Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, August 05, 2005

Efficient Markets and Anti-trust

Skip Sauer, main blogger at The Sports Economist, has pointed out that the proposed takeover of Reebok by Adidas may have made them better able to compete with Nike in some sense, but that competition is not likely to be enhanced by the merger:

Both the AP story and the WSJ ($) credulously report Adidas' spin on the deal, that the combined firm would "compete more forcefully with Nike.

If the market believed that assessment, Nike's share price would fall. But since the opening of trading on Tuesday, Nike's share price has risen $5.50 to $87 - a healthy, statistically significant return for a two day holding period. The market for Nike stock thus assesses the deal somewhat differently than the spin offered by Adidas.

Students of antitrust economics will immediately understand what the market is suggesting. Rather than creating a more effective competitor to Nike, the merger eliminates a rival responsible for price competition in the market for sneakers. Less vigorous price competition would increase the value of existing competitors, i.e. Nike.

I.e., following Stigler's Theory of Oligopoly, reducing the number of firms in an oligopoly that already has few firms in it will make it easier for the remaining members to engage in tacit (or explicit) collusion to maximize their joint profits.

Let me add that these firms might also acquire some short-term joint monopsony power in buying ads.

But in response to Skip's question [which appears in his full posting] about whether the merger should be allowed, I'm happy to let the market work in the longer run. If these firms make high profits, others will surely be induced to enter in some fashion with the effect of whittling away their price and profit margins.
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