The document provides an overview of the economic analysis conducted by the Chinese Taipei Fair Trade Commission (CTFTC) in merger investigations. It discusses the composition of staff members at the CTFTC, including economists. It also outlines the role of external experts, educational training programs, and the main quantitative methods used, such as diversion ratio analysis, critical loss analysis, regression analysis, and the upward pricing pressure index. The document then provides a case study of the CTFTC's analysis of a proposed merger between two large karaoke service providers in Chinese Taipei. The CTFTC used surveys and economic modeling to define the relevant market, calculate diversion ratios and other metrics, and ultimately blocked the merger based on the potential competitive

1. Economic Analysis in
Merger Investigations:
A Case in Chinese Taipei
Dr. Wen-Jen Tsay, Commissioner
Chinese Taipei Fair Trade Commission
9th December, 2020
Global Forum on Competition

2. Outline
Composition of Staff Members1.
2.
Role of External Experts &
Educational Training
3.
Main Quantitative Methods4.
5.
Procedure of Economic Analysis
A Blocked KTV Case
2

3. Centralized
Devolved
(decentralized)
Hybrid
(mixed)
 All the economists are
placed in the same
department or office
and led by an
economist, normally
the chief economist.
 All the economists are
assigned to different
departments and
offices.
 Each of the two
former types is
adopted.
Three Types of In-house Economist
Categorized by OECD
• The OECD identified three models that can
characterize the set-up within an authority :
3

4. Composition of Staff Members
• The CTFTC belongs to the mixed type because:
 Four of the seven commissioners, including the
chairperson, are PhD in economics.
 On Feb. 6, 2012,the CTFTC set up “the Information
and Economic Analysis Office” (IEAO) which
composed of six economics experts.
 40% of staff members majored in economic
or related subjects.
4

5. Procedure of Economic Analysis
• CTFTC has issued the “Principle of
Application of Economic Analysis in
Investigations” to deal with the following
cases:
 Abuse of dominance, concerted actions,
vertical price and non-price restraints, etc.
 Merger case (most frequently applied)
 From 2012 to 2019, 213 merger cases out of
461 cases (or 45.20%) needed in-depth
review based on economic analysis .
5

6. Procedure of the IEAO’s Participation in
Merger Review
• First, a handling unit may invite the IEAO to
jointly examine whether the documents are
complete.
• Second, a handling unit could request that the
IEAO perform economic analysis (including
quantitative or qualitative analysis).
• Before the handling unit presents the proposal for
approval, the countersignature of the IEAO is
also required.
6

7. Role of External Experts &
Educational Training
• External Expert Support: With cases
involving significant competition concerns, the
CTFTC might invite external economists to
attend workshops and public hearings.
Discuss topics range from market
definition, evaluation of market power,
structural or behavioral remedies, etc.
• Inner Educational training: The IEAO also
irregularly invites external economists to lecture
on economics topics to our staffs.
7

8. Quantitative Methods
•Main quantitative methods used by
CTFTC:
Diversion ratio analysis
Critical loss analysis
Regression analysis
The upward pricing pressure index (UPPI)
8

9. • We define the diversion ratio between product j
and product r as:
𝐷𝐷𝑟𝑟𝑟𝑟 = −
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑗𝑗
• That is, 𝐷𝐷𝑟𝑟𝑟𝑟 is the ratio of the sales lost from
product j to product r to the sales loss of product j,
when the price of product j increases.
• Diversion ratio can be used to evaluate the
demand substitutability between product r and j.
Diversion Ratio
9

10. • Critical loss is used for market definition.
• Firm has incentive to raise price under the
following profitability condition:
𝑃𝑃 + 𝑆𝑆𝑆𝑆 − 𝐶𝐶 𝑋𝑋 − 𝑍𝑍 > 𝑃𝑃 − 𝐶𝐶 𝑋𝑋 (1)
P : price
S : percentage of price increase
C : marginal cost
X : initial quantity
Z : loss of quantity causes by price increase
Critical Loss Analysis(1)
10

11. • Denotes the markup 𝑀𝑀 = (𝑃𝑃 − 𝐶𝐶)/𝑃𝑃, we can replace
𝑀𝑀 with 1/|𝜂𝜂| , where 𝜂𝜂 is the price elasticity of
demand via the widely known Lerner equation.
• Therefore, we can rewrite equation (1) as:
𝑆𝑆
𝑆𝑆 + 𝑀𝑀
>
𝑍𝑍
𝑋𝑋
Critical Loss (CL) Actual Loss (AL)
• As a result, the hypothetical monopolist can
profit by increasing the price, and one can define the
candidate market as a relevant market.
Critical Loss Analysis(2)
11

