The Conundrum of Out-of-Market Effects in Merger Enforcement

Cite this Article
Daniel J. Gilman, Brian Albrecht and Geoffrey A. Manne, The Conundrum of Out-of-Market Effects in Merger Enforcement, Truth on the Market (January 16, 2024),

Section 7 of the Clayton Act prohibits mergers that harm competition in “in any line” of commerce. And, indeed, the Supreme Court’s decisions in Philadelphia National Bank and Topco are often cited on behalf of the proposition that this means any single cognizable market, and that anticompetitive effects in one market cannot be offset by procompetitive effects in another.

That would appear to simplify antitrust analysis, and it certainly can. But as is so often the case in antitrust, apparent simplicity can be confounding in application. Is it really true that harm in any market, however narrow, is grounds to block a merger, whatever its broader effects? Is that the best reading of legal precedent? Is it required? And is it either practicable or desirable?

This post will be the first of several. Here, we focus on the question of out-of-market merger effects: efficiencies and other merger benefits under the Clayton Act. We note, however, that questions about the domain of inquiry—of in-market vs. out-of-market effects—can arise in conduct cases brought under Section 1 of the Sherman Act (as in Ohio v American Express, where the Supreme Court considered both sides of a two-sided transactional platform as a single market) or under Section 2 (as in Aspen Skiing Co., where the Court, considering allegedly exclusionary conduct, held that “it is appropriate to examine the effect of the challenged pattern of conduct on consumers, on respondent, and on petitioner itself.”) And analogous questions can confound merger definition in either merger or conduct cases.

This topic has found new salience, given a heightened emphasis on labor-competition issues at the federal antitrust agencies and, specifically, an express concern with labor effects in merger policy. This can be seen in, e.g., the merger guidelines jointly issued by the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) in December 2023, and in the FTC’s November 2022 Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, which finds harm to competition (or “a tendency… to negatively affect competitive conditions”) in conduct—including mergers—that harms “consumers, workers, or other market participants.” In addition, while the DOJ’s case blocking the merger of Penguin Random House with Simon & Schuster identified output effects in a product market—in addition to alleged impact on certain skilled labor—it was also styled as a labor-monopsony case.

The new merger guidelines declare ongoing—indeed, heightened—concern with labor-market effects, arguing that “Labor markets frequently have characteristics that can exacerbate the competitive effects of a merger between competing employers.” In that regard, the guidelines note, e.g., switching costs and search frictions that, of course, may be high or low and may impose costs on employers as well as employees. Guideline 10 doesn’t merely emphasize a potential concern with labor-market effects. It doubles down on the “any market” issue—first, by marrying an express concern with labor-market effects with likely (or perhaps merely potential) impact on competition “in any line of commerce and in any section of the country,” (emphasis in original–that is, in the guidelines, not the Clayton Act) and, second, by stating that “a merger’s harm to competition among buyers is not saved by benefits to competition among sellers.” That’s of special relevance because the merger of two national firms serving national product markets may often implicate numerous labor markets in any given locale, as well as labor markets in different locales.

Policy statements from the agencies suggest that a transaction’s likely (or perhaps just possible) impact on workers should be a routine consideration in merger scrutiny, and not just of labor-specific conduct. Are mergers to be challenged—and, if challenged, blocked—if they harm workers in a single labor market, even if they are procompetitive (and pro-consumer) in the relevant product market? Some labor markets may be national or even international—say, the search for a full professor and endowed chair in the economics department at MIT, or for an NHL goalie. But the large majority of labor markets are local. What if a merger harms workers in one local labor market but benefits workers in another?

At the core of the debate is a larger discussion regarding how antitrust deals with “out-of-market efficiencies” and “trading partner welfare.” A recent, interesting discussion on X (the platform formerly known as Twitter), involving Geoff Manne, Herb Hovenkamp, Steve Salop, and others illustrated some of the complexity in implementation.

Hovenkamp is right that, as a general matter, Article III judges are not experienced at balancing costs and benefits in the way that general consideration of cross-market efficiencies might suggest. Indeed, a single-market guideline might make a reasonable heuristic in many cases where out-of-market benefits are unclear or hard to substantiate.

But if the any market rule is truly a rule–taken both literally and seriously–why haven’t the agencies, over, say, the past 100 years, opposed more mergers on labor grounds, while refusing to consider productive efficiencies or other merger benefits on the grounds that they are “cross-market” or “out-of-market” efficiencies and, consequently, that there was no proper justification for harm to a single labor market?

Consider, for example, two auto manufacturers proposing to merge—in no small part, to streamline both manufacturing and distribution across their various models and lines. For an historical example, in the wake of the 1950 Celler-Kefauver amendments to the Clayton Act (which ought to be old enough for FTC Chair Lina Khan and Assistant U.S. Attorney General Jonathan Kanter), consider the 1954 merger that created American Motors (AMC).

Suppose that the horizontal merger does not raise any competition concerns in auto manufacturing or distribution markets—indeed, it could improve competition in both of those markets. But suppose, too, that there is at least one local labor market in which employment will drop as a result of the streamlining. An old inefficient manufacturing site is shuttered, and some workers are offered the opportunity to transfer, but others are not, and some who could move choose not to.  The suppression of employment/output in a given local labor market—say, welders within commuting distance of Flint, Michigan—would seem to be a cognizable harm in a line of commerce, in a single market. Would that sink the merger? Should it?

One could take a deep dive into the 1954 merger, but the problem is ubiquitous across diverse industries or lines of commerce and was characteristic of, e.g., industrialization. The more we look around, the more we see the potential to identify these harms in a single line of (labor) commerce.

