In a recently published article in ProMarket, John Kwoka of Northeastern University (who “worked on the draft Merger Guidelines while serving at the Federal Trade Commission as chief economist to the chair in 2022”) asserts that the U.S. Justice Department (DOJ) and Federal Trade Commission’s (FTC) draft merger guidelines aim to improve “deficient merger enforcement” by focusing on “lessening of competition,” rather than on “consumer surplus.”
With due respect to Kwoka, the draft guidelines, if adopted, would not “return antitrust to a sound economic and legal foundation.” Rather, they would generate costly uncertainty by returning federal merger enforcement to the pre-1980s structuralist era, when “efficiencies” was a dirty word. By discouraging welfare-enhancing merger proposals, they would harm the American economy.
Kwoka Mischaracterizes the State of Competition and the Effectiveness of Post-1970s Federal Antitrust Enforcement
Kwoka begins by once again raising the familiar complaint that industrial concentration has increased and competition has declined over the past 20 to 30 years, with lax antitrust enforcement identified as the key culprit. He contends that the FTC and DOJ challenged only the most anticompetitive mergers and thus “ignore[d] the hard cases that should have been brought.” According to Kwoka:
For too long [the FTC and DOJ] . . . accepted the erroneous Chicago School proposition that most mergers resulted in economic efficiency. They embraced the fallacy that vertical mergers are almost always procompetitive. They overlooked harm to workers and farmers and small businesses from buyer power caused by mergers. They all but abandoned challenges to mergers eliminating potential entrants into markets in the face of a higher legal standard. They ignored nontraditional harms such as tying, bundling, and leveraging that extended market power from one market into another. They failed to act against mergers whose principal effect was to entrench market dominance. They demonstrated a naïve belief in ease of entry. . . .
[What’s more] the consumer surplus standard has directed attention to price distortions in the markets for final products. But that focus overlooks how mergers can also distort the markets for inputs—wages and working conditions for laborers, and the prices that small businesses and farmers receive for what they supply to larger merging companies. A further problem with this standard is the undue attention it pays to price itself, even though significant competitive harm can arise from harder-to-measure aspects of transactions, such as quality, variety, and innovation. These latter issues are equally important even under a consumer surplus standard but have been overlooked simply because they are not so easily measured as price.
Furthermore, Kwoka maintains that the FTC and DOJ committed egregious error by not seriously investigating the more than 900 acquisitions by major tech companies (Amazon, Apple, Facebook/Meta, Google/Alphabet, and Microsoft). Kwoka complains:
No one can seriously believe that literally none of these acquisitions posed a competitive problem. Indeed, there is now widespread criticism of the lax manner in which the Agencies handled Google’s acquisition of DoubleClick and Facebook’s acquisitions of Instagram and WhatsApp, among many others.
Kwoka’s narrative is fatally flawed.
First, Kwoka’s claims of significantly higher market concentration and associated consumer harms are highly problematic. As I explained in my 2021 Mercatus Center Primer on US Antitrust Laws (citations omitted):
[T]he underlying assumptions of rising concentration and declining competition on which the neo-Brandeisian critique [of post-1970s antitrust enforcement] is largely based . . . are flawed. Chapter 6 of the 2020 Economic Report of the President, dealing with competition policy, summarizes research debunking those assumptions. To begin with, it shows that studies complaining that competition is in decline are fatally flawed. Studies such as one in 2016 by the Council of Economic Advisers rely on overbroad market definitions that say nothing about competition in specific markets, let alone across the entire economy. Indeed, in 2018, professor Carl Shapiro, chief DOJ antitrust economist in the Obama administration, admitted that a key summary chart in the 2016 study “is not informative regarding overall trends in concentration in well-defined relevant markets that are used by antitrust economists to assess market power, much less trends in concentration in the U.S. economy.” Furthermore, as the 2020 report points out, other literature claiming that competition is in decline rests on a problematic assumption that increases in concentration (even assuming such increases exist) beget softer competition. Problems with this assumption have been understood since at least the 1970s. The most fundamental problem is that there are alternative explanations (such as exploitation of scale economies) for why a market might demonstrate both high concentration and high markups—explanations that are still consistent with procompetitive behavior by firms. (In a related vein, research by other prominent economists has exposed flaws in studies that purport to show a weakening of merger enforcement standards in recent years.) Finally, the 2020 report notes that the real solution to perceived economic problems may be less government, not more: “As historic regulatory reform across American industries has shown, cutting government-imposed barriers to innovation leads to increased competition, strong economic growth, and a revitalized private sector.”
