Robert Gertner on Revising the Guidelines

Robert Gertner —  26 October 2009

The stated purpose of the DOJ/FTC Horizontal Merger Guidelines is to “reduce the uncertainty associated with enforcement of the antitrust laws.”  The Guidelines have had limited success in achieving this goal. They generally succeed in two important dimensions and fail in one. First, the Guidelines lay out a five step analysis consisting of market definition, market shares, potential adverse effects, entry, and efficiencies. The procedure is generally consistent with practice, it is a reasonable way to parse the set of issues, and thus provides some real guidance. Second, the Guidelines explain how the Agencies view the economic issues associated with each of these five steps and define broad standards. This is also useful.  The Guidelines describe, for example, that the Agencies evaluate entry on a timely, likely and sufficiency standard and explain the meaning of these standards. This type of content helps parties understand the Agencies’ approach and can reduce uncertainty. There are places where these standards are appropriate and reflect practice and other places where they can be improved.

The Guidelines fall short, however, in setting out the detailed methods of analysis and their relation to the standards for each of these steps. In a few areas, such as market share analysis, the Guidelines are very detailed in the methods and their implications for the standards while in most areas, the Guidelines provide few details. When the Guidelines are detailed, the practice tends to not follow the details (this is usually good, because the details are flawed).  In other areas, the Guidelines provide few details – they do not tell us how to estimate cost reductions, predict the likelihood of entry, or predict likely changes in coordination.

A revision of the Guidelines could attempt to correct details where they exist and add them where they are lacking. I think this would be a mistake because the task is hopeless. A more effective approach to revising the Guidelines would be to eliminate the misleading and flawed details and clarify and improve the definition, description and reasoning of the broader standards.  Such a revision could help the Guidelines achieve their purpose by eliminating misinformation and updating standards and explanations to reflect current practices and research advances.

A few examples of important potential changes along these lines are below:

  • Eliminate the presumptions of anticompetitive impacts from market share analysis and revise the presumptions of no competitive problem to align with practice. The Guidelines imply an anticompetitive presumption of a merger between a 5% and 10% firm in a market with a share distribution of 20-20-20-20-10-5-5. Fortunately, this seems grossly inconsistent with practice. The anticompetitive presumptions provide little guidance for two reasons. First they do not reflect true presumptions. Second, and more important, they play little role because the additional analysis of likely effects almost always trumps any presumption. It is hard to know if these presumptions deter potential efficiency-enhancing mergers, but they should be eliminated. The greatest value of market share analysis is to provide a presumption of no anticompetitive impact for mergers below certain thresholds. This helps promote the goal of reducing uncertainty, so long as the thresholds are consistent with the Agencies’ practices.
  • Explain and emphasize how the market definition exercise and effects analysis depend on the how pricing incentives change with a merger. In a static product differentiation model, this boils down to how elasticities change with a merger. Such a revision would avoid some of the most egregious misuses of critical loss analysis.
  • The Guidelines segment investigations into coordinated and unilateral effects and then further divides unilateral effects into product differentiation and capacity markets.  I find this segmentation problematic for reasons that require more detailed explanation than is appropriate for this forum. Among the problems with the current segmentation are:  (1) it pushes the analysis of differentiated product markets towards static models that may be inappropriate, (2) there seems to be a gap for markets with limited differentiation where capacity does not play an important role, including some bid markets, and (3) the definitions of unilateral and coordinated effects are murky and fail to deal with situations which are not coordination in the sense described by the Guidelines, but are situations where anticipated responses by competitors affects decisions.
  • One final, unrelated recommended revision is that the Guidelines include an explicit caveat that they apply only to merger analysis. In particular, the Guidelines’ market definition methodology is generally inappropriate in Section 2 cases, largely because cellophane fallacy issues that are avoided in mergers by analyzing changes from current prices. A caveat could help reduce their misuse.

One response to Robert Gertner on Revising the Guidelines

  1. 

    Rob: Excellent comments. I particularly like your second bullet point. While this is fairly well understood in practice (I hope), I think the absence of language in the Guidelines making the point explicit lends too much credence to the inappropriate application by courts of concentration ratios in unilateral effects cases.