Building on the AMC example, suppose a merger will consolidate manufacturing facilities in two states. The acquiring firm will expand production at a relatively new facility in State A, but its post-merger plans are to shutter an older, less-efficient facility owned and operated by the target firm, 1,100 miles away in State B. Numerous labor markets are involved, because, e.g., welders do not compete for jobs with fork-lift operators or engineers. Most, but not all, workers in the old facility will be offered the opportunity to move and work at the new facility; it’s likely that some will accept such offers and others will not. And suppose that the contemplated move is competitively significant in at least some of the labor markets. By assumption, suppose the merger increases efficiency: for any level of output, the merged party can produce it at lower cost than the separate companies could. The downstream product market is relatively competitive, so some of those efficiency gains will be passed on to consumers in the form of lower prices. Suppose there’s a national product market with a very large number of consumers relative to workers in the local labor market at issue.

To be sure, in any given case, out-of-market efficiencies (and other merger benefits) may be slight, poorly substantiated, unlikely, or even pretextual. The same can be said of in-market efficiencies. But that ain’t necessarily so. And in the aggregate, such merger benefits might well swamp the harm done in a particular local labor market. That could be true if consumer benefits are realized nationwide, across a large number of consumers, and harms are felt by a relatively small number of workers facing somewhat lower demand for their services in a specific local labor market. It could also be true if there are net gains to labor across states A and B, where harms in one labor market are offset by gains in another.

What do we do about that? What would be done—or could be done—under the 2023 Merger Guidelines? A given merger might implicate many distinct local labor markets, all of which cross-cut the geographic and product markets (originally) at issue.

That’s a complication, but it’s a complication that cuts both ways: there is no practicable way for the agencies to scrutinize (and analyze) all such markets for every proposed merger; at least, not with anything resembling current staffing, experience, and expertise (not to mention statutory timetables). Even if the agencies confined themselves to obvious overlaps in specific labor markets (occupational and geographic), there’d be no real possibility of litigating to block all such mergers. It might not turn Chair Khan’s “98% go through without even any second questions being asked by the agencies” figure on its head; but it could be applied to a great many mergers. What if the attorney general of State B sues, in parens patriae, to block the merger. A settlement is reached that’s beneficial to a labor market in State B but detrimental to a labor market in State A. Can the attorney general in State A intervene?

These general concerns about applying a strong reading of “in any market” to labor concerns are heightened by the agencies’ emphasis on structural presumptions in merger analysis, which is at odds with several decades of economic learning. Guideline 1 states that: “[m]ergers raise a presumption of illegality when they significantly increase concentration in a highly concentrated market.” The 2010 Horizontal Merger Guidelines also discussed concentration measures, but it discussed different ones, and it did not use the expression “presumption of illegality.” Under the 2010 guidelines, mergers “resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raised significant competitive concerns and often warrant scrutiny” (emphasis added); and “[m]ergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed likely to enhance market power.” Under the 2010 guidelines, a highly concentrated market was one with an HHI above 2,500. Under the 2023 guidelines, a highly concentrated market is one with an HHI above 1,800 and a presumption of illegality applies with a change in HHI of greater than 100. The new guidelines also impugn any merger resulting in a firm with a market share greater than 30% and an increase in HHI greater than 100.

In brief:

  1. There’s a stronger assumption;
  2. It’s applied to mergers leading to significantly lower levels of concentration;
  3. It’s applied with smaller increases in concentration;
  4. It applies to any input market, however local, and expressly including any labor market; and
  5. Harm in a single local labor market cannot be “saved by benefits to competition among sellers” in the downstream product market.

This is not a default concern with, e.g., mergers to monopoly or 3-to-2 mergers. For example, firms in a market with seven viable employers of a given class of employees might, pre-merger, have market shares of 30%, 20%, 15%, 15%, 9%, 8%, and 3%. Under the new guidelines, that would already be deemed highly concentrated, with an HHI (the sum of the market shares) of 1904. If the firm with 30% market share (in any single job category in any locale) were to acquire the firm with 9% market share, the HHI would jump to 2444—an increase of 540 points. That is, the acquisition would be presumed illegal under both of Guideline 1’s structural presumptions. Moreover, the presumption could not be rebutted by, e.g., any benefits to consumers in the downstream product market, no matter their magnitude (and no matter the number of consumers relative to the number of workers). Indeed, as noted above, it’s not at all clear the agencies would consider benefits to other labor markets, whether defined by different occupational categories or by different locales.

That seems a bit of a conundrum, as the Clayton Act does not prohibit all (or nearly all) mergers. That’s not in the statute; it’s not in established agency practice; and it’s not evident in a century of case law. So why don’t we see more precedents in favor of cross-market efficiencies, at least as they might offset local labor market harms? Perhaps because it’s hard; and perhaps because the agencies just haven’t brought those labor cases, even if they’ve brought a few others. Not in this century. Not in the last one either.

Of course, the agencies could manage selective enforcement under this sort of labor theory, but that would lend itself to arbitrary enforcement of the merger laws, perhaps largely blocking what would otherwise appear to be pro-competitive or benign mergers. This is true of any change in the guidelines—such as lowering HHI thresholds—that increases the possible cases the agencies could bring without increasing the resources that the agencies have to bring them. In both cases, the result is more arbitrary (and possibly political) case selection.

The 2010 Horizontal Merger Guidelines noted a measure of prosecutorial discretion. Perhaps the history of labor antitrust is the exercise of just that sort of discretion on the part of the agencies and the courts—leaving most labor concerns to federal and state labor law, while reserving antitrust scrutiny of labor issues to those more readily parsed from established merger-enforcement concerns. That would still be a matter of discretion, but at least a predictable and practicable one. And perhaps that’s all for the best.

Perhaps not, but if not, there seems to be a very general problem here, if not an intractable one. At least, there would seem to be a problem if one still cares about consumer welfare, and the possibility that a non-trivial number of transactions might foster it.