Archives For Concentration

Federal Trade Commission (FTC) Chair Lina Khan missed the mark once again in her May 6 speech on merger policy, delivered at the annual meeting of the International Competition Network (ICN). At a time when the FTC and U.S. Justice Department (DOJ) are presumably evaluating responses to the agencies’ “request for information” on possible merger-guideline revisions (see here, for example), Khan’s recent remarks suggest a predetermination that merger policy must be “toughened” significantly to disincentivize a larger portion of mergers than under present guidance. A brief discussion of Khan’s substantively flawed remarks follows.

Discussion

Khan’s remarks begin with a favorable reference to the tendentious statement from President Joe Biden’s executive order on competition that “broad government inaction has allowed far too many markets to become uncompetitive, with consolidation and concentration now widespread across our economy, resulting in higher prices, lower wages, declining entrepreneurship, growing inequality, and a less vibrant democracy.” The claim that “government inaction” has enabled increased market concentration and reduced competition has been shown to be  inaccurate, and therefore cannot serve as a defensible justification for a substantive change in antitrust policy. Accordingly, Khan’s statement that the executive order “underscores a deep mandate for change and a commitment to creating the enabling environment for reform” rests on foundations of sand.

Khan then shifts her narrative to a consideration of merger policy, stating:

Merger investigations invite us to make a set of predictive assessments, and for decades we have relied on models that generally assumed markets are self-correcting and that erroneous enforcement is more costly than erroneous non-enforcement. Both the experience of the U.S. antitrust agencies and a growing set of empirical research is showing that these assumptions appear to have been at odds with market realities.

Digital Markets

Khan argues, without explanation, that “the guidelines must better account for certain features of digital markets—including zero-price dynamics, the competitive significance of data, and the network externalities that can swiftly lead markets to tip.” She fails to make any showing that consumer welfare has been harmed by mergers involving digital markets, or that the “zero-price” feature is somehow troublesome. Moreover, the reference to “data” as being particularly significant to antitrust analysis appears to ignore research (see here) indicating there is an insufficient basis for having an antitrust presumption involving big data, and that big data (like R&D) may be associated with innovation, which enhances competitive vibrancy.

Khan also fails to note that network externalities are beneficial; when users are added to a digital platform, the platform’s value to other users increases (see here, for example). What’s more (see here), “gateways and multihoming can dissipate any monopoly power enjoyed by large networks[,] … provid[ing] another reason” why network effects may not raise competitive problems. In addition, the implicit notion that “tipping” is a particular problem is belied by the ability of new competitors to “knock off” supposed entrenched digital monopolists (think, for example, of Yahoo being displaced by Google, and Myspace being displaced by Facebook). Finally, a bit of regulatory humility is in order. Given the huge amount of consumer surplus generated by digital platforms (see here, for example), enforcers should be particularly cautious about avoiding more aggressive merger (and antitrust in general) policies that could detract from, rather than enhance, welfare.

Labor Markets

Khan argues that guidelines drafters should “incorporate new learning” embodied in “empirical research [that] has shown that labor markets are highly concentrated” and a “U.S. Treasury [report] recently estimating that a lack of competition may be costing workers up to 20% of their wages.” Unfortunately for Khan’s argument, these claims have been convincingly debunked (see here) in a new study by former FTC economist Julie Carlson (see here). As Carlson carefully explains, labor markets are not highly concentrated and labor-market power is largely due to market frictions (such as occupational licensing), rather than concentration. In a similar vein, a recent article by Richard Epstein stresses that heightened antitrust enforcement in labor markets would involve “high administrative and compliance costs to deal with a largely nonexistent threat.” Epstein points out:

[T]raditional forms of antitrust analysis can perfectly deal with labor markets. … What is truly needed is a close examination of the other impediments to labor, including the full range of anticompetitive laws dealing with minimum wage, overtime, family leave, anti-discrimination, and the panoply of labor union protections, where the gains to deregulation should be both immediate and large.

Nonhorizontal Mergers

Khan notes:

[W]e are looking to sharpen our insights on non-horizontal mergers, including deals that might be described as ecosystem-driven, concentric, or conglomerate. While the U.S. antitrust agencies energetically grappled with some of these dynamics during the era of industrial-era conglomerates in the 1960s and 70s, we must update that thinking for the current economy. We must examine how a range of strategies and effects, including extension strategies and portfolio effects, may warrant enforcement action.

Khan’s statement on non-horizontal mergers once again is fatally flawed.

With regard to vertical mergers (not specifically mentioned by Khan), the FTC abruptly withdrew, without explanation, its approval of the carefully crafted 2020 vertical-merger guidelines. That action offends the rule of law, creating unwarranted and costly business-sector confusion. Khan’s lack of specific reference to vertical mergers does nothing to solve this problem.

With regard to other nonhorizontal mergers, there is no sound economic basis to oppose mergers involving unrelated products. Threatening to do so would have no procompetitive rationale and would threaten to reduce welfare by preventing the potential realization of efficiencies. In a 2020 OECD paper drafted principally by DOJ and FTC economists, the U.S. government meticulously assessed the case for challenging such mergers and rejected it on economic grounds. The OECD paper is noteworthy in its entirely negative assessment of 1960s and 1970s conglomerate cases which Khan implicitly praises in suggesting they merely should be “updated” to deal with the current economy (citations omitted):

Today, the United States is firmly committed to the core values that antitrust law protect competition, efficiency, and consumer welfare rather than individual competitors. During the ten-year period from 1965 to 1975, however, the Agencies challenged several mergers of unrelated products under theories that were antithetical to those values. The “entrenchment” doctrine, in particular, condemned mergers if they strengthened an already dominant firm through greater efficiencies, or gave the acquired firm access to a broader line of products or greater financial resources, thereby making life harder for smaller rivals. This approach is no longer viewed as valid under U.S. law or economic theory. …

These cases stimulated a critical examination, and ultimate rejection, of the theory by legal and economic scholars and the Agencies. In their Antitrust Law treatise, Phillip Areeda and Donald Turner showed that to condemn conglomerate mergers because they might enable the merged firm to capture cost savings and other efficiencies, thus giving it a competitive advantage over other firms, is contrary to sound antitrust policy, because cost savings are socially desirable. It is now recognized that efficiency and aggressive competition benefit consumers, even if rivals that fail to offer an equally “good deal” suffer loss of sales or market share. Mergers are one means by which firms can improve their ability to compete. It would be illogical, then, to prohibit mergers because they facilitate efficiency or innovation in production. Unless a merger creates or enhances market power or facilitates its exercise through the elimination of competition—in which case it is prohibited under Section 7—it will not harm, and more likely will benefit, consumers.

Given the well-reasoned rejection of conglomerate theories by leading antitrust scholars and modern jurisprudence, it would be highly wasteful for the FTC and DOJ to consider covering purely conglomerate (nonhorizontal and nonvertical) mergers in new guidelines. Absent new legislation, challenges of such mergers could be expected to fail in court. Regrettably, Khan appears oblivious to that reality.

Khan’s speech ends with a hat tip to internationalism and the ICN:

The U.S., of course, is far from alone in seeing the need for a course correction, and in certain regards our reforms may bring us in closer alignment with other jurisdictions. Given that we are here at ICN, it is worth considering how we, as an international community, can or should react to the shifting consensus.

Antitrust laws have been adopted worldwide, in large part at the urging of the United States (see here). They remain, however, national laws. One would hope that the United States, which in the past was the world leader in developing antitrust economics and enforcement policy, would continue to seek to retain this role, rather than merely emulate other jurisdictions to join an “international community” consensus. Regrettably, this does not appear to be the case. (Indeed, European Commissioner for Competition Margrethe Vestager made specific reference to a “coordinated approach” and convergence between U.S. and European antitrust norms in a widely heralded October 2021 speech at the annual Fordham Antitrust Conference in New York. And Vestager specifically touted European ex ante regulation as well as enforcement in a May 5 ICN speech that emphasized multinational antitrust convergence.)

