Yesterday the final Horizontal Merger Guidelines Review workshop was held and, among other antitrust luminaries, our own Josh Wright participated. We look forward to a report from the front lines.
Meanwhile, Assistant Attorney General Varney’s comments are available on the interwebs. Overall her remarks seem uncontroversial, especially following on the heels of the agency’s (surprising?) clearance of the Live Nation/Ticketmaster merger with conditions (but see the agency’s challenge of the consummated Dean Foods/Foremost Farms merger, about which I will have more to say in a subsequent post). But I did find one section quite a bit troubling. Acknowledging that agency practice did not hew slavishly to the Guidelines’ “five-step analytical process” for assessing markets and market share, Varney noted that:
Implicit in deemphasizing the sequential nature of the Guidelines inquiry is a recognition that defining markets and measuring market shares may not always be the most effective starting point for many types of merger reviews. Remember, the purpose of defining a market and assessing shares is to assess potential harm. When it is clear, for instance, that either certain vulnerable customers are likely to be harmed by a merger, or that certain customers have in fact been harmed by a consummated merger, the need to define a market to assess likely competitive effects is diminished. For instance, the consumer harm that followed from the consummated Evanston hospital transaction lessened the importance of the Commission’s market definition and market share analyses in that matter. Our panelists have largely confirmed the view that market definition should not be an end-all exercise. Rather, it is something to be incorporated in a more integrated, fact-driven analysis directed at competitive effects.
I am among the many commenters who have criticized the Guidelines’ approach to market definition and market share–my submission to the workshops is here. There has also been a strong movement recently to do away with market definition in some unilateral effects analysis and to replace it with the UPP analysis promoted most recently in the Farrel & Shapiro article (pdf). Interestingly, while Varney is previously on record opposing this movement, elsewhere in this speech she seems to endorse it:
There is a growing body of evidence that measures of upward pricing pressure, which focus on diversion ratios, and price-cost margins, can be highly informative in assessing the likelihood of unilateral pricing effects.
But this is in a different section of the speech, UPP remains an analytical approach (as opposed to the class of cases Varney is concerned with here where harm to certain consumers is simply “clear”), and it does not seem to be what she’s talking about in the quote above. Here she seems to mean something else–and I fear it is something troubling.
Taken literally, what Varney is saying is that an ad hoc (ok, fine–an “integrated, fact-driven”) determination that some customers (“vulnerable” ones, whatever that means) may be made worse off by a merger lessens the need for a more comprehensive assessment of overall competitive dynamics within a relevant market. But I don’t know what this means, frankly. In the first place, how is the agency supposed to know that some customers are likely to be harmed if it hasn’t assessed the availability of substitutes and the extent of diversion? One can certainly criticize the method by which this assessment is made, but a conclusion of harm absent this assessment seems absurd. Moreover, if Varney really means that all that is required to condemn a merger is that any customers may be harmed, no matter how many are also benefited, at a minimum it sounds like she’s writing the efficiencies defense out of the Guidelines, but she may even be justifying condemnation of any and all mergers–after all, how many actions in the marketplace impose a cost on literally no one? If, as seems likely, it is inframarginal consumers who are “likely” “vulnerable” to price increases (where “vulnerable” may be a synonym for “having inelastic demand”), then this test is a repudiation of the entire economic edifice of modern merger analysis (parallel to my discussion of the DC Circuit’s Whole Foods decision here).
And Varney’s reference to the FTC’s Evanston Northwestern case is a bit of a sleight of hand. That was indeed a consummated transaction, where the requisite harm was shown by direct pricing evidence following the merger. That’s quite a bit different than tossing out the Merger Guidelines in a non-consummated merger case because it is “clear” that “vulnerable” consumers are “likely” to be harmed. And even the Evanston Northwestern case is not without controversy, precisely because forsaking the Guidelines’ analytical framework also forsook clarity in the analysis (see, for example, the strong criticism of the case here).
According to the Guidelines themselves,
The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.
The presence of some harm (how much, by the way?) to some consumers does not necessarily equate to market power, unless the definition is simply tautological. Under the Guidelines approach, this would require a market definition so narrow (defined to include only the harmed customers) that it would be economically meaningless (the classic “red-haired, bearded, one-eyed, man-with-a-limp classification” condemned by Justice Fortas in his Grinnell dissent). Sidestepping the Guideline’s analytical framework by equating the exercise of market power with a theoretical price increase that wouldn’t be cognizable under the Guidelines (and wouldn’t exist in the real world) is not merely an analytical shortcut, it is a subversion of the whole analysis. Again, see the fundamental errors of the Whole Foods case.
Now, in the end, all she may be saying is that sometimes there is direct evidence of harm, properly-statistically attributable to the merger, many years after a transaction has been consummated. Or that the risk of harm is so self-evident that a formal analysis isn’t required–say, when there are simply no other competitors in a relevant geographic area, no timely entry is possible (for some reason . . . ) and a significant number of customers is affected. I suppose this could happen. I would expect in such circumstances that the parties wouldn’t even bother attempting the merger, but maybe once in a while the situation could arise. But I just can’t fathom that this could be a significant enough possibility that it would rise to the level of an important policy speech on the Merger Guidelines by the AAG.
So what is Varney saying? Anyone?