MC Weinberg: 25 March 2015: p.ge 11)
xii Mergers Facilitate Tacit Collusion: Empirical Evidence from the U.S. Brewing Industry( NH miller and MC
Weinberg: 25 March 2015: p.ge 13)