Conclusion

Lina Khan’s recent ICN speech on merger policy sends all the wrong signals on merger guidelines revisions. It strongly hints that new guidelines will embody pre-conceived interventionist notions at odds with sound economics. By calling for a dramatically new direction in merger policy, it interjects uncertainty into merger planning. Due to its interventionist bent, Khan’s remarks, combined with prior statements by U.S. Assistant Attorney General Jonathan Kanter (see here) may further serve to deter potentially welfare-enhancing consolidations. Whether the federal courts will be willing to defer to a drastically different approach to mergers by the agencies (one at odds with several decades of a careful evolutionary approach, rooted in consumer welfare-oriented economics) is, of course, another story. Stay tuned.  

Biden administration enforcers at the U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) have prioritized labor-market monopsony issues for antitrust scrutiny (see, for example, here and here). This heightened interest comes in light of claims that labor markets are highly concentrated and are rife with largely neglected competitive problems that depress workers’ income. Such concerns are reflected in a March 2022 U.S. Treasury Department report on “The State of Labor Market Competition.”

Monopsony is the “flip side” of monopoly and U.S. antitrust law clearly condemns agreements designed to undermine the “buyer side” competitive process (see, for example, this U.S. government submission to the OECD). But is a special new emphasis on labor markets warranted, given that antitrust enforcers ideally should seek to allocate their scarce resources to the most pressing (highest valued) areas of competitive concern?

A May 2022 Information Technology & Innovation (ITIF) study from ITIF Associate Director (and former FTC economist) Julie Carlson indicates that the degree of emphasis the administration’s antitrust enforcers are placing on labor issues may be misplaced. In particular, the ITIF study debunks the Treasury report’s findings of high levels of labor-market concentration and the claim that workers face a “decrease in wages [due to labor market power] at roughly 20 percent relative to the level in a fully competitive market.” Furthermore, while noting the importance of DOJ antitrust prosecutions of hard-core anticompetitive agreements among employers (wage-fixing and no-poach agreements), the ITIF report emphasizes policy reforms unrelated to antitrust as key to improving workers’ lot.

Key takeaways from the ITIF report include:

  • Labor markets are not highly concentrated. Local labor-market concentration has been declining for decades, with the most concentrated markets seeing the largest declines.
  • Labor-market power is largely due to labor-market frictions, such as worker preferences, search costs, bargaining, and occupational licensing, rather than concentration.
  • As a case study, changes in concentration in the labor market for nurses have little to no effect on wages, whereas nurses’ preferences over job location are estimated to lead to wage markdowns of 50%.
  • Firms are not profiting at the expense of workers. The decline in the labor share of national income is primarily due to rising home values, not increased labor-market concentration.
  • Policy reform should focus on reducing labor-market frictions and strengthening workers’ ability to collectively bargain. Policies targeting concentration are misguided and will be ineffective at improving outcomes for workers.

The ITIF report also throws cold water on the notion of emphasizing labor-market issues in merger reviews, which was teed up in the January 2022 joint DOJ/FTC request for information (RFI) on merger enforcement. The ITIF report explains:

Introducing the evaluation of labor market effects unnecessarily complicates merger review and needlessly ties up agency resources at a time when the agencies are facing severe resource constraints.48 As discussed previously, labor markets are not highly concentrated, nor is labor market concentration a key factor driving down wages.

A proposed merger that is reportable to the agencies under the Hart-Scott-Rodino Act and likely to have an anticompetitive effect in a relevant labor market is also likely to have an anticompetitive effect in a relevant product market. … Evaluating mergers for labor market effects is unnecessary and costly for both firms and the agencies. The current merger guidelines adequately address competition concerns in input markets, so any contemplated revision to the guidelines should not incorporate a “framework to analyze mergers that may lessen competition in labor markets.” [Citation to Request for Information on Merger Enforcement omitted.]

In sum, the administration’s recent pronouncements about highly anticompetitive labor markets that have resulted in severely underpaid workers—used as the basis to justify heightened antitrust emphasis on labor issues—appear to be based on false premises. As such, they are a species of government misinformation, which, if acted upon, threatens to misallocate scarce enforcement resources and thereby undermine efficient government antitrust enforcement. What’s more, an unnecessary overemphasis on labor-market antitrust questions could impose unwarranted investigative costs on companies and chill potentially efficient business transactions. (Think of a proposed merger that would reduce production costs and benefit consumers but result in a workforce reduction by the merged firm.)

Perhaps the administration will take heed of the ITIF report and rethink its plans to ramp up labor-market antitrust-enforcement initiatives. Promoting pro-market regulatory reforms that benefit both labor and consumers (for instance, excessive occupational-licensing restrictions) would be a welfare-superior and cheaper alternative to misbegotten antitrust actions.

A new scholarly study of economic concentration sheds further light on the flawed nature of the Neo-Brandeisian claim that the United States has a serious “competition problem” due to decades of increasing concentration and ineffective antitrust enforcement (see here and here, for example). In a recent article, economist Yueran Ma—assistant professor at the University of Chicago’s Booth School of Business—found that economies of scale (an efficiency) were associated with a U.S. economy-wide rise in concentration in economic activities (not antitrust markets) and a growth in output over the last century. In particular, Ma explained (emphasis added):

New research observing 100 years of concentration in economic activities and investment in research and development shows that the dominance of large businesses has been increasing for at least a century and, as Marx conjectured, may be a feature of the increasingly stronger economies of scale that accompany industrial development. . . .

To understand the broad historical currents of concentration, we collected financial information of all US corporations by size groups for the past 100 years. . . .

To be clear, our focus is not market concentration for a particular product, which would require defining markets based on consumption activities. Instead, our focus is the business size distribution in the US, namely the extent to which larger businesses dominate in the total volume of production activities across the economy. . . .

The data reveals a persistent rise in the dominance of the top 1 percent and top 0.1 percent of businesses in the US. From 1918 to 1975, the SOI provided size groups sorted by net income (green line with circles). Starting in 1959, the SOI also provided size groups sorted by sales (red line with diamonds). The longest and most comprehensive size groups are sorted by assets, available since 1931 (blue line with triangles). No matter the measure you choose, the long-run increase in corporate concentration is clear. . . .

Just as Stigler, Marx and Lenin had predicted, the reason for increased concentration appears to be economies of scale. Among different industries, we find that the timing and the degree of rising concentration align closely with rising investment in research and development (R&D) and information technology (IT), measured using additional data from the Bureau of Economic Analysis (BEA). These types of investments usually require a certain degree of scale due to upfront spending, while also producing technological changes that enhance economies of scale. Accordingly, we use investment intensity in R&D and IT as a general indicator of firms exploiting economies of scale. . . .

We also find that increases in concentration are positively associated with industry growth. In particular, over the medium term (e.g., twenty years), industries that experience higher increases in concentration are also the ones that experience higher growth in real gross output. Correspondingly, their shares of economic output expand as well. . . .

A[ ] natural question is whether regulatory policies and antitrust enforcement drive the main trends we find. For instance, regulatory restrictions on interstate banking could have a direct impact on the size of banks (and we indeed observe rising concentration in banking when these restrictions were lifted). In most other sectors, we are not aware of policies that align with the patterns of rising concentration in our data. The past century witnessed several regimes of antitrust enforcement—however, rising corporate concentration has been a secular trend throughout these different antitrust regimes. We do not observe a significant relationship between corporate concentration in our data and standard aggregate antitrust enforcement measures, such as the number of antitrust cases filed by the Department of Justice (DOJ) or the budget of the DOJ’s antitrust division. Overall, we do not find evidence that antitrust shapes the economy-wide business size distribution, although it could have a more visible impact on the market for a particular product (which is closer to the domain of antitrust analyses).

