On July 19, the Department of Justice (DOJ) and Federal Trade Commission (FTC) (the agencies) finally issued new draft Merger Guidelines (DMG), open to public comments for two months. The DMG embody a set of thirteen individual Guidelines, which “are not exhaustive of the ways that a merger may substantially lessen competition or tend to create a monopoly” (Guideline 13). Coincidentally or not, the decision to promulgate thirteen Guidelines is a bad omen – the DMG are fatally flawed from start to finish.
A brief overview
The DMG are an anti-merger manifesto. They ignore economic learning regarding the benefits of vertical integration and the limitations of economic concentration numbers, and refuse to address modern antitrust case law that centers on consumer welfare – a topic given very short shrift by the DMG. The DMG lay out a large variety of theoretical stories of potential competitive harm as grounds for enforcement actions, without demonstrating any sensitivity to the potential procompetitive welfare-enhancing benefits of the conduct they discuss. In effect, they establish a “pick and choose” laundry list of numerous potential competitive pitfalls ascribed to mergers, which taken together create a strong disincentive to consider economically beneficial acquisitions. The very brief discussion of efficiencies near the end of the DMG (see Part IV, Rebuttal Evidence) makes it clear that efficiency defenses are in reality a dead letter.
Admittedly, the DMG do contain references to prior guidance on market definition and rebuttal evidence (Parts III and IV), as well as in four appendices dealing with evidence, evaluating competition between firms, market definition details, and calculating market shares. The overall tone of the DMG, however, reveals that decisions on merger challenges will be driven by the thirteen individual guidelines in Part II (Applying the Merger Guidelines). (Part I of the DMG, Overview, briefly lists the thirteen specific guidelines found in Part II, and specifies the content found in the latter parts of the document.)
The DMG’s lack of serious economic thinking regarding the potential benefits of mergers is appalling. Perhaps the real goal of the guidelines is to discourage mergers from being proposed, by raising the apparent legal risk of such transactions.
The rule of law will be undermined – and the economy will be harmed – to the extent the guidelines’ faulty legal and economic “guidance” precludes welfare-enhancing mergers from going forward.
With respect to cases that go to court, the judiciary would likely view the guidelines unfavorably – indeed, the guidelines’ deficiencies would undermine the credibility of agency lawyers in court and thereby weaken, not strengthen, the merger enforcement enterprise.
The agencies should withdraw the guidelines and rewrite them from scratch. In the interim, they should reinstate the 2010 Merger Guidelines.
What will the agencies do, and with what consequences?
Much ink will be spilled on the DMG’s deficiencies, but for now there are four alternative actions that the DOJ and FTC could take at the end of the two-month public comment period, in descending order of public policy wisdom:
- Faced with a storm of negative comments, they could choose to withdraw the DMG and reinstate the 2010 Horizontal Merger Guidelines, vowing to continue to apply them at least through the end of the first Biden term.
- They could withdraw the draft guidelines and go back to the drawing board, leaving a temporary gap in guidance for the business community.
- They could make a few substantive changes to address serious problems, and then issued final revised guidelines; or
- They could make minor cosmetic changes or no changes at all to the DMG, and issue them in final form.
Regrettably, given the Biden Administration’s commitment to a total revamping of antitrust enforcement, it is most likely that the agencies will choose the fourth option – the agencies may be expected to ignore their critics and issue a final version of the DMG (the final merger guidelines, or FMG) that retains all the major errors of the draft.
Assuming the fourth option, the guidelines’ reliance on ancient unreliable case law to paper over faulty economics will not be lost to the judiciary. Federal judges may be expected to give the FMG short shrift, and the agencies, which have had a terrible record in court of late, may be expected to suffer more setbacks in litigation.
What’s more, as Gus Hurwitz points out, “if adopted as proposed these changes will do serious reputational damage to the agencies in court.” Even sound challenges of clearly anticompetitive merger cases that should have been brought may be viewed with a jaundiced judicial eye. As such, the antitrust enforcement enterprise itself will be undermined.
More generally, the FMG will damage the rule of law and the economy. Why? Because at the margin, the rise in expected litigation risks and other merger-related costs (for example, possible corporate “reputational hits” arising from agency challenges) will prevent some welfare-enhancing mergers from going forward. Especially hard hit may be transactions involving firms whose costs structures and incomes make the decision to put forth a merger proposal a close call. The efficiency of the market for corporate control will be undermined (see here and here), entailing potentially substantial costs. And the rule of law will suffer, because public enforcers will have succeeded in preventing some transactions not on the merits, in a court of law, but merely by threatening to invoke the power of the state.
If my assumption that welfare-inimical FMG will be adopted, the future prospects for sound, economics-based antitrust merger enforcement, subject to the rule of law, could turn on the results of the 2024 elections.
Back to the DMG – a quick and dirty critique of the thirteen guidelines
Lengthy analyses of the thirteen guidelines will be forthcoming from many scholars during the next few weeks. For the moment, I will simply highlight a few examples of problematic suggestions found in eleven of the guidelines. (I do not address the second and third guidelines, which address the elimination of substantial competition between firms and increases in the risk of anticompetitive coordination. Those two guidelines, though far from perfect, are less obviously problematic than the other eleven guidelines.)
Guideline 1 – Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets. The DMG adopts a stronger structural presumption for alleging a Section 7 violation based on lower concentration levels than the 2010 Horizontal Merger Guidelines. The nuanced discussion of concentration as only part of a bigger picture is eliminated. A presumptively “bad” single firm concentration level of 30 percent is added, which could discourage efficiency-seeking welfare-promoting acquisitions by a host of firms. The limitations on concentration measures are ignored.
