A pervasive “Whig” view of United States antitrust history among scholars and practitioners celebrates the Merger Guidelines’ implementation of increasingly sophisticated economic methods since their inception in 1968. Eric A. Posner argues that the history of the Guidelines is better understood as a series of zigzags between competing normative standards that reflected the ideological values that prevailed at the time of their adoption.
As the Department of Justice and Federal Trade Commission beaver away at the long-awaited revision of the Merger Guidelines, we should avoid the temptation of seeing the history of the Guidelines as an evolution from a “benighted past to a glorious present,” despite the insistence of the many scholars who write about them. This Whig history says that the Supreme Court badly botched merger law in its foundational 1962 opinion in Brown Shoe v. U.S., where it held or implied that a merger that substantially increases concentration is illegal regardless of its impact on prices. The 1968 Merger Guidelines stepped back from the abyss by reinterpreting the goal of merger law as “price competition” and recognizing that “efficiencies” may justify an otherwise impermissible merger, albeit only in “exceptional circumstances.” Then, in successive versions (in 1982, 1992, 1997, and 2010), the Guidelines introduced additional and increasingly sophisticated economic methods, switched the emphasis from concentration to the impact of mergers on prices, and recognized a more robust role for efficiencies in merger analysis. All that is needed today is a bit of tightening up along the lines that have already been set out.
This Whig view sands away the edges of a complicated—and more interesting—history. In Brown Shoe and other opinions, the Supreme Court took Congress at its word and barred mergers that substantially lessen competition. The Court understood that Congress saw high prices as one harm among many others (including, above all, political power) that may occur when corporations rapidly achieve scale through acquisitions. Congress feared oligopolies and monopolies and sought to keep firms to a moderate size by eliminating large-firm mergers as a path to growth (“organic growth” of course remained a lawful option). While the Court vacillated between the functionalism of Brown Shoe and the formalism of Philadelphia National Bank, it never departed from its commitment to a “competition test” based on market structure—later formalized as concentration ratios or HHIs.
One must squint to find any repudiation of this view in the 1968 Guidelines, which on the contrary faithfully adopted the Court’s competition test. The repudiation came later. The 1982 and 1984 Guidelines replaced the Supreme Court’s competition test with the efficiency test first proposed by Oliver Williamson in his famous 1968 article and propagated by Robert Bork under the misleading label of the consumer welfare standard. The Reagan-era test was actually a total surplus test that counted producer as well as consumer surplus (“If the parties to the merger establish by clear and convincing evidence that a merger will achieve such efficiencies, the DOJ will consider those efficiencies in deciding whether to challenge the merger”). That might explain why the DOJ brought zero merger challenges in 1986 and 1987, at the height of a merger wave.
The 1997 and 2010 Guidelines replaced the efficiency test with the modern consumer welfare test, or what is best called a price test because the focus is on the predicted impact of the merger on the prices paid by the consumers of the merged firm’s goods and services. (The test also applies to prices paid by the firm to workers and other input suppliers.) Those Guidelines declared that the agencies will not challenge a merger that generates efficiencies large enough to reverse the anticompetitive effect on customers, that is, “by preventing price increases in that market.” The 2010 Guidelines also included the upward pricing pressure method for differentiated product markets, where the merger is evaluated entirely on the basis of its predicted impact on price.
While the economic sophistication of the Guidelines do advance Whig-like in linear fashion, the true significance of its historical path lies in its erratic zigzags among the three normative standards for evaluating mergers. The competition test of 1968 advanced the statute and Supreme Court decisions, which in turn reflect a policy judgment that an economy characterized by excessively large and powerful corporations produces social and political as well as economic harm. This policy reflected political hostility to corporate power in the national government when the Clayton Act was passed in 1914 by the Progressives and the Celler-Kefauver Act strengthened merger law in 1950 under a unified Democratic government.
The Reagan-era efficiency test of the 1980s treats the harms from market power as just one cost to be weighed against the gains to producers, and ignores everyone else. Today, the efficiency test still has its adherents, not all of them on the right. Efficiency is the workhorse normative standard for all kinds of economic analysis, which gives the same weight to producer surplus as to consumer surplus—because producers are people too, not all of them rich, and quite a bit of producer surplus is transferred back to the non-rich. Unlike the competition test, the efficiency test ignores the impact of mergers on people who are not in privity with the merging firms—ordinary citizens who may be harmed by firms that by virtue of their size and political power distort government policy or are hard to regulate.
