One of the most important changes in the Federal Trade Commission (FTC) and U.S. Justice Department’s (DOJ) draft merger guidelines is the abandonment of market power as the central element of merger enforcement. The “unifying theme” of the 2010 horizontal merger guidelines was that “mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.” The draft guidelines have dropped the unifying theme language.
The guidelines’ abandonment of enhancement of market power as the central element of merger enforcement will have profound consequences for antitrust. One consequence is that merger enforcement will no longer prioritize consumers over competitors of the merging firms. Another important consequence, however, is the loss of a limiting principle in merger enforcement. Courts recognize that enhancement of market power is a necessary element of a merger challenge under antitrust law. The U.S. Circuit Court of Appeals for the D.C. Circuit made this point clear in its 2001 FTC v. H.J. Heinz opinion when it held that “[m]erger enforcement, like other areas of antitrust, is directed at market power.” The draft guidelines have removed enhancement of market power as a necessary element of a merger case.
The absence of a limiting principle in merger enforcement would give the FTC and the DOJ’s Antitrust Division free rein to go after every merger, including in pursuit of goals that go beyond antitrust. The antitrust agencies may engage in political enforcement to benefit supporters of the administration in power. This would be a troubling development for antitrust.
Based on recent speeches, the current agency leadership may, in the name “fair competition,” pursue enforcement that favors labor and small businesses over consumers and large corporations. Recent public statements also suggest that the agencies are likely to target big tech and private equity. The agencies have yet to win an antitrust case against a big tech firm under their current leadership. The FTC recently lost its challenges of the Meta/Within and Microsoft/Activision Blizzard transactions. In both cases, the commission offered extremely weak evidence to support the enforcement actions.
Why Did the Draft Merger Guidelines Abandon Market Power?
Market power refers to a firm’s ability to raise prices profitably above the competitive level for buyers (customers) or to lower prices profitably below the competitive level for sellers (suppliers). Firms’ ability to deviate prices from the competitive level is constrained by competition from rivals. A merger has the potential to enhance the merging firms’ market power by eliminating competition between the merging firms or through other means.
The 2010 horizontal merger guidelines explained that “[a] merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.” Carl Shapiro—the architect of the 2010 guidelines—has criticized the draft guidelines for abandoning “enhanced market power, and thus harm to customers, as its unifying theme.” Shapiro argued that abandoning enhanced market power as the unifying theme of merger enforcement would be “a fundamental and reckless change from forty years of merger guidelines spanning many administrations.”
Why did the draft guidelines abandon enhanced market power as the central element of merger enforcement?
Rejecting the Consumer Welfare Standard
One explanation for why the draft merger guidelines abandoned enhanced market power as the central element of merger enforcement is that the agencies have rejected the consumer welfare standard as a core principle of antitrust. The consumer welfare standard limits the scope of antitrust laws to actions that may harm consumers (which may include suppliers of labor).
FTC Chair Lina Khan has criticized the standard for focusing on specific outcomes, such as price, rather than on “ensuring that markets were structured in ways that promoted openness and competition.” Assistant Attorney General Jonathan Kanter has likewise criticized the standard for focusing on wealth and output as the goals of enforcement and excluding other goals, such as to “protect our democracy from corporate power, or to promote choice and opportunity for individuals and small businesses.” Kanter argued that a further problem with the consumer welfare standard is that it requires antitrust enforcers to establish their cases through “econometric quantification of the price or output effects of the specific conduct at issue.”
Eric Posner, who worked on the draft merger guidelines while serving as counsel to Kanter, has suggested that the guidelines have avoided using the term “market power” because “it’s important that the agencies not commit themselves to proving price increases case by case.” There is nothing about market power as the unifying theme of merger enforcement, however, that commits the agencies to prove price increases case by case. The 2010 horizontal merger guidelines do not require the agencies to demonstrate price effects to bring a merger challenge. Indeed, the agencies have been bringing successful merger challenges without having to demonstrate price effects.
Market power’s focus on price is thematically divergent from the draft guidelines’ new policy direction. That direction, however, is not entirely clear. In a recent article, Joseph Simons and I discuss how the guidelines’ shift away from the consumer welfare standard has left many unanswered questions about the agencies’ merger-enforcement policies, goals, and priorities under current leadership.
Policies Against Mergers that Do Not Enhance Market Power
There is a more direct reason why the draft merger guidelines have abandoned enhancement of market power as the central element of merger enforcement: The guidelines include several theories of how mergers may violate antitrust law without enhancing market power.
For example, Guideline 7 states that mergers may violate antitrust laws under entrenchment theory. This theory may condemn a merger as illegal even in cases where the merging parties are not competitors in any relevant market and the merger does not enhance market power. The entrenchment theory states that a merger may substantially lessen competition by making a dominant firm an even more formidable competitor through merger-related economies of scale and scope, reduced capital costs, or other synergies.
Guideline 13 may also cover theories under which a merger violates antitrust law without enhancing market power. It essentially serves as a catchall provision for all the merger theories the agencies may pursue that were not already included in Guidelines 1 through 12. Guideline 13 discusses three examples of where “[t]he Agencies have in the past encountered mergers that lessen competition through mechanisms not covered” by the first 12 Guidelines. At least two of the examples appear not to involve any enhancement of market power.
