This article is a part of the The FTC's New Normal symposium.
The draft merger guidelines that were released July 19 by the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) indicate a shift by the agencies toward an overreliance on structural market factors to trigger merger scrutiny.
For example, Draft Guideline 1—titled “Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets”—would lower the bar for what constitutes a “highly concentrated” market on the Herfindahl-Hirschman Index (HHI). Evaluating mergers through this structural lens assumes both that concentration is present or escalating in the economy at large and that concentration always and only leads to harmful anticompetitive effects. Most detrimentally, it likely precludes the more nuanced assessment of a given merger’s impact on competition that the FTC had used over the preceding four decades. This shift will increase Type I errors in antitrust enforcement and rob or delay the benefits of competition-enhancing mergers to consumers.
The roots of the problem with today’s draft guidelines can be traced to a 1948 FTC study that erroneously found increased concentration and accelerated rates of concentration in U.S. industry. While the study was later discredited and the conclusions renounced by its authors, it nevertheless contributed to Congress’ 1950 amendments to the Clayton Act that increased regulatory powers over mergers. Passage of the Celler-Kefauver Act was no doubt fueled by the populist impulses of the time, but it was also informed by economic misinformation in the flawed FTC study.
It was a February 1950 article by John Lintner and Keith Butters that exposed the methodological flaws in the FTC’s 1948 report and disproved its conclusions. Lintner and Butters found that, contrary to what the FTC study claimed, mergers were much more important to smaller firms than to larger ones; that they actually reduced concentration by reducing market shares among the biggest companies; that merger activity among the biggest firms was minor; and that large firms’ internal growth dwarfed the effects of mergers. The economists who wrote the FTC study would go on to admit their mistakes in a footnote that noted:
If the Commission had made any general statement on this point, it would probably have concluded, based on its data, that the recent mergers have not substantially increased concentration in manufacturing as a whole.
But the damage of that initial error, coupled with populist political sentiment of the day, set the course for decades of flawed enforcement. Similar faulty reasoning seems poised to reemerge at the FTC with the proposed increased reliance on structural evaluation. Yet the same questions persist today about the amount of market concentration and the inevitability of anticompetitive consequences.
A 2022 report from the U.S. Chamber of Commerce makes the case that both economy-wide concentration and concentration in manufacturing specifically have been decreasing since 2007. But beyond the question of whether or not concentration is taking place is the more germane question of concentration’s effects on competition and consumers. That Chamber study goes on to find that:
Rising industrial concentration is often a sign of increasing market competition and associated with positive outcomes such as output growth, job creation, and higher employee compensation.
Similarly, a recent report from this symposium’s host—the International Center for Law and Economics (ICLE)—notes the perils of focusing solely on national concentration trends over local trends, where competition actually takes place:
…although it appears that national-level firm concentration is growing, this effect is driving increased competition and decreased concentration at the local level, which is typically what matters for consumers. The rise in national concentration is predominantly a function of more efficient firms competing in more— and more localized—markets. Rising national concentration, where it is observed, is a result of increased productivity and competition that weed out less-efficient producers. Similar results hold for labor-market effects.
Measures of concentration in a properly defined relevant market can be instructive, but they are no substitute for evaluating a merger’s actual effects on consumers. All the way back to the “O.G.” of U.S. antitrust law, Standard Oil Co. of New Jersey v. United States in 1911, the defendant was increasing output and lowering prices for consumers, making its market share a somewhat unimportant matter. The impetus for passing the Robinson-Patman Act decades later was a revolution in chain grocery-store retailing that delivered lower prices and greater variety to consumers.
A fundamental misunderstanding of concentration’s relationship with anti-competitive outcomes became legal precedent with Brown Shoe Co. Inc. v. United States, United States v. Philadelphia National Bank and others. The eventual result was Justice Potter Stewart’s famous 1966 dissenting quip that the sole consistency he could find in antitrust litigation “is that the Government always wins.”
Much of this economic error was eliminated with the consumer welfare standard and the use of more sophisticated economic analysis that began to guide the agencies and the courts in the late 1970s and early 1980s. Unfortunately, it is those very advances that the new draft merger guidelines threaten to undo.
Returning to clunky thresholds of market share, deemphasizing careful market definition, and ignoring possible benefits of mergers may preclude a more enlightened evaluation of aggregate competitive effects. Statutory language does not demand that we repeat the mistakes of the past and we shouldn’t.