Even if higher concentration in production activities comes from economies of scale, some contemporary observers fear that economies of scale will ultimately weaken competition and cultivate monopoly power (Lenin highlighted such concerns as well). Analyzing this question requires reliable measurement of market power. So far, most studies do not find rising markups (the standard measure of market power) before the 1980s, and some argue that markups have increased since the 1980s. Combined with our findings, the evidence suggests that stronger economies of scale does not always lead to stronger market power. It is possible that such a link may exist under certain conditions, and future research could shed more light on this topic.

In broad terms, Ma’s study describes a long-term rise in economic concentration (again, something entirely different from antitrust-relevant market concentration) in tandem with substantial increases in economies of scale and output expansion—overall, a story of long-term welfare enhancement. Antitrust-enforcement levels are not portrayed as significantly related to this trend, and there is no showing that rising economies of scale inevitably enhance market power. (Even possible increases in markups, whose existence has been contested, do not necessarily reflect an increase in market power, see here and here.)

Admittedly, Ma was engaged in a positive analysis of concentration, not a normative assessment. But her research certainly lends no support to the normative neo-Brandeisian notion that a drastic interventionist-minded overhaul of antitrust is required to address major competitive ills. To the contrary, one could logically infer that a dramatic rise in antitrust interventionism is not only uncalled for, but it could threaten the beneficial nature of rising economies of scale and output that have been shown to characterize the U.S. economy. One would hope that this inference would give Congress and U.S. antitrust enforcers pause before they embark on a novel interventionist path.

The Jan. 18 Request for Information on Merger Enforcement (RFI)—issued jointly by the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ)—sets forth 91 sets of questions (subsumed under 15 headings) that provide ample opportunity for public comment on a large range of topics.

Before chasing down individual analytic rabbit holes related to specific questions, it would be useful to reflect on the “big picture” policy concerns raised by this exercise (but not hinted at in the questions). Viewed from a broad policy perspective, the RFI initiative risks undermining the general respect that courts have accorded merger guidelines over the years, as well as disincentivizing economically beneficial business consolidations.

Policy concerns that flow from various features of the RFI, which could undermine effective merger enforcement, are highlighted below. These concerns counsel against producing overly detailed guidelines that adopt a merger-skeptical orientation.

The RFI Reflects the False Premise that Competition is Declining in the United States

The FTC press release that accompanied the RFI’s release made clear that a supposed weakening of competition under the current merger-guidelines regime is a key driver of the FTC and DOJ interest in new guidelines:

Today, the Federal Trade Commission (FTC) and the Justice Department’s Antitrust Division launched a joint public inquiry aimed at strengthening enforcement against illegal mergers. Recent evidence indicates that many industries across the economy are becoming more concentrated and less competitive – imperiling choice and economic gains for consumers, workers, entrepreneurs, and small businesses.

This premise is not supported by the facts. Based on a detailed literature review, Chapter 6 of the 2020 Economic Report of the President concluded that “the argument that the U.S. economy is suffering from insufficient competition is built on a weak empirical foundation and questionable assumptions.” More specifically, the 2020 Economic Report explained:

Research purporting to document a pattern of increasing concentration and increasing markups uses data on segments of the economy that are far too broad to offer any insights about competition, either in specific markets or in the economy at large. Where data do accurately identify issues of concentration or supercompetitive profits, additional analysis is needed to distinguish between alternative explanations, rather than equating these market indicators with harmful market power.

Soon to-be-published quantitative research by Robert Kulick of NERA Economic Consulting and the American Enterprise Institute, presented at the Jan. 26 Mercatus Antitrust Forum, is consistent with the 2020 Economic Report’s findings. Kulick stressed that there was no general trend toward increasing industrial concentration in the U.S. economy from 2002 to 2017. In particular, industrial concentration has been declining since 2007; the Herfindahl–Hirschman index (HHI) for manufacturing has declined significantly since 2002; and the economywide four-firm concentration ratio (CR4) in 2017 was approximately the same as in 2002. 

Even in industries where concentration may have risen, “the evidence does not support claims that concentration is persistent or harmful.” In that regard, Kulick’s research finds that higher-concentration industries tend to become less concentrated, while lower-concentration industries tend to become more concentrated over time; increases in industrial concentration are associated with economic growth and job creation, particularly for high-growth industries; and rising industrial concentration may be driven by increasing market competition.

In short, the strongest justification for issuing new merger guidelines is based on false premises: an alleged decline in competition within the Unites States. Given this reality, the adoption of revised guidelines designed to “ratchet up” merger enforcement would appear highly questionable.

The RFI Strikes a Merger-Skeptical Tone Out of Touch with Modern Mainstream Antitrust Scholarship

The overall tone of the RFI reflects a skeptical view of the potential benefits of mergers. It ignores overarching beneficial aspects of mergers, which include reallocating scarce resources to higher-valued uses (through the market for corporate control) and realizing standard efficiencies of various sorts (including cost-based efficiencies and incentive effects, such as the elimination of double marginalization through vertical integration). Mergers also generate benefits by bringing together complementary assets and by generating synergies of various sorts, including the promotion of innovation and scaling up the fruits of research and development. (See here, for example.)

What’s more, as the Organisation for Economic Co-operation and Development (OECD) has explained, “[e]vidence suggests that vertical mergers are generally pro-competitive, as they are driven by efficiency-enhancing motives such as improving vertical co-ordination and realizing economies of scope.”

Given the manifold benefits of mergers in general, the negative and merger-skeptical tone of the RFI is regrettable. It not only ignores sound economics, but it is at odds with recent pronouncements by the FTC and DOJ. Notably, the 2010 DOJ-FTC Horizontal Merger Guidelines (issued by Obama administration enforcers) struck a neutral tone. Those guidelines recognized the duty to challenge anticompetitive mergers while noting the public interest in avoiding unnecessary interference with non-anticompetitive mergers (“[t]he Agencies seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral”). The same neutral approach is found in the 2020 DOJ-FTC Vertical Merger Guidelines (“the Agencies use a consistent set of facts and assumptions to evaluate both the potential competitive harm from a vertical merger and the potential benefits to competition”).

The RFI, however, expresses no concern about unnecessary government interference, and strongly emphasizes the potential shortcomings of the existing guidelines in questioning whether they “adequately equip enforcers to identify and proscribe unlawful, anticompetitive mergers.” Merger-skepticism is also reflected throughout the RFI’s 91 sets of questions. A close reading reveals that they are generally phrased in ways that implicitly assume competitive problems or reject potential merger justifications.

For example, the questions addressing efficiencies, under RFI heading 14, casts efficiencies in a generally negative light. Thus, the RFI asks whether “the [existing] guidelines’ approach to efficiencies [is] consistent with the prevailing legal framework as enacted by Congress and interpreted by the courts,” citing the statement in FTC v. Procter & Gamble (1967) that “[p]ossible economies cannot be used as a defense to illegality.”

The view that antitrust disfavors mergers that enhance efficiencies (the “efficiencies offense”) has been roundly rejected by mainstream antitrust scholarship (see, for example, here, here, and here). It may be assumed that today’s Supreme Court (which has deemed consumer welfare to be the lodestone of antitrust enforcement since Reiter v. Sonotone (1979)) would give short shrift to an “efficiencies offense” justification for a merger challenge.

Another efficiencies-related question, under RFI heading 14.d, may in application fly in the face of sound market-oriented economics: “Where a merger is expected to generate cost savings via the elimination of ‘excess’ or ‘redundant’ capacity or workers, should the guidelines treat these savings as cognizable ‘efficiencies’?”

Consider a merger that generates synergies and thereby expands and/or raises the quality of goods and services produced with reduced capacity and fewer workers. This merger would allow these resources to be allocated to higher-valued uses elsewhere in the economy, yielding greater economic surplus for consumers and producers. But there is the risk that such a merger could be viewed unfavorably under new merger guidelines that were revised in light of this question. (Although heading 14.d includes a separate question regarding capacity reductions that have the potential to reduce supply resilience or product or service quality, it is not stated that this provision should be viewed as a limitation on the first sentence.)

