Fifteen months after the close of the comment period, we finally have the release of the draft merger guidelines by the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ).
While there is a lot to digest in the 51 page document with over 100 (largely stale) footnotes, the broad picture is clear: the goal of this document is to stop more mergers. Period.
To achieve that end, the guidelines have jettisoned the insights from economics that antitrust has learned over the past 60 years and moved back to a world where virtually all conduct is presumed to be anticompetitive.
In so doing, instead of providing a crucial tool for businesses and bringing clarity to the legal landscape surrounding mergers, the new draft guidelines create confusion by blurring the line between what the law is and what the agencies want the law to be.
Step Aside Consumer Welfare
The guidelines make a clear shift away from the long-standing legal precedent and policy principle of prioritizing consumer welfare. In its stead, the guidelines introduce a hodgepodge of factors straightforwardly intended to block mergers, regardless of whether they increase consumer welfare.
New Concentration Thresholds
For example, the merger guidelines would lower the Herfindahl-Hirschman Index (HHI) thresholds, thereby classifying a larger number of markets as concentrated or highly-concentrated.
A mere 50 years of economics tell us to be very skeptical of the importance of concentration as a measure of competition. So, why lower the thresholds? No economic argument or evidence is given. It’s simply lowered to stop more mergers.
More importantly than the specific HHI threshold, the new guidelines flip their role in antitrust analysis. Recognizing the concentration measures don’t prove anything anticompetitive, the 2010 merger guidelines explained that HHI thresholds “provide one way to identify some mergers unlikely to raise competitive concerns.” In other words, if you want to merge but the market is not concentrated, don’t worry about the FTC or DOJ blocking you.
In contrast, the new proposed guidelines flip this framing and burden of proof from innocent until proven guilty, to guilty until proven innocent. Now, it is not that low HHI means the merger is unlikely to raise competitive concerns. Rather, under the new guidelines an HHI over the threshold creates “structural presumption” against the merger. Underscoring the significance of this change, the permissible consumer welfare defenses in the face of a structural presumption basically don’t exist.
The guidelines are explicit that “efficiencies are not cognizable if they will accelerate a trend toward concentration.” The problem? Efficiencies will almost always increase concentration—especially if those efficiencies come from economies of scale! If a merger creates efficiencies, the merged firm can lower costs, cut prices, and attract more customers. That’s exactly what efficiency does! The economic evidence is quite strong that efficiency increases concentration.
The other option, so as to not attract customers and increase concentration, would be not pass on cost-savings to consumers. Is that what the FTC wants? Surely not, but that would be the effect if attracting customers is viewed as anticompetitive.
Were all of that not concerning enough, the FTC/DOJ have more up their sleeves. The guidelines state that if the merged firm’s market share is over 30%, that “presents an impermissible threat of undue concentration, regardless of the overall level of market concentration.” Prescribing such a bright-line outright is extreme. Is there really no time where 30% market share is okay? What if consumers are better off because of it?
The ultimate takeaway here is that the new concentration threshold guidance presents firms with a gauntlet to run if they want to make a deal. No doubt, combining the change in the burden with lower levels of acceptable concentration creates a recipe for many more blocked mergers. Notice I didn’t say anticompetitive mergers. Rather, this will just stop more mergers of every kind without regard for economic argument or recent law.
Vertical Mergers
For me, the most troubling change is in the handling of vertical mergers.
No one would claim vertical mergers cannot be anticompetitive, but law and the economics literature has long held they are different from horizontal mergers. The guidelines don’t do away with the distinction between the two, but they try to chip away at the difference, including by introducing a new structural presumption against vertical mergers.
The guidelines introduce the idea of a “foreclosure share.” That is, if the merged firm “could foreclose rival’s access,” then the guidelines assume they will. There is no need to show an incentive to foreclose. Again, no anticompetitive outcomes need to be predicted, no future harm to consumers needs to be shown.
Moreover, if the foreclosure share (aka market share, since no incentive to foreclose must be shown) is more than 50%, “that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition.” Color me skeptical that there is a solid economic argument that is the case.
To see why this is extreme, imagine an input seller with 50% of the market acquiring a downstream firm with 1% of the downstream market. By the agency’s definitions this would substantially lessen competition, since 50% is the “share of the related market that is controlled by the merged firm.” In what economic sense does this merger change who controls what inputs? They claim there is possible rebuttal evidence, but none mentioned in Section IV of the guidelines would actually apply. Instead, again, they cite to Brown Shoe Co. v. United States (1962) as conclusory evidence.
As Dan Crane points out, the guideline conception of vertical mergers is at odds with the law. For a recent example, take the Microsoft-Activision merger. The guidelines would certainly flag it to be blocked (we know how that went for them) since Microsoft could pull Call of Duty from the Sony Playstation consoles. But the courts concluded that Microsoft would not have an incentive to pull Call of Duty, since Sony has the biggest market share.
This begs the question: how can the FTC/DOJ claim the guidelines reflect the law when they admonish clearly legal, and recently affirmed, conduct?
Labor
Much has been made of the fact that the new guidelines are the first to place an emphasis on labor. Guideline 11 states that “When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers.”
Policymakers and the commentariat are clearly excited about the inclusion of language about labor markets. For their part, FTC Commissioner Alvaro Bedoya and California Attorney General Rob Bonta highlighted the importance of explicitly including labor in the guidelines.