Consistent with this counter-narrative, a 2022 NERA Economic Consulting report by Robert Kulick and Andrew Card analyzed economic data from the U.S. Census and concluded that:
- “[t]here is no general trend towards increasing industrial concentration in the U.S. economy from 2002 to 2017”;
- “[t]he evidence does not support the claim that high levels of industrial concentration have become a persistent structural feature of the U.S. economy”; and
- “[t]he evidence does not support the claim that rising industrial concentration is generally associated with poor economic outcomes.”
In a similar vein, a subsequent 2023 American Enterprise Institute working paper by Kulick and Card found:
Contrary to the popular “over-concentration” narrative, economy-wide industrial concentration has declined, not increased, when a comprehensive analysis of all available industry-level data is undertaken. To the extent that our study and other studies have found evidence of increasing concentration, these increases are found in subsets of the data that are not representative of economy-wide trends in concentration. . . . Furthermore, to the extent that there is a systematic relationship between industrial concentration and economic outcomes in the comparable industries sample, we find that increasing industrial concentration is positively correlated with output growth, employment, and employee compensation, indicating that rising industrial concentration can be a direct response to increased market competition. This conclusion is bolstered by two industry-specific case studies demonstrating a direct connection between increasing market competition and increasing industrial concentration.
In short, Kwoka blames antitrust for a problem—diminished competition associated with increased concentration—that simply does not exist, according to recent research.
Second, Kwoka’s assertions that the enforcement agencies failed to vigorously enforce antitrust merger law in recent decades fall flat. The “inadequate enforcement” narrative (applied to both merger and non-merger transactions) has been examined, seriously critiqued, and found wanting by renowned antitrust scholars, such as William Kovacic and Timothy Muris (both former FTC chairmen). Furthermore, the consistency in merger-enforcement patterns during the George W. Bush, Barack Obama, and Donald Trump administrations (see here, for example) underscores the bipartisan consensus on antitrust that existed prior to 2021. Also, for all the fanfare about prior “weak” merger enforcement, the Biden administration brought far fewer merger challenges in its first year (12) than the Trump administration did during its final year (31) (see here).
Rather than acknowledge and respond to this fact-specific research, Kwoka merely claims—citing nothing—that the FTC and DOJ failed to act against mergers that threatened competitive harm. The closest he comes to specifics is to assert, without support, that “[n]o one can seriously believe that literally none of the acquisitions [of major tech companies that were not challenged by the FTC and DOJ] posed a competitive problem.”
Such an ipse dixit ignores the thousands of hours spent by large numbers of talented agency lawyers and economists in evaluating those transactions. It also ignores the enormous efficiencies and welfare enhancement that can be achieved through platforms’ merger-facilitated integration of complementary assets (see here, for example).
In sum, Kwoka’s story of antitrust-enforcement failure rests on debunked theories of increased concentration and competitive harm, and fails to come to grips with the actual record of vigorous and consistent merger enforcement in recent decades.
Kwoka Mischaracterizes the Nature of Merger Enforcement Under Preexisting Guidelines
After spinning his tale of failed antitrust enforcement, Kwoka then turns to criticizing enforcers’ analytic approach under preexisting merger guidelines. He does this by criticizing the preexisting guidelines’ supposed focus on consumer surplus, citing two reasons.
First, he claims that this emphasis is unhelpful “for mergers where price plays little or no role,” such as zero-price markets (“increasingly common and important in our tech-oriented economy”).