Footnote 25 discusses another example where the agencies may challenge a merger that does not enhance market power, stating:
Typically, a merger eliminates a competitor by bringing two market participants under common control. Similar concerns arise if the merger threatens to cause the exit of a current market participant, such as a leveraged buyout that puts the target firm at significant risk of failure.
This footnote suggests that the agencies may challenge a merger based on the theory that it puts the target “at significant risk of failure” or increases the risk that the merger “would lead to or increase undue concentration” in the relevant market. This theory does not involve any enhancement of market power for the merging firms.
The logic of footnote 25 is flawed. It singles out leveraged buyouts (where buyers borrow funds to finance the acquisition) as an example of a financial structure where an acquisition may significantly increase the target’s probability of exiting its market. But even if leverage increases the probability of financial distress or bankruptcy for the acquirer, any restructuring of debt or bankruptcy reorganization will retain the target as an ongoing concern if it has positive value. The situation is analogous to a foreclosure where the homeowner borrows too much and is unable to make mortgage payments. The home foreclosure does not make the home disappear from the street. Does antitrust law prohibit a home purchase when the buyer borrows too much to buy the home? The logic of footnote 25 suggests that it might.
Notwithstanding its erroneous premise, footnote 25 has three important implications for merger enforcement.
- The agencies may challenge a simple asset acquisition where the sole basis for the challenge is the acquisition’s financing structure.
- The agencies may challenge a merger based on the assessment that it increases the risk of failure of one of the merging firms.
- The agencies may challenge a merger based on the assessment that it is likely to increase concentration in the relevant market, even when the merging firms are neither present nor possible future competitors in that market.
This one footnote vastly expands the universe of potential mergers that may be subject to an agency challenge. In each of the cases, the mergers in question do not enhance the merging firms’ market power.
As the foregoing discussion demonstrates, there is no limit to the theories that the agencies may pursue under the draft merger guidelines in challenging mergers that do not enhance market power.
Enhancement of Market Power as a Limiting Principle
Applying a limiting principle based on market power gives courts and the agencies a workable set of rules for determining which mergers are competitively benign and can be allowed to proceed, and which require further analysis.
The 2010 horizontal merger guidelines explain that mergers that are not likely to “create, enhance, or entrench market power or … facilitate its exercise” do not raise significant concerns about adverse competitive effects and ordinarily require no further analysis. Most mergers fall in this category. In many cases, the agencies can very quickly determine that a merger does not enhance market power, allowing the merger to proceed without delay. Quickly clearing mergers that are not likely to enhance merging firms’ market power reduces transaction costs, delays, and uncertainty, leading to a more efficient merger-review process.
The latest available Hart-Scott-Rodino Annual Report showed that the agencies received clearance to conduct an initial investigation in 7.9% of total notified transactions, in accordance with the HSR Act. The report also showed that the agencies issued second requests in only 1.9% of the notified transactions. Thus, for the overwhelming majority of notified transactions, the agencies were able to determine within 30 days that they posed no likely competitive harm. Under the 2010 horizontal merger guidelines, no competitive harm means that the mergers did not create, enhance, or entrench market power or facilitate its exercise.
Without the limiting principle of market-power enhancement, the agencies could pursue broad policy goals that go beyond protecting competition. The draft merger guidelines do not define what it means to “lessen competition substantially or tend to create a monopoly,” leaving it up to agencies to apply Section 7 of the Clayton Act on an ad hoc basis. Given this broad discretion to pursue novel theories that do not entail any enhancement of market power, the agencies may pursue actions that advance the political priorities of the administration in power. For example, the agencies could target mergers that threaten labor interests, even when the mergers do not enhance market power.
Consider a merger where the buyer plans to outsource many of the target’s jobs overseas and lay off half the target’s workforce, with the expectation that the reduction in workforce will produce further savings by decreasing wages of the remaining workers. Because the buyer and the target are not competitors in any market, this merger would not enhance the target’s market power. The merger lowers wages through a change of strategy, rather than through diminished competitive constraint. Would the agencies challenge this merger despite no enhancement in market power? Or would the agencies impede it with an extensive investigation and then seek a remedy that bars the merged firm from outsourcing the jobs as a condition of clearing the merger? Based on the guidance in the draft guidelines, there is nothing to stop the agencies from challenging this merger.
When the goal of enforcement is no longer protecting the interests of consumers, and the lack of market-power enhancement is no longer an impediment for bringing merger challenges, the possibilities to pursue political goals through merger enforcement are limitless. Absent a limiting principle, merger enforcement may become an instrument for advancing the interests of political allies. By abandoning market power as the central element of merger enforcement, the agencies forgo important protections against the misuse of antitrust. The politization of enforcement would ultimately undermine the public’s confidence in antitrust.
There are significant drawbacks to market power as a metric for determining whether a merger violates antitrust law. It can be quite difficult to determine with reasonable accuracy whether a merger is likely to enhance market power. To make merger assessment feasible, the agencies and courts may adopt shortcuts and presumptions to identify conditions that lead to market power enhancement. The 2010 horizontal merger guidelines do precisely that. with presumptions based on market shares.
Moreover, market power is a static concept. It does not fully capture key aspects of dynamic competition, such as innovation competition. New merger guidelines should reflect the importance of dynamic competition analysis in merger review.
But despite its limitations, market-power enhancement has a critical screening role in identifying mergers that require more in-depth analysis. The enhancement of market power is also a crucial limiting principle in merger enforcement. Discarding market power as a limiting principle in merger enforcement would be a big loss for antitrust.