The proposed Horizontal Merger Guidelines (HMGs) have been treated by some as a major shift in enforcement approach away from a tight structure that begins with market definition to a more flexible and open-ended competitive effects approach. Some of the specific concerns that have been raised are that the proposed HMGs dramatically change enforcement policy by (i) downplaying or ignoring the role of market definition in favor of a more holistic approach to competitive effects; (ii) defining overly narrow relevant markets; (iii) defining whatever market “works” to show anticompetitive effect; (iv) ignoring market definition and concentration in unilateral effects analysis; (v) creating a presumption of anticompetitive unilateral effects in every merger with differentiated products, and failing to have a safe harbor; (vi) fearing unilateral effects among firms that are not closest substitutes; (vii) overemphasizing diversion ratios among the merging parties and ignoring competition from non-merging products; and (viii) ignoring the competitive constraints from the potential for repositioning.
As Joe Sims has observed, “elections matter,” so a change in enforcement policy would not be all that surprising. It obviously is too soon to tell whether and by how much enforcement will change in practice. But, to check on the extent to which the language of the proposed HMGs represents a shift, I went back to the 2006 Merger Commentary to see what the previous administration said about these issues. I assign the Merger Commentary to my advanced antitrust students. But, this report is often ignored. I have reproduced some quotations from the 2006 Merger Commentary below. Readers can judge for themselves the extent to which elections matter for how the Agencies frame their analysis.
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- Downplaying or ignoring the role of market definition in favor of a more holistic approach to competitive effects
“At the center of the Agencies’ application of the Guidelines, therefore, is competitive effects analysis. That inquiry directly addresses the key question that the Agencies must answer: Is the merger under review likely substantially to lessen competition?” (Page 2)
“In some investigations, before having determined the relevant market boundaries, the Agencies may have evidence that more directly answers the ‘ultimate inquiry in merger analysis,’ i.e., ‘whether the merger is likely to create or enhance market power or facilitate its exercise.’ … Evidence pointing directly toward competitive effects may arise from statistical analysis of price and quantity data related to, among other things, incumbent responses to prior events (sometimes called ‘natural experiments’) such as entry or exit by rivals.” (Page 10)
“Evidence pertaining more directly to a merger’s actual or likely competitive effects also may be useful in determining the relevant market in which effects are likely.” (Page 10)
“Application of the Guidelines as an integrated whole to case-specific facts–not undue emphasis on market share and concentration statistics–determines whether the Agency will challenge a particular merger.” (Pages 15-16)
- Defining overly narrow relevant markets
“Defining markets under the Guidelines’ method does not necessarily result in markets that include the full range of functional substitutes from which customers choose.” (Page 6)
“The Agencies frequently conclude that a relatively narrow range of products or geographic space within a larger group describes the competitive arena within which significant anticompetitive effects are possible.” (Page 6)
“The description of an ‘antitrust market’ sometimes requires several qualifying words and as such does not reflect common business usage of the word ‘market.’ Antitrust markets are entirely appropriate to the extent that they realistically describe the range of products and geographic areas within which a hypothetical monopolist would raise price significantly and in which a merger’s likely competitive effects would be felt.” (Page 12)
“The boundaries of a market are less clear-cut in merger cases that involve products or geographic areas for which substitutes exist along a continuum. …. Even when no readily apparent gap exists in the chain of substitutes, drawing a market boundary within the chain may be entirely appropriate when a hypothetical monopolist over just a segment of the chain of substitutes would raise prices significantly.” (Page 15)
- Defining whatever market “works” to show anticompetitive effect
“This process [of defining markets] could lead to different conclusions about the relevant markets likely to experience competitive harm for two similar mergers within the same industry.” (Page 12)
- Ignoring market definition and concentration in unilateral effects analysis
“Indeed, market concentration may be unimportant under a unilateral effects theory of competitive harm. … The concentration of the remainder of the market often has little impact on the answer to that question.” (Page 16)
- Creating a presumption of anticompetitive unilateral effects in every merger with differentiated products, and failing to have a safe harbor
“Section 2.2 of the Guidelines does not establish a special safe harbor applicable to the Agencies’ consideration of possible unilateral effects. Section 2.2.1 provides that significant unilateral effects are likely with differentiated products when the combined market share of the merging firms exceeds 35% and other market characteristics indicate that market share is a reasonable proxy for the relative appeal of the merging products as second choices as well as first choices.” (Page 26)
- Overemphasizing diversion ratios among the merging parties and ignoring competition from non-merging products
“For mergers involving differentiated products, the “diversion ratios” between products combined by the merger are of particular importance. … In general, for any two products brought under common control by a transaction, the higher the diversion ratios, the more likely is significant harm to competition.” (Page 27)
The unilateral effects of a merger of differentiated consumer products are largely determined by the diversion ratios between pairs of products combined by the merger, and the diversion ratios between those products and the products of non-merging firms have at most a secondary effect.” (Page 28)
“A merger may produce significant unilateral effects even though a large majority of the substitution away from each merging product goes to non-merging products. … A merger may produce significant unilateral effects even though a non-merging product is the “closest” substitute for every merging product.” (Pages 27-28)
- Ignoring the competitive constraints from the potential for repositioning
“The Agencies rarely find evidence that repositioning would be sufficient to prevent or reverse what otherwise would be significant anticompetitive unilateral effects from a differentiated products merger.” (Page 31)
Remember: These quotations are taken from the 2006 Merger Commentaries, not the proposed HMGs!