The RFI’s discussion of topics other than efficiencies similarly sends the message that existing guidelines are too “pro-merger.” Thus, for example, under RFI heading 5 (“presumptions”), one finds the rhetorical question: “[d]o the [existing] guidelines adequately identify mergers that are presumptively unlawful under controlling case law?”

This question answers itself, by citing to the Philadelphia National Bank (1963) statement that “[w]ithout attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat.” This statement predates all of the merger guidelines and is out of step with the modern economic analysis of mergers, which the existing guidelines embody. It would, if taken seriously, threaten a huge number of proposed mergers that, until now, have not been subject to second-request review by the DOJ and FTC. As Judge Douglas Ginsburg and former Commissioner Joshua Wright have explained:

The practical effect of the PNB presumption is to shift the burden of proof from the plaintiff, where it rightfully resides, to the defendant, without requiring evidence – other than market shares – that the proposed merger is likely to harm competition. . . . The presumption ought to go the way of the agencies’ policy decision to drop reliance upon the discredited antitrust theories approved by the courts in such cases as Brown Shoe, Von’s Grocery, and Utah Pie. Otherwise, the agencies will ultimately have to deal with the tension between taking advantage of a favorable presumption in litigation and exerting a reformative influence on the direction of merger law.

By inviting support for PNB-style thinking, RFI heading 5’s lead question effectively rejects the economic effects-based analysis that has been central to agency merger analysis for decades. Guideline revisions that downplay effects in favor of mere concentration would likely be viewed askance by reviewing courts (and almost certainly would be rejected by the Supreme Court, as currently constituted, if the occasion arose).

These particularly striking examples are illustrative of the questioning tone regarding existing merger analysis that permeates the RFI.

New Merger Guidelines, if Issued, Should Not Incorporate the Multiplicity of Issues Embodied in the RFI

The 91 sets of questions in the RFI read, in large part, like a compendium of theoretical harms to the working of markets that might be associated with mergers. While these questions may be of general academic interest, and may shed some light on particular merger investigations, most of them should not be incorporated into guidelines.

As Justice Stephen Breyer has pointed out, antitrust is a legal regime that must account for administrative practicalities. Then-Judge Breyer described the nature of the problem in his 1983 Barry Wright opinion (affirming the dismissal of a Sherman Act Section 2 complaint based on “unreasonably low” prices):

[W]hile technical economic discussion helps to inform the antitrust laws, those laws cannot precisely replicate the economists’ (sometimes conflicting) views. For, unlike economics, law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve.

It follows that any effort to include every theoretical merger-related concern in new merger guidelines would undercut their (presumed) overarching purpose, which is providing useful guidance to the private sector. All-inclusive “guidelines” in reality provide no guidance at all. Faced with a laundry list of possible problems that might prompt the FTC or DOJ to oppose a merger, private parties would face enormous uncertainty, which could deter them from proposing a large number of procompetitive, welfare-enhancing or welfare-neutral consolidations. This would “undercut the very economic ends” of promoting competition that is served by Section 7 enforcement.

Furthermore, all-inclusive merger guidelines could be seen by judges as undermining the rule of law (see here, for example). If DOJ and FTC were able to “pick and choose” at will from an enormously wide array of considerations to justify opposing a proposed merger, they could be seen as engaged in arbitrary enforcement, rather than in a careful weighing of evidence aimed at condemning only anticompetitive transactions. This would be at odds with the promise of fair and dispassionate enforcement found in the 2010 Horizontal Merger Guidelines, namely, to “seek to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.”

Up until now, federal courts have virtually always implicitly deferred to (and not questioned) the application of merger-guideline principles by the DOJ and FTC. The agencies have won or lost cases based on courts’ weighing of particular factual and economic evidence, not on whether guideline principles should have been applied by the enforcers.

One would expect courts to react very differently, however, to cases brought in light of ridiculously detailed “guidelines” that did not provide true guidance (particularly if they were heavy on competitive harm possibilities and discounted efficiencies). The agencies’ selective reliance on particular anticompetitive theories could be seen as exercises in arbitrary “pre-cooked” condemnations, not dispassionate enforcement. As such, the courts would tend to be far more inclined to reject (or accord far less deference to) the new guidelines in evaluating agency merger challenges. Even transactions that would have been particularly compelling candidates for condemnation under prior guidelines could be harder to challenge successfully, due to the taint of the new guidelines.

In short, the adoption of highly detailed guidelines that emphasize numerous theories of harm would likely undermine the effectiveness of DOJ and FTC merger enforcement, the precise opposite of what the agencies would have intended.

New Merger Guidelines, if Issued, Should Avoid Relying on Outdated Case Law and Novel Section 7 Theories, and Should Give Due Credit to Economic Efficiencies

The DOJ and FTC could, of course, acknowledge the problem of administrability  and issue more straightforward guideline revisions, of comparable length and detail to prior guidelines. If they choose to do so, they would be well-advised to eschew relying on dated precedents and novel Section 7 theories. They should also give due credit to efficiencies. Seemingly biased guidelines would undermine merger enforcement, not strengthen it.

As discussed above, the RFI’s implicitly favorable references to Philadelphia National Bank and Procter & Gamble are at odds with contemporary economics-based antitrust thinking, which has been accepted by the federal courts. The favorable treatment of those antediluvian holdings, and Brown Shoe Co. v. United States (1962) (another horribly dated case cited multiple times in the RFI), would do much to discredit new guidelines.

In that regard, the suggestion in RFI heading 1 that existing merger guidelines may not “faithfully track the statutory text, legislative history, and established case law around merger enforcement” touts the Brown Shoe and PNB concerns with a “trend toward concentration” and “the danger of subverting congressional intent by permitting a too-broad economic investigation.”

New guidelines that focus on (or even give lip service to) a “trend” toward concentration and eschew overly detailed economic analyses (as opposed, perhaps, to purely concentration-based negative rules of thumb?) would predictably come in for judicial scorn as economically unfounded. Such references would do as much (if not more) to ensure judicial rejection of enforcement-agency guidelines as endless lists of theoretically possible sources of competitive harm, discussed previously.

Of particular concern are those references that implicitly reject the need to consider efficiencies, which is key to modern enlightened merger evaluations. It is ludicrous to believe that a majority of the current Supreme Court would have a merger-analysis epiphany and decide that the RFI’s preferred interventionist reading of Section 7 statutory language and legislative history trumps decades of economically centered consumer-welfare scholarship and agency guidelines.

Herbert Hovenkamp, author of the leading American antitrust treatise and a scholar who has been cited countless times by the Supreme Court, recently put it well (in an article coauthored with Carl Shapiro):

When the FTC investigates vertical and horizontal mergers will it now take the position that efficiencies are irrelevant, even if they are proven? If so, the FTC will face embarrassing losses in court.

Reviewing courts wound no doubt take heed of this statement in assessing any future merger guidelines that rely on dated and discredited cases or that minimize efficiencies.

New Guidelines, if Issued, Should Give Due Credit to Efficiencies

Heading 14 of the RFI—listing seven sets of questions that deal with efficiencies—is in line with the document’s implicitly negative portrayal of mergers. The heading begins inauspiciously, with a question that cites Procter & Gamble in suggesting that the current guidelines’ approach to efficiencies is “[in]consistent with the prevailing legal framework as enacted by Congress and interpreted by the courts.” As explained above, such an anti-efficiencies reference would be viewed askance by most, if not all, reviewing judges.