Second, he claims that the consumer-surplus focus handicaps enforcement “for mergers where price plays little or no role.” Those mergers involve issues such as innovation (“which is an inherently long run and often unpredictable process”); the entrenchment of a dominant position (“where the purpose of current actions is to impede entry over time”); or the elimination of a potential entrant (“that at some point in time would or might have deconcentrated a market”). He notes that “over time the [enforcement agencies] have chosen less often to raise them as central concerns despite their importance.”
Kwoka’s emphasis on the failure of a prior enforcement fixation on “consumer surplus” is, however, a red herring. Prior to the Biden administration, federal antitrust enforcers, of course, sought to promote consumer-welfare enhancement (viewed by many economists as something different than short-term consumer surplus) in evaluating mergers. They were not, however, stymied by a fixation with “consumer surplus” that discouraged them from assessing proposed mergers that did not involve short-term price effects (the metric applied to calculate changes in consumer surplus).
Prior to the Biden administration, the 2010 DOJ-FTC merger guidelines highlighted questions asked by the federal antitrust agencies in evaluating competitive effects, and they are a far cry from Kwoka’s simplistic tale of consumer-surplus-centric enforcement.
Section 1 of the 2010 guidelines explained that the agencies’ central concern is the enhancement of market power which, in addition to price effects, “can also be manifested in non-price terms and conditions that adversely affect customers, including reduced product quality, reduced product variety, reduced service, or diminished innovation. Such non-price effects may coexist with price effects, or can arise in their absence.” In short, the full range of potential nonprice effects were of major importance to enforcers, notwithstanding Kwoka’s suggestions to the contrary.
Section 2 of the 2010 guidelines provided that the agencies would consider a wide range of evidence drawn from actual observed effects (in the case of consummated mergers); direct comparisons based on experience; market shares and concentration; substantial head-to-head competition; and the disruptive role of a merging party. These varied sources of evidence yielded significant nonprice-related as well as price-related information relevant to competition.
In evaluating unilateral effects, Section 6 of the 2010 guidelines were concerned with all possible types of unilateral effects, not just price. Those included, for example, diminished innovation, reduced product variety, and exclusionary effects.
Section 10 of the 2010 guidelines was not only concerned with efficiencies that lowered price, but also those that improved quality, enhanced service, or brought forth new products. The agencies, however, only credited merger-specific efficiencies (“those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects”).
Prior to the Biden administration, did the FTC and DOJ, in practice, actually consider nonprice effects in carrying out merger enforcement? The answer is an unequivocal yes. In a 2018 submission to the OECD on nonprice effects of mergers, the United States documented a history of vigorous merger enforcement based on nonprice effects in a wide variety of market sectors, including, for example, hospitals, physician services, health insurance, integrated software systems, and free software products. A 2019 speech by then-FTC Commissioner Christine Wilson also showed that nonprice effects had featured prominently in merger-enforcement challenges (“[b]etween 2004 and 2014, the FTC challenged 164 mergers and alleged harm to innovation in 54 of them”).
To top it off, Kwoka also fails in his claim that prior merger enforcement ignored distortions in the markets for inputs. In a 2018 Yale Law Journal article, Scott Hemphill and Nancy Rose (well-known proponents of more aggressive antitrust enforcement) made the “central claim . . . that harm to sellers in an input market is sufficient to support antitrust liability.” They found support for their proposition in U.S. antitrust case law.
Kwoka’s Justification for the Draft Merger Guidelines Is Fatally Flawed
Kwoka claims that the draft guidelines overcome the (debunked, see above) flaws of prior merger analysis by focusing on a “lessening of competition” standard. He states:
[T]he effects of mergers reveal themselves in stages over time—some sooner, others only later—and the policy standard should match the emergence of specific harms over time. The consumer surplus standard is a measure of the outcome of a merger in a price-oriented market but is best suited for mergers whose effects are more immediate and focused on price. For mergers whose effects are more distant in time and uncertain in detail, the policy focus should be on the logically earlier stage of the process by which competitive harm may emerge, namely, whether and how the merger has distorted the competitive process itself.
