It comes to our attention in recent weeks that Oracle, a company specializing in business software, has had their $9.4 billion bid to acquire their rival company PeopleSoft blocked by the U.S. Justice Department. The agency claims to foresee an elimination of competition between firms providing software for human resource and financial management enterprise software applications. The current oligopoly comprises of three companies: SAP, PeopleSoft, and Oracle. This type of merger is known as a horizontal merger due to the firms’ identical production of goods and services and same geographic market. If Oracle were allowed to merge with PeopleSoft then it would create great harm to its customers. After merging, Oracle would thereby have more market power when compared to the final remaining firm, SAP, and be able to exercise their increased market power to raise the price of their products and its unilateral effects tend to be noticeably higher when the merged firms have highly substitutable goods. The lawsuit states the unilateral effects would consist of “higher prices, less innovation and fewer choices for the businesses, government agencies, and other organizations that depend on this type of software.”
To assess the cause of substantial unilateral effects as part of modern merger control includes the utilization of merger simulation models. This simulation approach is considered more transparent, objective, and precise in providing qualitative results. The approach uses information from pre-merger market conditions and assumptions based on the behavior of firms and consumers. The DOJ used a merger simulation model based on an English Auction model that allows for multiple bidders and multiple rounds. This simulation models would present reliable projections on the effects of price and quantity in the short run. This could prove to be great asset for the DOJ because they can substantiate their claim that there can be a potential for a post-merger price. However, the DOJ never presented any of this evidence at the trial stating claims merely only addressing the likelihood to occur after such events (Mcafee Page 6 PDF).
The DOJ took an additional approach by performing a price regression analysis. This regression would show the variability of Oracle’s price discounts depending on the presence or absence during a procurement competition between firms namely SAP and PeopleSoft. It proved DOJ’s position because the findings proved that consumers receive a 9.7 percentage point greater with the presence of PeopleSoft than when there is no competition for Oracle. Oracle’s rebuttal refutes DOJ’s claim. Campbell, one of Oracle experts, argues their customers are highly sophisticated buyers who engage in one-on-one negotiations with vendors and hold more leverage in obtaining discounts on software. Campbell also rejects the DOJ’s product market definition due to the differentiation of financial and human resource software and such software cannot be considered perfect substitutes therefore the claim of unilateral effects is lost.
I believe the DOJ had a substantial case when it came to define the relevant market. Both Oracle and PeopleSoft competed in the lower-profile market or the enterprise source planning market. While it is true that neither of them dominated this market, if you utilize market gerrymandering then you would see an entirely different perspective. DOJ could have looked at the ERP market separately by that I mean the inventory software, human resource software, and the like are divided into its own market. And if and only then will you see that Oracle and PeopleSoft are firms that appear dominant in these individual markets.