Other queries in heading 14 also view efficiencies as problematic. They suggest that efficiency claims should be treated negatively because efficiency claims are not always realized after the fact. But merger activity is a private-sector search process, and the ability to predict ex post effects with perfect accuracy is an inevitable part of market activity. Using such a natural aspect of markets as an excuse to ignore efficiencies would prevent many economically desirable consolidations from being achieved.

Furthermore, the suggestion under heading 14 that parties should have to show with certainty that cognizable efficiencies could not have been achieved through alternative means asks the impossible. Theoreticians may be able to dream up alternative means by which efficiencies might have been achieved (say, through convoluted contracts), but such constructs may not be practical in real-world settings. Requiring businesses to follow dubious theoretical approaches to achieve legitimate business ends, rather than allowing them to enter into arrangements they favor that appear efficient, would manifest inappropriate government interference in markets. (It would be just another example of the “pretense of knowledge” that Friedrich Hayek brilliantly described in his 1974 Nobel Prize lecture.)

Other questions under heading 14 raise concerns about the lack of discussion of possible “inefficiencies” in current guidelines, and speculate about possible losses of “product or service quality” due to otherwise efficient reductions in physical capacity and employment. Such theoretical musings offer little guidance to the private sector, and further cast in a negative light potential real resource savings.

Rather than incorporate the unhelpful theoretical efficiencies critiques under heading 14, the agencies should consider a more helpful approach to clarifying the evaluation of efficiencies in new guidelines. Such a clarification could be based on Commissioner Christine Wilson’s helpful discussion of merger efficiencies in recent writings (see, for example, here and here). Wilson has appropriately called for the symmetric treatment of both the potential harms and benefits arising from mergers, explaining that “the agencies readily credit harms but consistently approach potential benefits with extreme skepticism.”

She and Joshua Wright have also explained (see here, here, and here) that overly narrow product-market definitions may sometimes preclude consideration of substantial “out-of-market” efficiencies that arise from certain mergers. The consideration of offsetting “out-of-market” efficiencies that greatly outweigh competitive harms might warrant inclusion in new guidelines.

The FTC and DOJ could be heading for a merger-enforcement train wreck if they adopt new guidelines that incorporate the merger-skeptical tone and excruciating level of detail found in the RFI. This approach would yield a lengthy and uninformative laundry list of potential competitive problems that would allow the agencies to selectively pick competitive harm “stories” best adapted to oppose particular mergers, in tension with the rule of law.

Far from “strengthening” merger enforcement, such new guidelines would lead to economically harmful business uncertainty and would severely undermine judicial respect for the federal merger-enforcement process. The end result would be a “lose-lose” for businesses, for enforcers, and for the American economy.

Conclusion

If the agencies enact new guidelines, they should be relatively short and straightforward, designed to give private parties the clearest possible picture of general agency enforcement intentions. In particular, new guidelines should:

  1. Eschew references to dated and discredited case law;
  2. Adopt a neutral tone that acknowledges the beneficial aspects of mergers;
  3. Recognize the duty to challenge anticompetitive mergers, while at the same time noting the public interest in avoiding unnecessary interference with non-anticompetitive mergers (consistent with the 2010 Horizontal Merger Guidelines); and
  4. Acknowledge the importance of efficiencies, treating them symmetrically with competitive harm and according appropriate weight to countervailing out-of-market efficiencies (a distinct improvement over existing enforcement policy).

Merger enforcement should continue to be based on fact-based case-specific evaluations, informed by sound economics. Populist nostrums that treat mergers with suspicion and that ignore their beneficial aspects should be rejected. Such ideas are at odds with current scholarly thinking and judicial analysis, and should be relegated to the scrap heap of outmoded and bad public policies.

Antitrust policymakers around the world have taken a page out of the Silicon Valley playbook and decided to “move fast and break things.” While the slogan is certainly catchy, applying it to the policymaking world is unfortunate and, ultimately, threatens to harm consumers.

Several antitrust authorities in recent months have announced their intention to block (or, at least, challenge) a spate of mergers that, under normal circumstances, would warrant only limited scrutiny and face little prospect of outright prohibition. This is notably the case of several vertical mergers, as well as mergers between firms that are only potential competitors (sometimes framed as “killer acquisitions”). These include Facebook’s acquisition of Giphy (U.K.); Nvidia’s ARM Ltd. deal (U.S., EU, and U.K.), and Illumina’s purchase of GRAIL (EU). It is also the case for horizontal mergers in non-concentrated markets, such as WarnerMedia’s proposed merger with Discovery, which has faced significant political backlash.

Some of these deals fail even to implicate “traditional” merger-notification thresholds. Facebook’s purchase of Giphy was only notifiable because of the U.K. Competition and Markets Authority’s broad interpretation of its “share of supply test” (which eschews traditional revenue thresholds). Likewise, the European Commission relied on a highly controversial interpretation of the so-called “Article 22 referral” procedure in order to review Illumina’s GRAIL purchase.

Some have praised these interventions, claiming antitrust authorities should take their chances and prosecute high-profile deals. It certainly appears that authorities are pressing their luck because they face few penalties for wrongful prosecutions. Overly aggressive merger enforcement might even reinforce their bargaining position in subsequent cases. In other words, enforcers risk imposing social costs on firms and consumers because their incentives to prosecute mergers are not aligned with those of society as a whole.

None of this should come as a surprise to anyone who has been following this space. As my ICLE colleagues and I have been arguing for quite a while, weakening the guardrails that surround merger-review proceedings opens the door to arbitrary interventions that are difficult (though certainly not impossible) to remediate before courts.

The negotiations that surround merger-review proceedings involve firms and authorities bargaining in the shadow of potential litigation. Whether and which concessions are made will depend chiefly on what the parties believe will be the outcome of litigation. If firms think courts will safeguard their merger, they will offer authorities few potential remedies. Conversely, if authorities believe courts will support their decision to block a merger, they are unlikely to accept concessions that stop short of the parties withdrawing their deal.

This simplified model suggests that neither enforcers nor merging parties are in position to “exploit” the merger-review process, so long as courts review decisions effectively. Under this model, overly aggressive enforcement would merely lead to defeat in court (and, expecting this, merging parties would offer few concessions to authorities).

Put differently, court proceedings are both a dispute-resolution mechanism and a source of rulemaking. The result is that only marginal cases should lead to actual disputes. Most harmful mergers will be deterred, and clearly beneficial ones will be cleared rapidly. So long as courts apply the consumer welfare standard consistently, firms’ merger decisions—along with any rulings or remedies—all should primarily serve consumers’ interests.

At least, that is the theory. But there are factors that can serve to undermine this efficient outcome. In the field of merger control, this is notably the case with court delays that prevent parties from effectively challenging merger decisions.

While delays between when a legal claim is filed and a judgment is rendered aren’t always detrimental (as Richard Posner observes, speed can be costly), it is essential that these delays be accounted for in any subsequent damages and penalties. Parties that prevail in court might otherwise only obtain reparations that are below the market rate, reducing the incentive to seek judicial review in the first place.

The problem is particularly acute when it comes to merger reviews. Merger challenges might lead the parties to abandon a deal because they estimate the transaction will no longer be commercially viable by the time courts have decided the matter. This is a problem, insofar as neither U.S. nor EU antitrust law generally requires authorities to compensate parties for wrongful merger decisions. For example, courts in the EU have declined to fully compensate aggrieved companies (e.g., the CFI in Schneider) and have set an exceedingly high bar for such claims to succeed at all.

In short, parties have little incentive to challenge merger decisions if the only positive outcome is for their deals to be posthumously sanctified. This smaller incentive to litigate may be insufficient to create enough cases that would potentially helpful precedent for future merging firms. Ultimately, the balance of bargaining power is tilted in favor of competition authorities.

Some Data on Mergers

While not necessarily dispositive, there is qualitative evidence to suggest that parties often drop their deals when authorities either block them (as in the EU) or challenge them in court (in the United States).

