Getting efficiencies right at the FTC: Commissioner Wright dissents in Ardagh/Saint-Gobain merger

Geoffrey Manne —  15 April 2014

FTC Commissioner Josh Wright pens an incredibly important dissent in the FTC’s recent Ardagh/Saint-Gobain merger review.

At issue is how pro-competitive efficiencies should be considered by the agency under the Merger Guidelines.

As Josh notes, the core problem is the burden of proof:

Merger analysis is by its nature a predictive enterprise. Thinking rigorously about probabilistic assessment of competitive harms is an appropriate approach from an economic perspective. However, there is some reason for concern that the approach applied to efficiencies is deterministic in practice. In other words, there is a potentially dangerous asymmetry from a consumer welfare perspective of an approach that embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other.

In the summer of 1995, I spent a few weeks at the FTC. It was the end of the summer and nearly the entire office was on vacation, so I was left dealing with the most arduous tasks. In addition to fielding calls from Joe Sims prodding the agency to finish the Turner/Time Warner merger consent, I also worked on early drafting of the efficiencies defense, which was eventually incorporated into the 1997 Merger Guidelines revision.

The efficiencies defense was added to the Guidelines specifically to correct a defect of the pre-1997 Guidelines era in which

It is unlikely that efficiencies were recognized as an antitrust defense…. Even if efficiencies were thought to have a significant impact on the outcome of the case, the 1984 Guidelines stated that the defense should be based on “clear and convincing” evidence. Appeals Court Judge and former Assistant Attorney General for Antitrust Ginsburg has recently called reaching this standard “well-nigh impossible.” Further, even if defendants can meet this level of proof, only efficiencies in the relevant anticompetitive market may count.

The clear intention was to ensure better outcomes by ensuring that net pro-competitive mergers wouldn’t be thwarted. But even under the 1997 (and still under the 2010) Guidelines,

the merging firms must substantiate efficiency claims so that the Agency can verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved (and any costs of doing so), how each would enhance the merged firm’s ability and incentive to compete, and why each would be merger-specific. Efficiency claims will not be considered if they are vague or speculative or otherwise cannot be verified by reasonable means.

The 2006 Guidelines Commentary further supports the notion that the parties bear a substantial burden of demonstrating efficiencies.

As Josh notes, however:

Efficiencies, like anticompetitive effects, cannot and should not be presumed into existence. However, symmetrical treatment in both theory and practice of evidence proffered to discharge the respective burdens of proof facing the agencies and merging parties is necessary for consumer‐welfare based merger policy

There is no economic basis for demanding more proof of claimed efficiencies than of claimed anticompetitive harms. And the Guidelines since 1997 were (ostensibly) drafted in part precisely to ensure that efficiencies were appropriately considered by the agencies (and the courts) in their enforcement decisions.

But as Josh notes, this has not really been the case, much to the detriment of consumer-welfare-enhancing merger review:

To the extent the Merger Guidelines are interpreted or applied to impose asymmetric burdens upon the agencies and parties to establish anticompetitive effects and efficiencies, respectively, such interpretations do not make economic sense and are inconsistent with a merger policy designed to promote consumer welfare. Application of a more symmetric standard is unlikely to allow, as the Commission alludes to, the efficiencies defense to “swallow the whole of Section 7 of the Clayton Act.” A cursory read of the cases is sufficient to put to rest any concerns that the efficiencies defense is a mortal threat to agency activity under the Clayton Act. The much more pressing concern at present is whether application of asymmetric burdens of proof in merger review will swallow the efficiencies defense.

It benefits consumers to permit mergers that offer efficiencies that offset presumed anticompetitive effects. To the extent that the agencies, as in the Ardagh/Saint-Gobain merger, discount efficiencies evidence relative to their treatment of anticompetitive effects evidence, consumers will be harmed and the agencies will fail to fulfill their mandate.

This is an enormously significant issue, and Josh should be widely commended for raising it in this case. With luck it will spur a broader discussion and, someday, a more appropriate treatment in the Guidelines and by the agencies of merger efficiencies.

 

Geoffrey Manne

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http://laweconcenter.org/

4 responses to Getting efficiencies right at the FTC: Commissioner Wright dissents in Ardagh/Saint-Gobain merger

  1. 

    I don’t see Commissioner Wright’s concern in his Ardagh dissent with crediting efficiencies, though very well drafted, as raising an “enormously significant issue” or requiring that he be “widely commended for raising it”. This debate — anticompetitive effect v. efficiencies — has raged at the FTC since the initial Guidelines were promulgated back in the 80′s. Probably even before that. I remember when then BC Director and then Chairman Tim Muris insisted that we credit efficiencies in all mergers cases. he also wrote extensively on this very issue years ago. This is nothing new. But I will observe that the debate seems to raise its ugly head more often and become more heated at a time when Democrats have greater influence over Commission action than Republicans, like now. But as we all know, the tide will shift eventually and the argument from the Democrats — then in the minority — will be that efficiencies are speculative, non credible, prepared for litigation, non merger specific and should be ignored. When you’ve been around this as long as I have, this is nothing more than deja’ vu all over again!

    But it does make for interesting reading!

    • 

      I think the importance is more in highlighting the disparate evidentiary treatment. I agree that this is an age-old debate — it just bears repeating that little has been done about it even though the HMGs were supposed to have done something about it.

      • 

        There is no right answer or solution to an “age-old debate”. It just gets debated over and over eventually becoming older still and less relevant. But disparate evidentiary treatment seems reasonable to me given that the parties alleging the cost savings control the information and possess all the underlying data supporting the efficiencies. How does the regulator ever get access to a complete and finite data set? Never. Merging parties just continue generating more statistical support for speculative cost savings based on complete guesses and rigged hypotheses. I’ve seen it. But for the HSR timing requirements in most mergers, the efficiency review process would be continuous and never-ending. And then if real savings could be generated how do you be certain they are passed on. You can’t. So the pre merger analytical work is time consuming, costly and wasteful. So let the government’s burden be less (or disparate) and let’s all move on to the next fictionalize efficiency defense.

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