This is what the draft Guidelines seek to accomplish by shifting focus to the lessening of competition. After all, if the competitive process itself is now distorted by a merger, that will predictably result in a distorted outcome in the near or possibly not-so-near future. For enforcement purposes, the crucial fact is that any distortion of the competitive process is more immediately evident than the often unmeasurable or delayed distortion of outcomes. For these reasons the guiding principle for enforcement should be whether the competitive process has been distorted, a determination sufficient by itself but supplemented where feasible with evidence on the specific outcome.
Kwoka fleshes out his “lessening of competition” standard by citing three examples: entrenchment, mergers combining firms engaged in innovative efforts, and acquisition of potential or nascent competitors. He argues that, in examples such as these, preexisting merger analysis that focused “on the more immediately evident effect of a merger” precluded good cases from being brought, while “harms to the competitive process” identified through application of the draft merger guidelines would justify merger challenges. In other words, the guidelines avoid the problem of “predicting the future” that allegedly stymied prior guidelines analysis.
With regard to entrenchment, Kwoka gives the example of “[m]ergers that permit the imposition of switching costs or engage in strategic bundling or increase dominance of necessary data services.” With respect to mergers of innovators, he states that “[r]epresentative scenarios include mergers that combine firms at different stages of the innovation process, or that strive for what might be competing products, or that are simply involved in primary research whose outcome and timing are subject to great uncertainty.” With respect to potential or nascent competition, he expresses concern about “the acquisition of a firm that might otherwise have entered and strengthened competition.”
Kwoka is unfair to preexisting analysis under the 2010 guidelines. Under those guidelines, hard evidence indicating that a proposed merger would inefficiently impose costs on third parties, or promote inefficient bundling to harm competitors without benefiting consumers, could have given rise to a challenge. Hard evidence demonstrating that a proposed merger would plainly harm competition in technology markets—say, by combining substitute technologies or, in product markets, by combining substitute products and services merely to repress competition with no significant synergies—also could have justified a lawsuit.
With regard to potential and nascent competition, Kwoka states:
Determining the market-wide effects of the acquisition of a firm that might otherwise have entered and strengthened competition requires predicting the nature of future competition with and without that firm. In the case of a nascent competitor, these difficulties are even more substantial, since a nascent competitor is one that is currently assessed as having the capability of evolving over time into a fulsome competitor to an established firm with market power. But that assessment poses substantial difficulties in predicting the nature and timing of the actual outcome.
If an assessment of an “innovation-related” merger created substantial difficulties in predicting future outcomes, it should not have been a candidate for challenge under the preexisting guidelines (assuming, of course, no showing of short-term consumer harm). But this is a virtue, not a bug. Acquisitions of technologies may generate substantial synergies by bringing together complementary technologies and enhancing research and development insights, leading to major improvements in products and services.
The summary challenge to such a merger under the draft merger guidelines—based on the mere supposition that a market’s future competitive posture “might be enhanced” by preventing the merger—would sacrifice potential major innovation gains for society. Indeed, a future market featuring a major competitor with valuable new technology-enhanced products and services could generate a wave of dynamic competition, yielding welfare gains that would swamp potential short-term static welfare concerns. As such, opposition to the merger under the draft guidelines would itself “lessen competition” by precluding future innovation-driven dynamic competition, turning Kwoka’s “lessening of competition” standard on its head.
Indeed, more generally, far from tending to harm competition, a wide variety of mergers may promote competition by enhancing innovation. As Daniel Spulber explains in his recent article on “Antitrust Policy Toward Innovation Competition,” mergers can generate innovation efficiencies of various sorts.
More specifically, merged firms “may have greater incentives to conduct R&D because they can cross-sell product innovations in their combined markets.” In addition to generating economies of scale in R&D, “[b]y combining complementary R&D projects, merging firms can realize economies of scope by sharing equipment, facilities, and other assets across those R&D projects.” A “vertically integrated firm may obtain returns from combining invention and innovation, improving the design of new products because of better market information, and improving the commercialization of products due to better product designs.”