U.S. merging parties nearly always either reach a settlement or scrap their deal when their merger is challenged. There were 43 transactions challenged by either the U.S. Justice Department (15) or the Federal Trade Commission (28) in 2020. Of these, 15 were abandoned and almost all the remaining cases led to settlements.

The EU picture is similar. The European Commission blocks, on average, about one merger every year (30 over the last 31 years). Most in-depth investigations are settled in exchange for remedies offered by the merging firms (141 out of 239). While the EU does not publish detailed statistics concerning abandoned mergers, it is rare for firms to appeal merger-prohibition decisions. The European Court of Justice’s database lists only six such appeals over a similar timespan. The vast majority of blocked mergers are scrapped, with the parties declining to appeal.

This proclivity to abandon mergers is surprising, given firms’ high success rate in court. Of the six merger-annulment appeals in the ECJ’s database (CK Hutchison Holdings Ltd.’s acquisition of Telefónica Europe Plc; Ryanair’s acquisition of a controlling stake in Aer Lingus; a proposed merger between Deutsche Börse and NYSE Euronext; Tetra Laval’s takeover of Sidel Group; a merger between Schneider Electric SA and Legrand SA; and Airtours’ acquisition of First Choice) merging firms won four of them. While precise numbers are harder to come by in the United States, it is also reportedly rare for U.S. antitrust enforcers to win merger-challenge cases.

One explanation is that only marginal cases ever make it to court. In other words, firms with weak cases are, all else being equal, less likely to litigate. However, that is unlikely to explain all abandoned deals.

There are documented cases in which it was clearly delays, rather than self-selection, that caused firms to scrap planned mergers. In the EU’s Airtours proceedings, the merging parties dropped their transaction even though they went on to prevail in court (and First Choice, the target firm, was acquired by another rival). This is inconsistent with the notion that proposed mergers are abandoned only when the parties have a weak case to challenge (the Commission’s decision was widely seen as controversial).

Antitrust policymakers also generally acknowledge that mergers are often time-sensitive. That’s why merger rules on both sides of the Atlantic tend to impose strict timelines within which antitrust authorities must review deals.

In the end, if self-selection based on case strength were the only criteria merging firms used in deciding to appeal a merger challenge, one would not expect an equilibrium in which firms prevail in more than two-thirds of cases. If firms anticipated that a successful court case would preserve a multi-billion dollar merger, the relatively small burden of legal fees should not dissuade them from litigating, even if their chance of success was tiny. We would expect to see more firms losing in court.

The upshot is that antitrust challenges and prohibition decisions likely cause at least some firms to abandon their deals because court proceedings are not seen as an effective remedy. This perception, in turn, reinforces authorities’ bargaining position and thus encourages firms to offer excessive remedies in hopes of staving off lengthy litigation.

Conclusion

A general rule of policymaking is that rules should seek to ensure that agents internalize both the positive and negative effects of their decisions. This, in turn, should ensure that they behave efficiently.

In the field of merger control, those incentives are misaligned. Given the prevailing political climate on both sides of the Atlantic, challenging large corporate acquisitions likely generates important political capital for antitrust authorities. But wrongful merger prohibitions are unlikely to elicit the kinds of judicial rebukes that would compel authorities to proceed more carefully.

Put differently, in the field of antitrust law, court proceedings ought to serve as a guardrail to ensure that enforcement decisions ultimately benefit consumers. When that shield is removed, it is no longer a given that authorities—who, in theory, act as agents of society—will act in the best interests of that society, rather than maximize their own preferences.

Ideally, we should ensure that antitrust authorities bear the social costs of faulty decisions, by compensating, at least, the direct victims of their actions (i.e., the merging firms). However, this would likely require new legislation to that effect, as there currently are too many obstacles to such cases. It is thus unlikely to represent a short-term solution.

In the meantime, regulatory restraint appears to be the only realistic solution. Or, one might say, authorities should “move carefully and avoid breaking stuff.”

Germán Gutiérrez and Thomas Philippon have released a major rewrite of their paper comparing the U.S. and EU competitive environments. 

Although the NBER website provides an enticing title — “How European Markets Became Free: A Study of Institutional Drift” — the paper itself has a much more yawn-inducing title: “How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift.”

Having already critiqued the original paper at length (here and here), I wouldn’t normally take much interest in the do-over. However, in a recent episode of Tyler Cowen’s podcast, Jason Furman gave a shout out to Philippon’s work on increasing concentration. So, I thought it might be worth a review.

As with the original, the paper begins with a conclusion: The EU appears to be more competitive than the U.S. The authors then concoct a theory to explain their conclusion. The theory’s a bit janky, but it goes something like this:

  • Because of lobbying pressure and regulatory capture, an individual country will enforce competition policy at a suboptimal level.
  • Because of competing interests among different countries, a “supra-national” body will be more independent and better able to foster pro-competitive policies and to engage in more vigorous enforcement of competition policy.
  • The EU’s supra-national body and its Directorate-General for Competition is more independent than the U.S. Department of Justice and Federal Trade Commission.
  • Therefore, their model explains why the EU is more competitive than the U.S. Q.E.D.

If you’re looking for what this has to do with “institutional drift,” don’t bother. The term only shows up in the title.

The original paper provided evidence from 12 separate “markets,” that they say demonstrated their conclusion about EU vs. U.S. competitiveness. These weren’t really “markets” in the competition policy sense, they were just broad industry categories, such as health, information, trade, and professional services (actually “other business sector services”). 

As pointed out in one of my earlier critiques, In all but one of these industries, the 8-firm concentration ratios for the U.S. and the EU are below 40 percent and the HHI measures reported in the original paper are at levels that most observers would presume to be competitive. 

Sending their original markets to drift in the appendices, Gutiérrez and Philippon’s revised paper focuses its attention on two markets — telecommunications and airlines — to highlight their claims that EU markets are more competitive than the U.S. First, telecoms:

To be more concrete, consider the Telecom industry and the entry of the French Telecom company Free Mobile. Until 2011, the French mobile industry was an oligopoly with three large historical incumbents and weak competition. … Free obtained its 4G license in 2011 and entered the market with a plan of unlimited talk, messaging and data for €20. Within six months, the incumbents Orange, SFR and Bouygues had reacted by launching their own discount brands and by offering €20 contracts as well. … The relative price decline was 40%: France went from being 15% more expensive than the US [in 2011] to being 25% cheaper in about two years [in 2013].

While this is an interesting story about how entry can increase competition, the story of a single firm entering a market in a single country is hardly evidence that the EU as a whole is more competitive than the U.S.

What Gutiérrez and Philippon don’t report is that from 2013 to 2019, prices declined by 12% in the U.S. and only 8% in France. In the EU as a whole, prices decreased by only 5% over the years 2013-2019.

Gutiérrez and Philippon’s passenger airline story is even weaker. Because airline prices don’t fit their narrative, they argue that increasing airline profits are evidence that the U.S. is less competitive than the EU. 

The picture above is from Figure 5 of their paper (“Air Transportation Profits and Concentration, EU vs US”). They claim that the “rise in US concentration and profits aligns closely with a controversial merger wave,” with the vertical line in the figure marking the Delta-Northwest merger.

Sure, profitability among U.S. firms increased. But, before the “merger wave,” profits were negative. Perhaps predatory pricing is pro-competitive after all.

Where Gutiérrez and Philippon really fumble is with airline pricing. Since the merger wave that pulled the U.S. airline industry out of insolvency, ticket prices (as measured by the Consumer Price Index), have decreased by 6%. In France, prices increased by 4% and in the EU, prices increased by 30%. 

The paper relies more heavily on eyeballing graphs than statistical analysis, but something about Table 2 caught my attention — the R-squared statistics. First, they’re all over the place. But, look at column (1): A perfect 1.00 R-squared. Could it be that Gutiérrez and Philippon’s statistical model has (almost) as many parameters as variables?