The price test of the 1990s and 2000s accounts for the effect of mergers on an even smaller subset of those affected by it—the immediate consumers of the merged firm’s goods and services—excluding producers and other non-consumers. Defenders of the price test see a virtue in disregarding producers who are on average wealthier than consumers—this gives the test its center-left tinge—but the original justification was in part based on the argument that the price test was easier to administer than the efficiency test was. The price test thus also ignores the impact of mergers on politics. Most of the victims of mergers were to be sacrificed on the altar of administrability.
The three tests plainly reflect different ideological goals, corresponding to points on the political spectrum, rather than levels of economic sophistication. They also reflect different intuitions about how complex merger policy should be. But Congress settled this dispute. Section 7 bans mergers that substantially lessen competition and tend to result in monopolies, and it was drafted to make enforcement easy, not hard. That prohibition does not create exceptions for mergers to monopolies that are efficient or reduce prices. That view may have made little sense to free-market economists of the 1980s but never caught on with the public. By the 1990s, someone in government must have realized that even conservative-leaning lower courts would never accept the efficiency test, a test that would have allowed the statute’s bad guys—giant corporations—to merge whenever their profits exceeded the harms inflicted on the consumers they exploited.
The price test, by contrast, made some headway with judges. Bewitched by the apparent simplicity of that test but restrained by the statutory language and the Supreme Court’s pronouncements, the courts have waffled, frequently focusing on price but rarely saying that price is all that matters. Meanwhile, agencies have waved through countless mergers in the last few decades that in an earlier era would have been blocked. Anti-big business sentiment fell out of fashion during the Reaganite 1980s and the neoliberal consensus of the 1990s but has roared back with the growth of corporate power over the last two decades, and now the “populist” impulse behind the merger statutes seems less foreign that it did during the height of antitrust reform in the 1980s and 1990s.
It is a real irony that the empirical literature indicates that the economic sophistication that has poured into the Guidelines appears to have resulted in dramatic underenforcement of merger law. A growing consensus is that mergers over the last several decades have on average resulted in higher rather than lower prices and generated few if any efficiencies. Indeed, the notion that large mergers are necessary to achieve unexploited efficiencies seems to have been assumed by economists rather than derived from rigorous empirical research. The retrospective merger literature, accompanied by dramatic evidence of rising concentration and markups throughout U.S. markets, have sparked the Neo-Brandeisian rebellion among a group of academics and policymakers who bewail antitrust’s benighted present and yearn for a return to its glorious past. What went wrong?
Part of the answer may be that the simplifying assumptions that are necessary to make economic analysis tractable have blinded analysts to many of the harms of corporate consolidation. The notion that large firms will spend resources to obtain political power and use that political power to protect themselves from competition is hardly foreign to economists. The idea flows from economic premises and grounds the entire subdiscipline of political economy. The idea also explains campaign finance and related laws, steadily being eroded by the Supreme Court, that try to reduce corporate influence on democracy. Yet antitrust economists have simply ruled out strict merger standards that could be justified by such concerns because they do not appear on a supply and demand diagram.
But even taken on its own terms, the price test imposes excessive cognitive load on regulators, courts, and even experts. Having jettisoned from analysis merger impacts that would be too difficult to measure, the price-test technocrats set about developing standards that are too difficult to meet. Proving that a merger will reduce prices requires data that are never sufficiently plentiful or modeling assumptions that are always easily challenged. The resulting battle of the experts, presided over by generalist judges, gives an advantage to the defendants, who are sheltered by the burden of proof, and win just by introducing sufficient doubt. The competition test has the virtue of simplicity—a virtue that was recognized as far back as Philadelphia National Bank and never refuted. It may be time to zag back to the 1960s.
For further discussion and sources, see Eric A. Posner, “Market Power, Not Consumer Welfare: A Return to the Foundations of Merger Law.”
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