My sense is that while it’s fine for the guidelines to be explicit that labor markets are markets in the antitrust sense and that mergers that create monopsony power can be anticompetitive, I’m less sure this represents some big change. In fact, I titled my piece on the latest labor antitrust case between Penguin–Random House and Simon & Schuster “business as usual.” Some things under the sun may be new, but this isn’t one of them.
In the weeds of the labor element, one immediately evident problem is that the draft guidelines attempt to create a false symmetry between product markets and labor markets. Doing so fails to appreciate how labor markets are different from product markets both in theory and in practice.
On the one hand, in theory, no matter how much people say it, monopsony is not the mirror image of monopoly. For instance, suppose the guidelines accepted efficiency as a justification for mergers (they don’t, but suppose they do). A merger that increases efficiencies may result in fewer workers being hired. That’s not an anticompetitive effect.
From a practical antitrust perspective, where you need to define relevant markets, it’s worth remembering that labor markets are simply different from products markets. While “MRIs in the DC area” may make sense as a market and antitrust has developed tools to analyze it, “bank tellers in the DC area” is not a market in any meaningful sense. For one, most bank tellers can leave for completely different jobs outside of banking while MRIs will, always and forever, be MRIs. Yet, the standard tools (such as merger simulations) don’t handle a world with so many potential employers. The DOJ must have forgotten that Prof. Kevin Murphy made this point at their 2019 workshop on Competition in Labor Markets:
[I]n many product markets, particularly the ones we tend to study in antitrust, we often see relatively few alternatives on the buyer side, that you look at if I stop buying from firm A, the vast majority of customers go to either B, C or D, for example, in a market where there’s four primary sellers of the product. We’re sort of used to dealing with kind of small numbers, oligopoly-type models in those markets. Many labor markets, not all labor markets, don’t look anything like that. If you look at where people go when they leave a firm or where people come from when they go to the firm, often very diffuse. People go many, many different places. If you look at employer data and you ask where do people go when they leave, of-ten you’ll find no more than 5 percent of them go to any one firm, that they go all over the place. And some go in the same industry. Some go in other industries. Some change occupations. Some don’t.
The Penguin–Random House and Simon & Schuster case was the exception. In that case, there were only a few firms in the market for the writers’ labor, so standard tools applied. We should not give up on applying antitrust to labor markets, but we need to recognize the differences.
To the extent that the guidelines recognize the differences, it is to point out the additional ways that labor markets are anticompetitive. The guidelines assert “labor markets are often relatively narrow.” Often? By what metric? I’d appreciate some evidence or a fair argument. The best papers find falling labor market concentration at the local level, which is how the agencies believe we should define the geographic labor market.
Beyond tenuous concerns about concentration, as the agencies point out, workers must search for jobs. Sure, but firms must search for workers. As they point out, workers must invest in learning skills. Sure, but firms must invest in training skills. There is a holdup problem on both sides that changes how the labor market functions. It is artificial to assume it always pushes against workers.
Protecting Competitors, not Consumers
The merger guidelines also have a new section around platforms. Again, citing to Brown Shoe, conduct is anticompetitive if it “deprives rivals of a fair opportunity to compete.” This may seem like standard antitrust, but the language matters. The guideline formulation sets an exceedingly low bar for impermissible conduct. The suggested concern is not about even hypothetically depriving consumers of a choice or about the quality of products, but merely a nebulous conception of a “fair opportunity to compete.”
Lamentable as this development is, we shouldn’t be surprised by the FTCs inclination to move away from a singular focus on consumers (or even trading partners) in lieu of harm to competitors. We’ve already seen it in the attempt to reinvigorate the Robinson Patman Act. Both actions place competitors above consumers.
Predetermined Outcome
While the foregoing developments are premised upon legally dubious authority and plainly wanting economics, nothing about the draft guidelines comes as a surprise. The 14 month long process was not really about “updating” the guidelines for the times based on new evidence or law. Rather, it was about wish-casting the state of antitrust law in Chair Khan and AAG Kanter’s image.
While FTC and DOJ are striving to present these new guidelines as a tool geared at “strengthening enforcement,” the details articulate a different message: that they are committed to blocking as many mergers as possible.
As I wrote in National Review last year, it was clear where these guidelines were heading before they were even written:
Unfortunately, these agencies’ most recent request betrays their ultimate political agenda for the update. Khan and Kanter declared at the outset of this process that they have “launched a joint public inquiry aimed at strengthening enforcement against illegal mergers.” Right from the start, they show their preference for simply stronger — not necessarily better — enforcement, leading to (in the words of Stanford’s Doug Melamed) a “very tendentious” effort to produce new merger guidelines now.
In fact, in their request for information, the agencies asked, “What changes in standards or approaches would appropriately strengthen enforcement against mergers that eliminate a potential competitor?” We know the answer: strengthening enforcement. Now we need help justifying and implementing it.
As the guidelines undergo further review and potential revisions (including from courts), it is essential to ensure a balanced approach that emphasizes the long-standing principle of consumer welfare, promotes competition, and allows for procompetitive mergers that drive innovation and economic growth. Striking the right balance between enforcement and fostering a dynamic marketplace remains crucial to realizing the goals of effective antitrust policy.
As my colleague Gus Hurwitz pointed out, it’s important to remember that the guidelines are not binding. Yes, the courts cite them, but the courts also cite academic research. They will continue to cite the guidelines only to the extent that they are seen as legitimate by the courts and consistent with antitrust law.