12. • To test if the pricing strategies of j firm depends
on the presence of r firm in the relevant market,
we can run the following regression:
ln 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝒋𝒋 = 𝛼𝛼0 + 𝛽𝛽1 𝐷𝐷𝒓𝒓 + 𝛽𝛽2Population
+𝛽𝛽3Income Per Capita
+𝛽𝛽4Other Store Number
+𝛽𝛽5 𝐷𝐷2016 + 𝛽𝛽6 𝐷𝐷2017 + 𝛽𝛽7Labor
+𝛽𝛽8Rent+ε
• 𝐷𝐷𝒓𝒓:Dummy variable of r firm , 𝐷𝐷𝒓𝒓= 1 denotes r
firm competes with j firm in the same market.
Regression Analysis
12

13. • If firms j and r merger, and they belong to the
same firm, the profit change in r due to the price
increase in j will bear as a cost by the merged
firm.
• We denote the aforementioned cost as 𝑡𝑡1, which
works via first changing the price of j, then the
sales of j, and finally the profit of r:
• 𝑡𝑡1 ≡ −
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑗𝑗
≡ −
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑗𝑗
• But we know
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑟𝑟
≅ 𝑝𝑝𝑟𝑟 − 𝑐𝑐𝑟𝑟, which is the unit
profit.
• Additionally, -
𝜕𝜕𝜕𝜕𝑟𝑟
𝜕𝜕𝜕𝜕𝑗𝑗
is the diversion ratio 𝐷𝐷𝑟𝑟𝑟𝑟.
Upward Pricing Pressure(1)
13

14. • Therefore, we can approximate 𝑡𝑡1 as 𝑡𝑡1 ≡
𝐷𝐷𝑟𝑟𝑟𝑟 𝑝𝑝𝑟𝑟 − 𝑐𝑐𝑟𝑟 .
• Likewise, 𝑡𝑡2 can be expressed as 𝑡𝑡2 ≡ 𝐷𝐷𝑗𝑗𝑗𝑗 𝑝𝑝𝑗𝑗 − 𝑐𝑐𝑗𝑗 .
• These are UPP.
• While evaluating the unilateral effect of a merge
firm, Farrell and Shapiro (2010) have
incorporated the cost efficiency due to merger
into consideration.
Upward Pricing Pressure(2)
14

15. Application in A Blocked Case :
Karaoke Service Providers
15

16. History of the Case
2003 first
merger
notification
was filed.
CTFTC did
not prohibit
but the 2
failed to
merge
2006
merger filed
again
CTFTC
blocked the
merger but
the decision
was revoked
and
returned to
the CTFTC
2007 CTFTC
reviewed the
case and
decided to
block again.
The decision
was revoked
again but
the CTFTC
won the
appeal in
the Supreme
Court in
2009 .
2010 and
2014 the 2
were fined
for gun-
jumping.
2019 file
merger
notification
for the
third time.
16

17. • The CTFTC used survey to calculate elasticity of
demand, critical loss, diversion ratio, and GUPPI.
Diversion Ratio Outcomes
Acquirer
( j firm)
Acquiree
( r firm)
Notes
Price elasticity
of demand
𝜂𝜂𝑗𝑗𝑗𝑗 = −5.84 𝜂𝜂𝑟𝑟𝑟𝑟 = −5.67 If price of each firm rises 1%,
sales will decreases approx. 6%
Diversion ratio 𝐷𝐷𝑟𝑟𝑟𝑟= 0.5805
(switch j to r)
𝐷𝐷𝑗𝑗𝑗𝑗 = 0.5291
(switch r to j)
Apparently higher than other
alternative venues
If price of
merging firms
all increase by
10%
% of consumers will switch to
the following candidate services:
mini KTV booths: 1.6%
singing apps:1.5%
online KTV: 0.6%
live steaming :0%
These new services obviously
could not be considered to
belong to the same product
market
→Thus we define relevant
market!
17

