Recent Antitrust and Regulatory Changes Both Unravel the Consensus

Presidential administrations over the last 50 years have pursued widely varying policy goals, but they have agreed—at least, in principle—that policies should be efficient and improve social welfare. Now, the Biden administration is taking steps to unravel that bipartisan consensus. We focus on different policy areas (Dudley on regulation and Sullivan on antitrust) and are struck by the similarities among the radical changes being proposed. 

Draft Merger Guidelines

As other posts in this series have observed, the Federal Trade Commission (FTC) and U.S. Justice Department’s (DOJ) draft Merger Guidelines present a new vision of merger review that appears to demote the use of economics and adopts a more formulaic approach to proposed mergers targeted for further scrutiny. The guidelines downplay the effect of efficiencies that mergers can produce. This represents a departure from the previous guidelines, which have maintained the goal of balancing the pro-competitive benefits of mergers against their anticompetitive costs. The changes in the guidelines could threaten the bipartisan respect that the guidelines have achieved over the last 40 years. 

Recent policy changes at the FTC raise similar concerns, including the withdrawal of the 2020 Vertical Merger Guidelines for their acknowledgement of efficiencies and the withdrawal of the 2015 Statement of Enforcement Principles Regarding “Unfair Methods of Competition” (UMC) for its reliance on a rule-of-reason framework, which takes efficiencies into account.

Draft Regulatory Impact Analysis Guidelines

On the regulatory front, President Joe Biden has directed agencies to “modernize regulatory review,” and the Office of Management and Budget (OMB) in April proposed revisions to Circular A-4 on conducting regulatory impact analysis. Circular A-4 and Executive Order 12866, on which it is founded, have proven durable across different presidential administrations because they are based on objective and nonpartisan principles designed to inform policymakers on an important dimension of regulatory decisions—the efficiency of different approaches to achieving policy goals.

The draft changes go way beyond “modernizing” and appear designed to steer analytical results to support this administration’s policy preferences, rather than present objective evidence and estimates to policymakers and the public. Like the merger guidelines, the draft A-4 changes reflect a mistrust of market forces and a willingness to intervene and override state and individual decisions. Enthusiastic supporters of the revisions say they represent an “entirely new regulatory philosophy, one that is unwilling to sacrifice widely shared values like dignity and equity for brutal, cold, calculating efficiency.”

Proposed Revisions Reduce the Information Available

The purpose of both the draft Merger Guidelines and Circular A-4 is to inform policy officials, courts, firms, and the public about the likely impact of actions they might take.

The merger guidelines aim to inform firms on how the agencies will investigate mergers. The guidelines do not determine whether a merger can proceed—ultimately, that will be decided by the courts. In the past, the courts have given deference to the merger guidelines and their use of economics to determine whether a merger violates antitrust laws. 

Similarly, regulatory impact analysis informs policy decisions, but does not determine them. For more than 40 years, agencies have been asked to apply an economic lens to examine the welfare differences among alternative policies, and to identify those expected to yield the greatest positive net benefits to society. Policymakers must consider other factors when making regulatory decisions, including legal constraints, political viability, distributional impacts, practicality, etc., but the analysis provides “useful information for decision makers and the public[…], even when economic efficiency is not the only or the overriding public policy objective.”

In both cases, under the revised guidelines, less information on the consequences of actions will be available.

How to Improve the Draft Merger Guidelines

To ensure that the merger guidelines provide objective, consistent guidance to firms and continue to be respected by the courts, we offer the following suggestions: 

