In order to discuss the Meta/Within merger decision, it is important to understand the legal underpinnings and history of competition merger cases.
Most mergers that violate the antitrust laws in the US are “horizontal,” or between competitors. A much smaller group are “vertical” mergers between firms that are structurally related as buyer and seller. Other mergers, which involve neither actual competitors nor vertically related firms, do not fit either model, and courts have had trouble developing good theory about them.
The 1913 Sidney Winslow decision was the government’s first challenge to a merger of noncompetitors who produced complementary products. A maker of lasting machines, leather sewing machines, and fastening machines united to form the United Shoe Machinery Company (USM). While there was precedent for condemning mergers of competitors, Justice Holmes did not see it here. He compared it to a union of two makers of steam engine components, “one to make the boilers and another to make the wheels.” Creating one firm capable of doing the whole thing was simply “an effort after greater efficiency.” Justice Holmes did not consider whether each party might have entered the others’ markets on its own, creating greater competition. Perhaps uncoincidentally, USM went on to become one of the most storied monopolists of the mid-twentieth century.
During the 1960s and 1970s, merger policy significantly overreached. The courts condemned competitively harmless horizontal and vertical mergers in unconcentrated markets, but also held exaggerated views about other types of mergers. Some were condemned for threatening “reciprocity,” or preferential dealing between the merged parties. For example, the Supreme Court condemned Consolidated Foods, a diversified food processor, for acquiring a dominant maker of dehydrated onions. The Court said that the merger enabled Consolidated to pressure its suppliers into purchasing its own dehydrated products for food preparation. In DuPont (GM) the merger was said to be bad because it gave DuPont a preferred position in bidding to supply General Motors with automobile fabrics and paints. Other mergers were condemned because they gave firms an unfair advantage by improving their products or reducing their costs. For example, Allis-Chalmers condemned the union of a company that made rolling mills for steel and another that made their electrical hookups. The court said the merger was bad because it created the “only company capable of … installing a complete rolling mill.” Such decisions protected higher cost or less innovative competitors at consumers’ expense.
Conservatives such as Judge Robert Bork, who believed that entry barriers rarely existed unless the government created them, believed that most merger policy was harmful, but particularly the antitrust rules against nonhorizontal mergers. One unfortunate victim of neoliberal pushback against hyperactive merger policy was the law governing mergers of “potential” competitors, which Bork fiercely opposed. Ironically, potential competition doctrine had actually pursued mergers for the right reasons: that they threatened higher prices or limited innovation. So the debate was not so much over goals, but rather about theory and burdens of proof. For example, Procter & Gamble condemned a firm making a full line of household chemicals except bleach for acquiring Clorox, a bleach maker. The FTC’s theory was that P&G had the interest and resources to develop its own brand of bleach, a generic chemical. In that case there would have been two large bleach makers instead of one. Once the Clorox acquisition occurred, however, P&G had no incentive to do that. A few years later the Falstaff decision addressed a national brewer’s acquisition of a regional New England brewer. The Supreme Court held that, whether or not Falstaff would actually have entered the New England market, the smaller New England brewers feared that it would. This perceived threat from outside of the market served to keep prices down. Once Falstaff made its acquisition, however, that threat was removed. The P&G rationale came to be called the “actual potential entrant” doctrine, and the Falstaff rationale the “perceived potential entrant” doctrine.
In a horizontal merger case, the courts contemplate the effects of removing one competitor from a market. By contrast, in potential competition cases they examine unions that make it less likely that a new competitor will enter. The firm that enters anew adds an additional competitor, which can make a big difference in a concentrated market. The outside firm that simply acquires an existing firm does not do that. So the potential competition theory depends on predictions about the likelihood and consequences of independent market entry.
Unfortunately, potential competition litigation turned into flyspecking about the many ways new entry might or might not occur, unreasonably expanding the government’s burden. The courts wrung their hands over questions such as how to prove whether a firm would have entered on its own had an acquisition been forbidden, while other firms would not. Theories about exclusionary pricing that Robert Bork had derisively dismissed when they were applied to dominant firms, gained new life when used to create reasons why a firm might be unwilling to enter a market. The 1984 merger guidelines, written during the heyday of neoliberal anti-enforcement bias, required proof that an acquiring firm had an “entry advantage” that made it more likely that it would enter a market even while others did not. The Supreme Court’s Marine Bancorporation decision, which nearly killed potential competition analysis, presented a perverse twist: A conservative Supreme Court majority held that new entry would not likely have occurred had an acquisition been forbidden, while liberal dissenters argued that it could.
Merger analysis under §7 of the Clayton Act is “probabilistic” under a test that considers whether its “effects may be substantially to lessen competition.” The probabilities of harm must be considered in light of the likelihood of offsetting social gains. Further, the inquiry must be manageable, focusing mainly on two things: concentration in the “target” market, and entry barriers. The probabilistic effects test is generally measured by objective evidence. Sometimes the best evidence of a likely effect is intentions, however. For example, if a firm’s records evidenced an intent or desire to enter a market, then its entry by means of an acquisition is more likely to be an alternative to independent entry.
Today, antitrust review of potential competition mergers suffers from outdated Merger Guidelines. The last Guidelines to address potential competition mergers systematically were issued in 1984, and reflect anti-enforcement biases that were strong at that time. The courts have emphasized the importance of up-to-date Guidelines, most recently in the Time-Warner vertical merger case. The Government responded by updating its Guidelines for vertical mergers. At the time of this writing, it is very likely doing the same for potential competition mergers.
The other problem is unnecessary complexity. There are many cases to clear and the Clayton Act’s probabilistic effects test makes reasonable but imperfect prediction possible. Will enforcers occasionally get a case wrong? Yes, but in highly concentrated markets and difficult entry the danger of false negatives is greater than that of false positives. What the government needs to show is high concentration in a carefully defined market, lack of significant entry, and an acquiring firm that could have entered on its own. The current (2010) Merger Guidelines already have criteria for determining whether new entry is likely.
Then, under the actual potential entrant doctrine, the question is whether the target market is sufficiently concentrated that it will perform better with a new entrant? If so, does the announced merger reduce the likelihood of additional new entry into that market? Under the perceived potential entrant doctrine, the first question once again is whether the target market is highly concentrated. Then, did the acquiring firm’s presence outside the market provide a threat that served to keep prices down? Finally, does the acquisition materially change that picture?
The recent Meta/Within potential competition decision found high concentration, assuming that the market was properly defined. Its entry barrier analysis indicated that new entry was possible but difficult. The court also held that the standard was “reasonable probability,” which was something “noticeably greater than 50%.” The court then held that the FTC did not prove that it was “reasonably probable” that Meta would have entered on its own, notwithstanding its conceded capabilities and interest. The court made a detailed analysis of all the ways that Meta might have entered on its own, discounting all uncertainties in favor of the defendant. Rather, the principle should have been that the market will find a way, and it is not the plaintiff’s job to show the particular route.
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