Guideline 4 – Mergers Should not Eliminate a Potential Entrant in a Concentrated Market. This guideline delineates a variety of “potential entry” stories that may discourage efficient acquisitions by non-competing firms in arguably adjacent markets, relying on old case law.
Guideline 5 – Mergers Should Not Substantially Lessen Competition by Creating a Firm that Controls Products or Services that Its Rivals May Use to Compete. This guideline sweeps far too broadly, since a host of efficient mergers may enhance the efficiency of the acquiror in the market by putting together products or services that competitors might want to have. Such acquisitions may improve the quality of the merged firm’s quality while temporarily harming rivals. So what? Absent purely exclusionary behavior, this would strengthen the competitive process, and incentivize rivals to raise the quality of their own offerings – a procompetitive response. At its heart, this guideline appears aimed at preventing “excessively vigorous” competition that may disadvantage existing competitors.
Guideline 6 – Vertical Mergers Should Not Create Market Structures that Foreclose Competition. This guideline ignores the efficiencies of vertical integration and creates disincentives to beneficial vertical acquisitions of all sorts. It ignores modern economics and cites outdated case law that would make judicial law clerks laugh and thoughtful judges harrumph.
Guideline 7 – Mergers Should Not Entrench of Extend a Dominant Position. This peculiar guidelines employs discredited structuralist thinking as well as “leveraging” and “entrenchment” theories to attack mergers that are neither vertical nor horizontal (in short, mergers that cannot have any plausible anticompetitive effects). The bizarre reference to “preserv[ing] the possibility of eventual deconcentration” is cited, without regard to the economic effects of or the means of achieving deconcentration. Once again, ancient badly reasoned and illogical case law is cited, without reference to economic reasoning learning.
Guideline 8 – Mergers Should Not Further a Trend Toward Concentration. This guideline, which eschews any reference to actual economic effects and cites “oldie but baddy” case law, would support challenges to a wide variety of innocuous mergers.
Guideline 9 – When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series. This guideline would support a challenge which, considered under its own terms, does not threaten to substantially harm competition. In addition to citing two dated 1960s cases (Brown Shoe and Pabst), it finds support in the FTC’s November 2022 Section 5 Policy Statement, which is fatally flawed (see here).
Guideline 10 – When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform. This guideline raises concerns about a platform’s acquisitions that limit rivals’ access to the platform and favor the platform’s own offerings. It fails to note the strong efficiency cases for a platform’s favoring its own products or services, or a business’s general right to control the terms of access to the facility it has created (a right which incentivizes the generation of new and improved facilities, among other things).
Guideline 11 – When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers. This guideline’s discussion ignores the limitations on labor monopsony theories, as pointed out by Brian Albrecht (The Cracked Mirror of Monopoly-Monopsony Symmetry) and Eric Fruits (Hunting for Labor-Market Monopsonies (and Giffen Goods). As such, it greatly exaggerates the nature of the problem, and inappropriately posits a new matter for special concern. The FTC and DOJ have not ignored monopsony issues when they arose in appropriate cases in the past.
Guideline 12 –When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition. This guideline fails to cite to any economic evidence that this is a concern of any significance. (It cites two old rather inapposite cases.) It appear to be aimed at discouraging acquisitions of this type, without regard to their actual competitive effects.
Guideline 13 – Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly. This “kitchen sink” guideline merely states the truism that the first twelve guidelines “address common scenarios” (really?) but “are not exhaustive. . . . [A] wide range of evidence can show that a merger may lessen competition or tend to create a monopoly.” True, but what is the point? And, once more, where is the recognition, found in the 2010 Horizontal Merger Guidelines, that “[t]he Agencies seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.” (Emphasis added.)
Before Closing – the DMG Are Anti-Efficiency
While a discussion of all the other flaws in the DMG is beyond the scope of this commentary, one troublesome paragraph stands out in particular. The brief subsection on procompetitive efficiencies, found in Part IV of the DMG, reveals itself as anti-efficiency. Its introductory paragraph states:
The Supreme Court has held that “possible economies [from a merger] cannot be used as a defense to illegality.” [Citation to Philadelphia National Bank case omitted.] Competition usually spurs firms to achieve efficiencies internally, and Congress and the courts have indicated their preference for internal efficiencies and organic growth. Firms also often work together using contracts short of a merger to combine complementary assets without the full anticompetitive consequences of a merger.
This statement gives the game away. “Economies,” which, by the way, may generate substantial economic welfare, will be ignored by the agencies. The claim that “Congress and the courts” prefer organic growth to mergers is far from clear. (And anyway, why should congressional preferences or judges’ tastes trump the right of private parties to dispose of their property as they see fit, as long as there is no clear statutory violation?) Furthermore, in certain situations mergers may more quickly or effectively generate efficiencies than “organic growth” – in other words, they may be welfare-superior to the internal growth alternative. Finally, the closing reference to “the full anticompetitive consequences of a merger” implicitly sends the message that mergers tend to harm competition – when the reality is that the vast majority of mergers that the agencies review have no anticompetitive consequences at all.
The short discussion following this paragraph (covering merger specificity, verifiability, pass through, and competitive ramifications) makes it clear that the agencies will, as a practical matter, probably never credit merger-related efficiencies. Particularly problematic is the statement that “efficiencies are not cognizable if they will accelerate a trend toward concentration . . . or vertical integration” – such trends may have no bearing on the effectiveness of competition, as a legion of economists could have explained to the DMG drafters.
The DMG is a seriously flawed document. It reflects badly dated case law and unsound economics. If promulgated in its current form, it will prove economically harmful and undermine the rule of law. One can only hope that the agencies will experience an epiphany and withdraw the DMG, while reinstating the 2010 Horizontal Merger Guidelines for the time being. I would not, however, count on it.