This week, I submitted two comments to the Horizontal Merger Guidelines Revision Project.
The first, submitted with a group of economists focusing on the use of price/cost margins in merger analysis. The submission lays out the basic relationship between margins and elasticities that flows from the profit-maximization assumption, and then discusses several of the factors that arise in the implementation of this analysis in practice and how the proposed HMGs take them into account. The submission concludes:
In conclusion, the inverse relationship between the price/cost margin and the firm’s own-price elasticity follows from the fundamental working assumption of profit maximization, has a long history in economics and remains relevant for careful and reliable merger analysis, along with econometric estimates and other facts learned during a full merger analysis. The treatment of margins in the proposed HMGs correctly notes that margins are informative about the potential for price increases in a unilateral effects analysis. The proposed HMGs do not conclude that margins are dispositive of the likelihood of a price increase and emphasize the importance of empirical evidence of demand conditions and other factors that might limit the ability and incentive of firms to raise prices post- merger. As recognized by the proposed HMGs, the ultimate goal of merger analysis is to evaluate the likely potential to harm competition, using all the available evidence, not just margins.
The Economists Submission makes a simple but important point, and I was very pleased (and flattered) to be asked to join the list of distinguished economists endorsing the analysis (led by Steve Salop, and including Mike Baye, Aaron Edlin, Richard Gilbert, Jerry Hausman, Dan Rubinfeld, Richard Schmalansee, and Lawrence White).
The Wright Submission was a solo-venture, and originated out of my earlier post discussing some concerns I had with the 2010 HMGs emphasis on close substitutes and narrower markets. I wrote that the problem with the new HMGs, and one of the reasons for skepticism about the narrow market approach, was that:
Defining narrower markets will inevitably lead to circumstances in which the consumers in the narrowly defined markets are harmed, but others are benefitted. I suspect the true concern of those skeptical of the “narrow” market approach adopted by the HMGs, which has not been articulated, is that the narrower markets obscure competitive benefits of the merger that are “outside” the market. Thus, the new approach could lead to Section 7 liability for mergers that result in net increases in consumer welfare.
To relieve this concern, I proposed that the Agencies adopt go beyond should “go beyond ‘cheap talk’ to ‘binding commitment’ in order to avoid imposing needless anxiety on businesses” and adopt “language that would indicate that the Agencies would not bring cases when they believe that the merger, taking into account competitive effects in the narrowly defined relevant market and elsewhere, is pro-competitive.”
In my submission to the Agencies, I elaborated on these ideas, arguing that the new HMGs should be expanded to discuss how the Agencies will exercise their prosecutorial discretion in this area. I discuss the need for such a commitment by the Agencies in light of the approach envisioned by the new HMGs, some of the potential complications with an approach that would effectively involve the Agencies committing to engage in precisely the sort of cross-market balancing Philadelphia National Bank rules out, and how parties could satisfy their burden to prove these efficiencies under the new Section 10 of the HMGs. I conclude that:
The proposal to amend note 11 to commit the Agencies to forbear from challenging mergers where out of market efficiencies outweigh anticompetitive effects merely updates the new HMGs in a manner consistent with the modern intellectual foundation of merger analysis.
Check out both proposals and let me know what you think. Other proposals and comments to the Agencies are available here.
UPDATE: I understand many of the links to the submissions of the FTC Public Comments webpage are not functioning properly. I’ve noticed over the last several days that a 1-2 day lag between when the link is posted and when it works (sending to pdf of submission rather than error page). I’ve posted hard copies of the Economists_Submission and the Wright Submission here in the meantime (and replaced the links in the post above).