My sense is that there is no need to revise the DOJ/FTC Horizontal Merger Guidelines, with one exception.  As Greg Werden points out, “a thorough revision would take up to three years and occupy some of the agencies’ best people for a total of more than two thousand hours.” The current guidelines lay out the general framework quite well and any change in language relative to that framework are likely to create more confusion rather than less.  Based on my own experience, the business community has had a good sense of how the agencies conduct merger analysis.  The only exception is the Guideline’s concentration thresholds, which have been obsolete in practice since at least the mid 1990s.  Those thresholds should probably be changed to reflect actual practice.  If, however, the current administration intends to materially change the way merger analysis is conducted at the agencies, then perhaps greater revision makes more sense.  But even then, perhaps the best approach is to try out some of the contemplated changes (i.e. in actual investigations) and publicize them in speeches and the like before memorializing them in a document that is likely to have some substantial permanence to it.

I’m confident that my esteemed colleagues, who have far more expertise about the merger guidelines than I, will offer all sorts of terrific ideas for revising the substance of the guidelines. While I would certainly advocate a few specific changes (i.e., revise the HHI thresholds to reflect actual agency practice), I’ll leave the devilish details to the experts and concentrate on one “modest” (quite literally!) revision:

I would encourage the antitrust agencies to clarify, within the actual text of the guidelines (i.e., not in mere commentary like that issued in 2006), that the guidelines are not the law, should not be treated as such by the courts, do not exhaustively specify when a merger will or will not be anticompetitive, and should be flexibly implemented to account for case-specific factors that cannot be specified ex ante. In short, the guidelines should explicitly acknowledge that the ultimate question in any horizontal merger case requires the application of a standard, not a rule.

A rule is a legal mandate that entails an advance determination of what conduct is permissible and leaves only factual issues for the adjudicator (e.g., “Do not drive faster than 65 m.p.h.”). A standard, by contrast, is a mandate that leaves to the adjudicator both factual issues and some judgment about what conduct is permissible (e.g., “Do not drive at an excessive speed.”). Rules provide superior guidance to the governed and the adjudicator, but they can misfire if over- or underinclusive, and they therefore require ex ante specification of all factors that might be relevant to a sound decision. Standards provide less guidance, but they are more likely to generate a correct adjudication in any particular case, for the adjudicator is free to account for unforeseen, case-specific quirks.

The legal question at issue in a horizontal merger case — “might the business combination substantially lessen competition or tend to create a monopoly?” — requires the ultimate adjudicator to apply a standard, not a rule. It is simply impossible to specify ex ante all the considerations relevant to answering this question. Accordingly, to the extent the merger guidelines are viewed by courts as rules for separating pro- from anticompetitive mergers, they are bound to generate incorrect adjudications when they inevitably misfire.

Now I realize the merger guidelines, as currently drafted, do not purport to bind courts and do state that their “mechanical application . . . may provide misleading answers” and that they should be applied “reasonably and flexibly to the particular facts and circumstances of each proposed merger.” I don’t believe this is enough. The fact is, generalist judges asked to resolve the complicated economic disputes in a horizontal merger case are reluctant to veer beyond the guidelines’ prescribed analysis and, as a practical matter, treat the guidelines as though they are, in fact, the law. In the D.C. Circuit’s Whole Foods decision, for example, the majority chided the dissent for having incorrectly applied the merger guidelines. Given that the merger guidelines simply cannot exhaustively specify all the considerations relevant to evaluating a proposed merger, courts’ treatment of them as the final word implies that relevant considerations will get left out.

Take Whole Foods for example. A key fact in that case was that the vast majority of shoppers who buy from so-called “premium natural and organic supermarkets” (PNOS) also shop regularly at conventional grocers. Thus, if a combined Whole Foods/Wild Oats were to raise prices on items available at conventional supermarkets, buyers would likely just start buying those items on their conventional grocer outings rather than on their PNOS outings. Unfortunately, nothing in the merger guidelines calls for a consideration of “cross-shopping,” and this important argument therefore got short shrift. Had the guidelines explicitly stated: “This is not the law. We can’t state up front all relevant considerations. Courts should credit plausible arguments based on factors not stated herein,” this important argument might have gotten the attention it deserved.

Or take considerations relevant to dynamic (Schumpeterian) competition. While I am sympathetic to the Sidak/Teece arguments that the merger guidelines should account for dynamic competition concerns, I simply can’t figure out how one would write a rule that would do that. How can we specify ex ante all the considerations that are relevant to whether a business merger will enhance dynamic, though not necessarily static, competition? There may be an answer to that question — and I much look forward to hearing from Sidak and Teece on this issue — but I don’t know what it is. An alternative approach would be to free up the ultimate adjudicators — the courts — to account for dynamic competition considerations by disabusing them of the notion that they must treat the merger guidelines as law. Parties could then articulate their dynamic competition arguments on a case-by-case basis, and the courts could credit those that appear to have merit.

The main objectives of the merger guidelines, I assume, are (1) to deter combination attempts that would harm competition (i.e., those that would clearly be subject to challenge); (2) to avoid deterring combinations that would not harm competition (i.e., those within a safe harbor); and (3) to assure some consistency across the regulatory agencies and across administrations. These objectives could still be attained — and greater accuracy in outcome could be achieved — if the merger guidelines specified that the ultimate inquiry involves application of a standard rather than a rule.