Notice that all the regressions with an R-squared of 0.9 or higher include country fixed effects. The two regressions with R-squareds of 0.95 and 0.96 also include country-industry fixed effects. It’s very possible that the regressions results are driven entirely by idiosyncratic differences among countries and industries. 

Gutiérrez and Philippon provide no interpretation for their results in Table 2, but it seems to work like this, using column (1): A 10% increase in the 4-firm concentration ratio (which is different from a 10 percentage point increase), would be associated with a 1.8% increase in prices four years later. So, an increase in CR4 from 20% to 22% (or an increase from 60% to 66%) would be associated with a 1.8% increase in prices over four years, or about 0.4% a year. On the one hand, I just don’t buy it. On the other hand, the effect is so small that it seems economically insignificant. 

I’m sure Gutiérrez and Philippon have put a lot of time into this paper and its revision. But there’s an old saying that the best thing about banging your head against the wall is that it feels so good when it stops. Perhaps, it’s time to stop with this paper and let it “drift” into obscurity.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

Earlier this week, merger talks between Uber and food delivery service Grubhub surfaced. House Antitrust Subcommittee Chairman David N. Cicilline quickly reacted to the news:

Americans are struggling to put food on the table, and locally owned businesses are doing everything possible to keep serving people in our communities, even under great duress. Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub—which has a history of exploiting local restaurants through deceptive tactics and extortionate fees—marks a new low in pandemic profiteering. We cannot allow these corporations to monopolize food delivery, especially amid a crisis that is rendering American families and local restaurants more dependent than ever on these very services. This deal underscores the urgency for a merger moratorium, which I and several of my colleagues have been urging our caucus to support.

Pandemic profiteering rolls nicely off the tongue, and we’re sure to see that phrase much more over the next year or so. 

Grubhub shares jumped 29% Tuesday, the day the merger talks came to light, shown in the figure below. The Wall Street Journal reports companies are considering a deal that would value Grubhub stock at around 1.9 Uber shares, or $60-65 dollars a share, based on Thursday’s price.

But is that “pandemic profiteering?”

After Amazon announced its intended acquisition of Whole Foods, the grocer’s stock price soared by 27%. Rep. Cicilline voiced some convoluted concerns about that merger, but said nothing about profiteering at the time. Different times, different messaging.

Rep. Cicilline and others have been calling for a merger moratorium during the pandemic and used the Uber/Grubhub announcement as Exhibit A in his indictment of merger activity.

A moratorium would make things much easier for regulators. No more fighting over relevant markets, no HHI calculations, no experts debating SSNIPs or GUPPIs, no worries over consumer welfare, no failing firm defenses. Just a clear, brightline “NO!”

Even before the pandemic, it was well known that the food delivery industry was due for a shakeout. NPR reports, even as the business is growing, none of the top food-delivery apps are turning a profit, with one analyst concluding consolidation was “inevitable.” Thus, even if a moratorium slowed or stopped the Uber/Grubhub merger, at some point a merger in the industry will happen and the U.S. antitrust authorities will have to evaluate it.

First, we have to ask, “What’s the relevant market?” The government has a history of defining relevant markets so narrowly that just about any merger can be challenged. For example, for the scuttled Whole Foods/Wild Oats merger, the FTC famously narrowed the market to “premium natural and organic supermarkets.” Surely, similar mental gymnastics will be used for any merger involving food delivery services.

While food delivery has grown in popularity over the past few years, delivery represents less than 10% of U.S. food service sales. While Rep. Cicilline may be correct that families and local restaurants are “more dependent than ever” on food delivery, delivery is only a small fraction of a large market. Even a monopoly of food delivery service would not confer market power on the restaurant and food service industry.

No reasonable person would claim an Uber/Grubhub merger would increase market power in the restaurant and food service industry. But, it might convey market power in the food delivery market. Much attention is paid to the “Big Four”–DoorDash, Grubhub, Uber Eats, and Postmates. But, these platform delivery services are part of the larger food service delivery market, of which platforms account for about half of the industry’s revenues. Pizza accounts for the largest share of restaurant-to-consumer delivery.

This raises the big question of what is the relevant market: Is it the entire food delivery sector, or just the platform-to-consumer sector? 

Based on the information in the figure below, defining the market narrowly would place an Uber/Grubhub merger squarely in the “presumed to be likely to enhance market power” category.

  • 2016 HHI: <3,175
  • 2018 HHI: <1,474
  • 2020 HHI: <2,249 pre-merger; <4,153 post-merger

Alternatively, defining the market to encompass all food delivery would cut the platforms’ shares roughly in half and the merger would be unlikely to harm competition, based on HHI. Choosing the relevant market is, well, relevant.

The Second Measure data suggests that concentration in the platform delivery sector decreased with the entry of Uber Eats, but subsequently increased with DoorDash’s rising share–which included the acquisition of Caviar from Square.

(NB: There seems to be a significant mismatch in the delivery revenue data. Statista reports platform delivery revenues increased by about 40% from 2018 to 2020, but Second Measure indicates revenues have more than doubled.) 

Geoffrey Manne, in an earlier post points out “while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.” That may be the case here.

The figure below is a sample of platform delivery shares by city. I added data from an earlier study of 2017 shares. In all but two metro areas, Uber and Grubhub’s combined market share declined from 2017 to 2020. In Boston, the combined shares did not change and in Los Angeles, the combined shares increased by 1%.

(NB: There are some serious problems with this data, notably that it leaves out the restaurant-to-consumer sector and assumes the entire platform-to-consumer sector is comprised of only the “Big Four.”)

Platform-to-consumer delivery is a complex two-sided market in which the platforms link, and compete for, both restaurants and consumers. Platforms compete for restaurants, drivers, and consumers. Restaurants have a choice of using multiple platforms or entering into exclusive arrangements. Many drivers work for multiple platforms, and many consumers use multiple platforms. 

Fundamentally, the rise of platform-to-consumer is an evolution in vertical integration. Restaurants can choose to offer no delivery, use their own in-house delivery drivers, or use a third party delivery service. Every platform faces competition from in-house delivery, placing a limit on their ability to raise prices to restaurants and consumers.

The choice of delivery is not an either-or decision. For example, many pizza restaurants who have their own delivery drivers also use platform delivery service. Their own drivers may serve a limited geographic area, but the platforms allow the restaurant to expand its geographic reach, thereby increasing its sales. Even so, the platforms face competition from in-house delivery.

Mergers or other forms of shake out in the food delivery industry are inevitable. Mergers will raise important questions about relevant product and geographic markets as well as competition in two-sided markets. While there is a real risk of harm to restaurants, drivers, and consumers, there is also a real possibility of welfare enhancing efficiencies. These questions will never be addressed with an across-the-board merger moratorium.

An oft-repeated claim of conferences, media, and left-wing think tanks is that lax antitrust enforcement has led to a substantial increase in concentration in the US economy of late, strangling the economy, harming workers, and saddling consumers with greater markups in the process. But what if rising concentration (and the current level of antitrust enforcement) were an indication of more competition, not less?

By now the concentration-as-antitrust-bogeyman story is virtually conventional wisdom, echoed, of course, by political candidates such as Elizabeth Warren trying to cash in on the need for a government response to such dire circumstances:

In industry after industry — airlines, banking, health care, agriculture, tech — a handful of corporate giants control more and more. The big guys are locking out smaller, newer competitors. They are crushing innovation. Even if you don’t see the gears turning, this massive concentration means prices go up and quality goes down for everything from air travel to internet service.  

But the claim that lax antitrust enforcement has led to increased concentration in the US and that it has caused economic harm has been debunked several times (for some of our own debunking, see Eric Fruits’ posts here, here, and here). Or, more charitably to those who tirelessly repeat the claim as if it is “settled science,” it has been significantly called into question

Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.

What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.