An incumbent may “expand its portfolio of technologies or . . . broaden its product range” by acquiring a startup or new entrant. Also, “[t]he incumbent firm may have complementary technological knowledge and intellectual property (IP) that can be combined with the newly acquired technology to generate better innovations.” These varied and impressive innovation-related efficiencies are essentially ignored by Kwoka and the draft merger guidelines.
Another serious problem with Kwoka’s “lessening of competition” discussion is its willingness to forego any evidentiary showing of likely near-term or intermediate-term consumer harm, based on the mere assertion that an acquisition would “lessen competition” under the draft merger guidelines.
Cases of exclusionary conduct lacking any plausible procompetitive explanation (in other words, competition “not on the merits”) certainly justify challenges, both under the prior 2010 guidelines and the new draft guidelines. But absent such conduct, justifying a merger challenge based on mere speculation regarding a longer-term future outcome risks substantial harm to the competitive process. In other words, conduct that Kwoka labels a “lessening of competition” can often be misdiagnosed.
Consistent with and further bolstering this point, the examples of conduct that Kwoka cites as involving “lessened competition”—such as bundling, mergers combining innovative efforts, and acquisitions of potential or nascent competitors—often may have procompetitive explanations. The risk of error cost in condemning such transactions is high, absent an extremely strong evidentiary basis.
What’s more, citing hypothesized longer-term effects compounds the error cost, because uncertainty rises as possible outcomes are projected into the future. (That is a key reason why merger analysis generally has had a short-term focus.) Kwoka makes no reference to these costs, which counsel strongly against merger challenges based on highly speculative hypothesized future outcomes. (Such speculations are a prime example of Friedrich Hayek’s “pretense of knowledge” by government bureaucrats.)
Neither Kwoka nor the draft merger guidelines address the fact that mergers play a significant role in the market for corporate control (see, for example, Jonathan Macey’s summary here, the late Fred McChesney’s article here, and the late Henry Manne’s analysis here). Mergers and acquisitions are important in bringing about better utilization of scarce assets in the economy, by facilitating changes in management and corporate planning. A public policy that artificially discourages mergers undermines this beneficial process and, as such, undermines economic efficiency and lessens competition (once again, turning Kwoka’s “lessening of competition” standard on its head). There is little doubt that the draft merger guidelines are far less favorable toward mergers than prior guidelines; indeed, they “provide a strong indication of the [federal antitrust] agencies’ general aversion to mergers,” as former FTC economist Jay Ezreliev cogently explains.
Perhaps most disappointing is Kwoka’s total failure to address the many detailed comments directed to the serious deficiencies of the draft merger guidelines (see, for example, the fulsome comments for the record submitted by Mercatus Center Visiting Scholar Greg Werden, and my brief initial reactions to the draft guidelines, here). The implicit assumption of his article is that the guidelines are able to successfully employ his “lessening of competition” test and thereby accurately identify those proposed mergers that merit challenge.
But as Dennis Carlton points out, “the draft Guidelines are suggesting that any transaction can be stopped as long as there is even a remote possibility that competition can be harmed.” (Carlton also notes that, by failing to address specifically the understanding that competition is good because it benefits consumers and suppliers, the draft merger guidelines “risk falling into the fatal antitrust trap of confusing the protection of rivals with the protection of competition.”) As discussed above, such an approach inevitably leads to high degrees of costly error in merger assessment and foregoes potentially huge societal gains from innovation.
Finally, as Gregory Werden explains, the draft merger guidelines offend the rule of law by failing to identify mergers that federal enforcers will challenge and those they will not, due to a lack of controlling principles and consistent standards (unlike prior guidelines). The draft merger guidelines thereby impose counterproductive costly uncertainty on the private sector.
For these reasons, adoption and application of the draft guidelines in their current form would harm competition and the American economy, contradicting Kwoka’s claim that the guidelines are well-designed to address the lessening of competition.
Kwoka is a dedicated industrial organization economist who has committed much time and effort to critiquing prior merger enforcement and to justifying the draft merger guidelines. His dedication to his cause is commendable and his views merit due respect and attention. His critique, however, is fatally defective, and his defense of the draft guidelines is equally flawed. As such, his defense of the guidelines based on a “competitive process” theory should be accorded no weight.