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General Electric And Honeywell Vs European Anti Trust Commission

1022 words - 5 pages

The merger between General Electric (GE) and Honeywell would have been the largest ever merger between two industrial companies, it would have increased GE’s size by almost a third. GE is a leading manufacturer of airplane engines and Honeywell is a leading producer of avionic systems (such as engine starters). It was a stand out merger as it was the first time a merger between two US companies had been solely derailed by the European anti-trust Commission (EC), after having been cleared by the US Department of Justice (DoJ).
The EC’s rational to block the merger was based on two main arguments that point toward dominance and an “incompatibility with the common market”. There was an ...view middle of the document...

GE and Honeywell then merge and engage in “mixed bundling”, meaning they still sell the individual components but also a package of the two. The merged firm lowers the price of the bundled components and raises the price of their stand-alone components. What happens is due to a “Cournot effect”; prior to the merger a price cut by one of the merging firms, say GE, will increase Honeywell’s sales. Without the merger neither firm will consider this externality before lowering price. Following the merger however, the entity does consider this effect and can “internalise” it by lowering the price of the bundle to a lower level than the two firms would have chosen independently. Consumers are more likely to demand the cheaper bundled goods and this will increase the merged firm’s sales and therefore market share. Choi argues that competitors will respond by reducing their prices but not to the level of the merged products. They will see their profits and market share fall and could be forced out of the market, reducing competition with the merger. Choi then explains due to rivals leaving the market; GE/Honeywell can then enjoy their dominant (monopolist) position and drive up the price in the long run.
Nalebuff (2001) challenged Choi’s use of the Cournot model. He argues that Cournot’s model was designed to only consider two monopoly firms that operated alone in a market, a duopoly, but when applying this model to a market where there are more than two firms the results become more complicated. Nalebuff shows that because there were rivals to the merger who will cut their prices when faced with the bundle, this cut may offset the mergers potential gains. He also questioned the assumptions Choi used, namely all prices charged are assumed the same. This is unrealistic in this market, as generally the two parties will negotiate on price. Through simple modelling he shows that if customer’s valuations are known, a firm can completely price discriminate and leave bundling unprofitable.
Nalebuff continues by arguing that bundling makes the most sense when the components...

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