1. Do not give precedence to formulaic rules over economics analysis in evaluating the likely effect of proposed mergers. Years of progress in economic theory and empirical research have refined our understanding of how competition works and how it depends on firm and market factors. Abandoning this knowledge would increase the costs to firms that propose mergers which are beneficial or neutral, as well as the agencies’ costs in attempting to block them. 
2. Drop the citations to old case law that was written before economics became an integral part of antitrust. These citations give the impression that the agencies are operating on outdated knowledge and would likely be ignored by the courts. 
3. Be clear about what the draft Merger Guidelines are trying to protect. Prior guidelines have been concerned primarily with preventing price increases or the worsening of other terms that would harm consumers. In contrast, the draft guidelines also appear to be concerned with increasing wages and benefits, and improving “terms relating to various additional dimensions of competition.” Moreover, the guidelines do not clearly distinguish protecting competitors from protecting the competitive process. Protecting wages, benefits, and inefficient rivals go against the objective of protecting consumer welfare, and having multiple, conflicting objectives would necessarily result in a less transparent decision-making process.
4. Retain the previous guidelines’ treatment of efficiencies from mergers. The draft guidelines practically eliminate the possibility that efficiencies from mergers could be used as a cognizable defense by requiring that efficiencies benefit competition in order to be counted (i.e, reduce prices), but not to “accelerate a trend towards concentration,” which they would likely do if they benefitted competition. The guidelines should also recognize the well-known efficiencies from vertical mergers, including the elimination of double marginalization.

Retaining the Integrity of Regulatory Analysis

In a letter to the U.S. Office of Management and Budget (OMB), all of the former presidents of the Society for Benefit-Cost Analysis (including Dudley) encouraged significant revisions to the draft circular to retain its integrity and durability. 

1. The revised circular—at almost twice the length of the original—should be shortened and reorganized to emphasize key points and methods. Clearer, more streamlined guidance that emphasizes transparency in the presentation of alternatives, assumptions, and uncertainties would likely yield more meaningful analysis that could be more readily communicated to the officials responsible for setting policy, and to the public. 
2. The revised draft circular contains an extensive new section on distributional impacts. This is appropriate, as few regulatory analyses currently provide data on the distribution of both costs and benefits based on income or other socioeconomic factors. The draft’s proposal to apply different numerical “weights” to benefits and costs based on income or other group characteristics, however, is not supported by widely accepted principles, nor is there professional consensus for making such interpersonal-utility comparisons. Rather than encouraging agencies to embed in their quantitative benefit-cost analysis weights that reflect particular normative frameworks and are difficult to understand and interpret, Circular A-4 should advise them to present information on distributional impacts as clearly as the evidence permits. That would give policymakers information necessary to make the normative policy decisions that take the incidence of regulatory benefits and costs into account. 
3. The draft circular directs agencies to use a default rate of 1.7% to discount all effects for up to 30 years into the future, and lower rates thereafter. The appropriate rate for discounting future benefits and costs, however, is far less settled in the economic literature than such a precise figure warrants. Given the complexity of the subject and the important effect that discount rates have on estimates of benefits and costs, the circular should not direct agencies to use a single number. Instead, it should provide a range of perhaps two or three rates, and direct agencies to use the range to demonstrate the sensitivity of the results to the choice of discount rate. 
4. The draft provides too much latitude for choosing to regulate based on paternalistic assumptions that people do not act in their own interest. Before presumed behavioral biases can be used to justify overriding individual choices, OMB should require agencies to “provide evidence that individuals behave irrationally (and do not learn) in the specific situation covered by the proposed regulation.”
5. While there may be situations in which considering effects that fall on people outside the United States may be appropriate, under no circumstances should only global impacts be presented. Transparency regarding where the likely benefits and costs will fall geographically is essential for understanding distributional impacts, as well as for complying with statutory mandates.

Ensuring Reliability and Durability

The Biden administration’s draft revisions to its merger and regulatory analysis guidelines both appear designed to tilt analysis to achieve this administration’s policy preferences. Some of the proposed changes depart from widely accepted practices, principles, and evidence. The draft Merger Guidelines appear to be aimed at preventing mergers and preventing further concentration in markets, even when efficient. The draft Circular A-4 changes appear to put a thumb on the scale in favor of more regulatory control over private actions. In both cases, the revisions abandon longstanding, bipartisan agreement on the importance of understanding how government actions affect economic efficiency and social welfare.