Dennis Carlton on Revising the Merger Guidelines

Dennis Carlton —  26 October 2009

1. Do the Guidelines need revision?

The Horizontal Merger Guidelines have served a very valuable purpose by making horizontal merger analysis much more sensible than it was prior to the 1980s.There is much less disagreement about horizontal merger policy than there is about vertical antitrust policy so some vertical guidelines would be especially welcome. Nevertheless, despite the lack of widespread disagreement about horizontal merger policy, it is desirable, though not critical, to improve the horizontal guidelines, making sure that they are up to date and relevant. I would be reluctant to change them significantly because they have served a valuable purpose by providing a consistent and durable framework for merger analysis primarily by focusing attention on the right questions to ask in merger analysis, namely how will price and competition be affected post merger.

2. If yes, What would be the first change you would recommend?

If the guidelines are revised,there are several areas for improvement. The main one would be an elimination (or clarification) of the distinction between unilateral and coordinated effects analysis. The guidelines fail to distinguish clearly between unilateral and coordinated effects. The guidelines suggest that there is one theory for unilateral and another for coordinated effects. That is just not so. In terms of economic theory, they both rely on identical economic theory which is non-cooperative game theory.

The way unilateral effects have often been implemented is as part of a merger simulation using a static model with an assumption of Bertrand competition. There’s no reason in theory why you can’t expand a model like that to be dynamic over time. And if it is dynamic then it looks like much of the description of what the guidelines would call coordinated effects where one firm interacts with another over time.  (The discussion of unilateral effects in the guidelines suggests keeping the price of all other firms constant in doing the analysis. This is somewhat of a detail.  It is of course conservative to ignore the fact that other firms may respond to a price increase by their own price increase but there is no need to ignore the behavior of other firms.) Distinguishing between coordinated and unilateral on the basis of whether a model is dynamic or static seems like a peculiar use of terminology.

There is however a relevant distinction that could be made based on whether the competitive structure– the competitive game– will change after a merger. This change could happen if for example post merger information flows between firms became more transparent so as to change what economists call the competitive game. Note that this is different from simply changing the number of firms that are playing any specific competitive game. One could define coordinated to refer to this case of the game changing post merger, but that is not how it is currently defined.

You often see unilateral effects being used when, in order to find an antitrust harm, the market definition would require such a narrow market definition that people who are prosecuting the case feel uncomfortable with it. They therefore prefer to use a broad market definition but to rely on unilateral effects.  But this use of unilateral effects just serves to undermine the market definition in the guidelines and I find it unhelpful.

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