The final version of the Agencies’ Merger Guidelines are a thoughtful improvement over the draft version, writes Fiona Scott Morton. Both the economic and legal analysis in the final version promise to more effectively prevent harmful mergers and bring U.S. antitrust into the modern age.
The final version of the Agencies’ (Department of Justice/Federal Trade Commission) Merger Guidelines are hugely improved from the draft version and promise to bring the economic analysis of merger enforcement in the United States up to date.
The most important change to the document is the declaration in the second paragraph that the reason to engage in merger enforcement is to protect consumers and workers from the harms caused by increased market power, namely higher prices, less innovation and lower quality, and in the case of workers, lower prices and less favorable working conditions. This is a foundational improvement. Without an overriding goal for merger enforcement that makes the people better off, merger enforcement would have little point. That said, the Guidelines pass up the chance to include other input suppliers, e.g. farmers, in this initial statement of purpose. Because those input suppliers are often small businesses which need protecting from market power as workers do, this would have made sense to include.
I have no comment on any change in quality on the still extensive legal reasoning in the Merger Guidelines, though clustering the legal citations so that they do not appear to be an evidentiary source for economic knowledge is helpful. I hope that any court that criticizes the arguments here, or discards the legal reasoning in these Guidelines entirely, nonetheless recognizes the value of the economics in the document. The economic knowledge the staff has managed to clearly condense into relatively few pages represents a consensus on a very necessary step forward. Indeed, the importance of the economics is reflected in its upgrade from an Appendix to Section 4. If influential, these Merger Guidelines will be more effective at preventing harmful mergers because they present a nuanced and well-founded understanding of modern markets and also reflect the strategies that firms are using today to try to obtain market power. Indeed, it may be that because the economics is sound and useful, the document will be more difficult for courts to discard in its entirety even if they dislike the legal analysis; this may give the legal analysis more influence than it otherwise would have garnered.
The slimmed-down list of Guidelines now contains four frameworks covering head-to-head competition and two that cover mergers in related markets to form the analytical base of the document. The remaining five points (Trends, Series of Acquisitions, Platforms, Partial Acquisitions, Labor Markets) explain particular characteristics of a transaction that are plus factors to consider beyond the basic framework. For example, the draft Guideline (formerly 8) indicating that mergers in industries experiencing a trend toward consolidation could be illegal is now Guideline 7 explaining that such a trend is one factor the Agencies will consider when assessing a transaction. This framing is far more likely to be helpful to good enforcement because it can be used when the underlying economics varies, as it surely will across many industries over many years.
A number of Guidelines did not attract significant economic criticism, and these are largely unchanged. However, the final version contains several more important improvements. The related market merger analysis is divided into the standard approach in Guideline 5 and an analysis in Guideline 6 that introduces strategic behavior over time. As I have noted before, I think the combination of horizontal and non-horizontal Guidelines into one document is extremely useful and clarifying. The law covers any kind of merger, so therefore a document that covers any kind of merger creates more legal certainty for executives and their advisors as they make decisions. In addition, the economics of the different types of transactions are linked in a way that is useful to lawyers and economists doing the analysis.
The draft entrenchment Guideline (formerly 7) appeared to capture any transaction that simply made the combined firms more productive or their product more attractive. The new text of Guideline 6 uses somewhat indirect legal phrasing to note the need for the transaction to harm competitors’ ability and incentive to compete beyond normal product improvements and cost reduction before there is a competition problem. This is helpful. What is particularly interesting and useful is the material in the Entrench and Extend Guideline (6) that explains how the merger could affect longer-run industry outcomes. This Guideline is focused only on firms with a dominant position which is either being protected with the merger or leveraged into market power in a new area. For example, a merger can provide a dominant firm the ability and incentive to take additional steps after the merger such as degrading interoperability that will lead to competitor weakening or exit. When a growing competitor poses a threat to the dominant firm, such a transaction harms competition. The “extend” portion of this Guideline captures the well-known strategy of a firm with market power leveraging a non-horizontal acquisition into a new market or segment. Again, the second step of the anticompetitive merger is the reduction of the competition in that related market. With Guideline 6, the Agencies are incorporating— more explicitly and to a greater extent— the applied theory and strategy literature developed over the last fifty years.
Both of these ideas link mergers with monopolization, which the Guidelines note in a refreshing break from strict legal labels that do not always match the strategic behavior of firms. The entrench and extend strategies of Guideline 6 are frequently modeled in the academic literature but are difficult to describe in a succinct and general way. The fact that the Guidelines are taking on this material is terrific in my view. However, I expect successful enforcement in this area will take time because the ideas are more sophisticated and inherently less amenable to quantification and exact predictions. The Guidelines point out that exact predictions are not necessary to assess the risk that the merger creates. And the theme that merger assessment is always an uncertain prediction of the future is a helpful framing for all the material in the document. Another enforcement challenge is that such strategies play out in two steps, compounding the difficulty of demonstrating them in court. But just because something is hard does not mean it should be avoided when there is an opportunity to protect consumers from increases in market power. The fact that these Merger Guidelines are taking the first step towards effective enforcement in this area is laudable.
The other novel Guideline covers Platforms (8), where the document does an admirable job of summarizing the existing state of knowledge in a way that should be useful to enforcers and courts. Overall, these Merger Guidelines expand the range of anticompetitive mergers explained with well-founded economic analysis and, by so doing, increase the ability of the agencies to enforce against them. In the areas the Guidelines have not previously addressed such as platform economics and entrenchment strategies, the development of both the literature and the case law will determine how well the Guidelines stand the test of time. Because of rapid evolution in technology, business strategy, and economic analysis, it seems likely that the next revision—whenever the Agencies decide to conduct this exercise again— will focus on these areas.
Author Disclosure: Fiona Scott Morton regularly consults for authorities and private parties on antitrust matters. At present she is not working on any matters related to the Merger Guidelines.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
