This article is a part of the Merger Guidelines Symposium symposium.
Yes, the Merger Guidelines should be revised.
The Guidelines primary purpose is to “articulate the analytical framework the Agency applies in determining whether a merger is likely substantially to lessen competition.” While the Guidelines have been very successful in articulating a useful economic framework for analyzing mergers, their performance in terms of satisfying that goal has been largely mediocre. If the goal articulated by the Guidelines is an important one, and I do believe that providing some modicum of legal certainty to businesses contemplating merger decisions is valuable goal, then the Merger Guidelines do need revising in order to fulfill their purpose.
The mere fact that agency practice is much more predictable now than it used to be does not warrant inaction when one considers the Guidelines in light of their primary purpose. Indeed, that the agencies consistently apply different standards to the Clayton Act 7 standard than what appears in the Guidelines is no more a defense of the Guidelines than the fact that nobody cites Vons Grocery or Pabst is an argument for keeping those decisions on the books.
So in my view, the Guidelines ought to be revised with an eye toward changes that will bring the Guidelines in line with actual agency practice and update the Guidelines to reflect modern economic thinking and empirical evidence.
What is the first revision I’d make and why?
Following these principles, I think revision discussions should focus on low hanging fruit that satisfies these criteria. There are a number of areas that arguably qualify, but let me start with one simple one: The Agencies should revise the Guidelines to affirmatively abandon use of the structural presumption to demonstrate a substantial lessening of competition. Of course, the Guidelines tell us that they are not designed to inform parties “how the Agency will conduct the litigation of cases that it decides to bring,” use of the structural presumption is fundamentally about economics and not litigation strategy.
Indeed, in its formulation in Philadelphia National Bank,the Supreme Court held that:
A merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.
While the structural presumption has been eroded from the days of Philadelphia National Bank when it was invoked in the context of a merger creating a firm with 30% share of the market, it also has not disappeared. And it is important to note that the justification for the presumption was its economic content. Indeed, the Court noted that the size of mergers above the presumptive level of concentration made them “inherently suspect” and that the test was “fully consistent with economic theory,” and forged “common ground among most economists.”
There are two important reasons why the Agencies should formally reject the structural presumption.
The first is that it is an an explicitly economic test that is no longer justified by modern economics. Modern economic learning and empirical evidence does not support the notion that mergers that generate post-merger firm with greater than 30 percent share substantially lessen competition. It is a convenient litigation tool to shift the burden to defendants when courts are not persuaded by a competitive effects story. But that is no excuse. If the Agencies believe the best available evidence does not support the economic foundation of the structural presumption, they should abandon it.
Note that I’m not saying that the Agencies could not discuss alternative presumptions based on sound economics. Perhaps economic theory and empirical evidence provide the basis of alternative bright line standards which can appropriately be made the basis of a presumption that a particular merger will substantially lessen competition and harm consumers. But the presumption as it currently exists no longer comports with modern economics or Agency thinking about merger analysis and should be abandoned.
The second reason to explicitly abandon the presumption is that it is far too sensitive to the market definition exercise. I think its important to note the tension between the movement toward and sometimes celebration of unilateral and coordinated effects analysis at the Agencies and away from market definition (even if not completely) and use of the structural presumption which depends so heavily on the identification of the relevant market. The market definition exercise may well have its virtues in constraining agencies from bringing cases with overly narrow markets. However, when the critical lesson of the modern economic approaches to mergers is that post-merger change in pricing incentives and competitive effects are what matters, it is difficult to justify the structural approach either with reference to the Guidelines articulate purpose or modern economics.
When it comes to the structural presumption, the Agencies should not get to have it both ways. If we’re going to take the modern economics of mergers seriously, and reduce the importance of market definition in favor of competitive effects, we should also do away with the structural presumption. The Supreme Court is not likely to take a merger case any time soon and do away with the presumption themselves. It is up to the Agencies to eliminate the presumption as it currently exists in order to restore consistency with economic learning and empirical evidence.