18. • The critical loss(CL) of j firm is:
𝐶𝐶𝐶𝐶𝑗𝑗 =
10%
10% + 1/5.84
= 36.87% < 58.4% 𝐴𝐴𝐴𝐴𝑗𝑗
Therefore, j firm itself can’t constitute a market.
• The critical loss(CL) of r firm is:
𝐶𝐶𝐶𝐶𝑟𝑟 =
10%
10% + 1/5.67
= 36.18% < 56.7% 𝐴𝐴𝐴𝐴𝑟𝑟
Similarly, r firm itself can’t constitute a market.
• This implies that these two firms could compete
in the same market.
Critical Loss Outcomes
18

19. • Our regression analysis shows that the
presence of j firm in the same relevant
market will drive down the price of r firm
by more than 10%.
• This analysis support the statement that
there exists significant competition
between these two firms.
Regression Outcomes
19

20. • Unilateral effect evaluation : the CTFTC also
used inner data of the merging firms to evaluate
GUPPI of both firms.
• According to the above analyses, the
CTFTC blocked the merger.
GUPPI Outcomes
Acquirer
(j firm)
Acquiree
(r firm)
GUPPI [4.37%-9.26%]
In each cities
[12.22%-22.44%]
In each cities
20

21. New Merger Simulation: Objectives
• GUPPI only has directions but not exact value, thus:
Modifies the three-stage merger simulation procedure of
Nevo (2010) by replacing the demand analysis in the first
stage with survey-generated diversion ratios and
own price elasticities.
We provide an exact post-merger prices formula
under the scenario of two firms competing in the same
relevant market and operating independent of the rest
firms in this market.
The above two-firm scenario is the one considered by
Farrell and Shapiro (2010) for UPP and regularly occurs
in most filing cases of merger, where the competition
enforcers can only have access to the data of these two
firms most of the time. 21

22. New Merger Simulation(1)
• Theorem 1: When two single-product firms were
competing in a relevant market after a merger
between these two firms, the post-merger pricing
strategy of these two products is:
 𝑝𝑝2
∗
=
−𝜂𝜂11 𝜂𝜂22 𝑚𝑚𝑚𝑚2 𝐷𝐷12 𝐷𝐷21−𝜂𝜂22 𝑚𝑚𝑚𝑚1 𝐷𝐷12
1+𝜂𝜂11+𝜂𝜂22+𝜂𝜂11 𝜂𝜂22−𝜂𝜂11 𝜂𝜂22 𝐷𝐷12 𝐷𝐷21
+
𝜂𝜂22 𝑚𝑚𝑚𝑚2+𝜂𝜂11 𝜂𝜂22 𝑚𝑚𝑚𝑚2
1+𝜂𝜂11+𝜂𝜂22+𝜂𝜂11 𝜂𝜂22−𝜂𝜂11 𝜂𝜂22 𝐷𝐷12 𝐷𝐷21
 𝑝𝑝1
∗
=
𝜂𝜂11 𝑚𝑚𝑚𝑚1−𝜂𝜂11 𝑚𝑚𝑚𝑚2 𝐷𝐷21
1+𝜂𝜂11
+
𝜂𝜂11 𝐷𝐷21
1+𝜂𝜂11
𝑝𝑝2
∗
• Where 𝑚𝑚𝑚𝑚𝑖𝑖=𝑝𝑝𝑖𝑖 1 +
1
𝜂𝜂𝑖𝑖𝑖𝑖
⇄
𝑝𝑝𝑖𝑖−𝑚𝑚𝑚𝑚𝑖𝑖
𝑝𝑝𝑖𝑖
=
−1
𝜂𝜂𝑖𝑖𝑖𝑖
, i=1 or 2
• Moreover, 𝑝𝑝1
∗
= 𝑝𝑝1, 𝑝𝑝2
∗
= 𝑝𝑝2 when 𝐷𝐷12 = 𝐷𝐷21 = 0.
22

23. • The formula in Theorem 1 is “practical, robust, and
transparent” as Farrell and Shapiro (2011) mentioned,
because the value of prices, marginal cost, diversion
ratios, price elasticities, and diversion ratios can be easily
obtained via surveys and Lerner equation.
• Tsay and Hu (2020) also prove that:
𝑝𝑝1
∗
− 𝑝𝑝1
𝑝𝑝1
≥ 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺1
𝑝𝑝2
∗
− 𝑝𝑝2
𝑝𝑝2
≥ 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺2
.
• The price increase ratio resulting from merging is
always greater than or equal to the GUPPI.
New Merger Simulation(2)
23