The most recent — and, I believe, most significant — corrective to the conventional story comes from economists Chang-Tai Hsieh of the University of Chicago and Esteban Rossi-Hansberg of Princeton University. As they write in a recent paper titled, “The Industrial Revolution in Services”: 

We show that new technologies have enabled firms that adopt them to scale production over a large number of establishments dispersed across space. Firms that adopt this technology grow by increasing the number of local markets that they serve, but on average are smaller in the markets that they do serve. Unlike Henry Ford’s revolution in manufacturing more than a hundred years ago when manufacturing firms grew by concentrating production in a given location, the new industrial revolution in non-traded sectors takes the form of horizontal expansion across more locations. At the same time, multi-product firms are forced to exit industries where their productivity is low or where the new technology has had no effect. Empirically we see that top firms in the overall economy are more focused and have larger market shares in their chosen sectors, but their size as a share of employment in the overall economy has not changed. (pp. 42-43) (emphasis added).

This makes perfect sense. And it has the benefit of not second-guessing structural changes made in response to technological change. Rather, it points to technological change as doing what it regularly does: improving productivity.

The implementation of new technology seems to be conferring benefits — it’s just that these benefits are not evenly distributed across all firms and industries. But the assumption that larger firms are causing harm (or even that there is any harm in the first place, whatever the cause) is unmerited. 

What the authors find is that the apparent rise in national concentration doesn’t tell the relevant story, and the data certainly aren’t consistent with assumptions that anticompetitive conduct is either a cause or a result of structural changes in the economy.

Hsieh and Rossi-Hansberg point out that increased concentration is not happening everywhere, but is being driven by just three industries:

First, we show that the phenomena of rising concentration . . . is only seen in three broad sectors – services, wholesale, and retail. . . . [T]op firms have become more efficient over time, but our evidence indicates that this is only true for top firms in these three sectors. In manufacturing, for example, concentration has fallen.

Second, rising concentration in these sectors is entirely driven by an increase [in] the number of local markets served by the top firms. (p. 4) (emphasis added).

These findings are a gloss on a (then) working paper — The Fall of the Labor Share and the Rise of Superstar Firms — by David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenan (now forthcoming in the QJE). Autor et al. (2019) finds that concentration is rising, and that it is the result of increased productivity:

If globalization or technological changes push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms, which have high markups and a low labor share of value-added.

We empirically assess seven predictions of this hypothesis: (i) industry sales will increasingly concentrate in a small number of firms; (ii) industries where concentration rises most will have the largest declines in the labor share; (iii) the fall in the labor share will be driven largely by reallocation rather than a fall in the unweighted mean labor share across all firms; (iv) the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; (v) the industries that are becoming more concentrated will exhibit faster growth of productivity; (vi) the aggregate markup will rise more than the typical firm’s markup; and (vii) these patterns should be observed not only in U.S. firms, but also internationally. We find support for all of these predictions. (emphasis added).

This is alone is quite important (and seemingly often overlooked). Autor et al. (2019) finds that rising concentration is a result of increased productivity that weeds out less-efficient producers. This is a good thing. 

But Hsieh & Rossi-Hansberg drill down into the data to find something perhaps even more significant: the rise in concentration itself is limited to just a few sectors, and, where it is observed, it is predominantly a function of more efficient firms competing in more — and more localized — markets. This means that competition is increasing, not decreasing, whether it is accompanied by an increase in concentration or not. 

No matter how may times and under how many monikers the antitrust populists try to revive it, the Structure-Conduct-Performance paradigm remains as moribund as ever. Indeed, on this point, as one of the new antitrust agonists’ own, Fiona Scott Morton, has written (along with co-authors Martin Gaynor and Steven Berry):

In short, there is no well-defined “causal effect of concentration on price,” but rather a set of hypotheses that can explain observed correlations of the joint outcomes of price, measured markups, market share, and concentration. As Bresnahan (1989) argued three decades ago, no clear interpretation of the impact of concentration is possible without a clear focus on equilibrium oligopoly demand and “supply,” where supply includes the list of the marginal cost functions of the firms and the nature of oligopoly competition. 

Some of the recent literature on concentration, profits, and markups has simply reasserted the relevance of the old-style structure-conduct-performance correlations. For economists trained in subfields outside industrial organization, such correlations can be attractive. 

Our own view, based on the well-established mainstream wisdom in the field of industrial organization for several decades, is that regressions of market outcomes on measures of industry structure like the Herfindahl-Hirschman Index should be given little weight in policy debates. Such correlations will not produce information about the causal estimates that policy demands. It is these causal relationships that will help us understand what, if anything, may be causing markups to rise. (emphasis added).

Indeed! And one reason for the enduring irrelevance of market concentration measures is well laid out in Hsieh and Rossi-Hansberg’s paper:

This evidence is consistent with our view that increasing concentration is driven by new ICT-enabled technologies that ultimately raise aggregate industry TFP. It is not consistent with the view that concentration is due to declining competition or entry barriers . . . , as these forces will result in a decline in industry employment. (pp. 4-5) (emphasis added)

The net effect is that there is essentially no change in concentration by the top firms in the economy as a whole. The “super-star” firms of today’s economy are larger in their chosen sectors and have unleashed productivity growth in these sectors, but they are not any larger as a share of the aggregate economy. (p. 5) (emphasis added)

Thus, to begin with, the claim that increased concentration leads to monopsony in labor markets (and thus unemployment) appears to be false. Hsieh and Rossi-Hansberg again:

[W]e find that total employment rises substantially in industries with rising concentration. This is true even when we look at total employment of the smaller firms in these industries. (p. 4)

[S]ectors with more top firm concentration are the ones where total industry employment (as a share of aggregate employment) has also grown. The employment share of industries with increased top firm concentration grew from 70% in 1977 to 85% in 2013. (p. 9)

Firms throughout the size distribution increase employment in sectors with increasing concentration, not only the top 10% firms in the industry, although by definition the increase is larger among the top firms. (p. 10) (emphasis added)

Again, what actually appears to be happening is that national-level growth in concentration is actually being driven by increased competition in certain industries at the local level:

93% of the growth in concentration comes from growth in the number of cities served by top firms, and only 7% comes from increased employment per city. . . . [A]verage employment per county and per establishment of top firms falls. So necessarily more than 100% of concentration growth has to come from the increase in the number of counties and establishments served by the top firms. (p.13)

The net effect is a decrease in the power of top firms relative to the economy as a whole, as the largest firms specialize more, and are dominant in fewer industries:

Top firms produce in more industries than the average firm, but less so in 2013 compared to 1977. The number of industries of a top 0.001% firm (relative to the average firm) fell from 35 in 1977 to 17 in 2013. The corresponding number for a top 0.01% firm is 21 industries in 1977 and 9 industries in 2013. (p. 17)

Thus, summing up, technology has led to increased productivity as well as greater specialization by large firms, especially in relatively concentrated industries (exactly the opposite of the pessimistic stories):  

[T]op firms are now more specialized, are larger in the chosen industries, and these are precisely the industries that have experienced concentration growth. (p. 18)

Unsurprisingly (except to some…), the increase in concentration in certain industries does not translate into an increase in concentration in the economy as a whole. In other words, workers can shift jobs between industries, and there is enough geographic and firm mobility to prevent monopsony. (Despite rampant assumptions that increased concentration is constraining labor competition everywhere…).

Although the employment share of top firms in an average industry has increased substantially, the employment share of the top firms in the aggregate economy has not. (p. 15)

It is also simply not clearly the case that concentration is causing prices to rise or otherwise causing any harm. As Hsieh and Rossi-Hansberg note:

[T]he magnitude of the overall trend in markups is still controversial . . . and . . . the geographic expansion of top firms leads to declines in local concentration . . . that could enhance competition. (p. 37)

Indeed, recent papers such as Traina (2018), Gutiérrez and Philippon (2017), and the IMF (2019) have found increasing markups over the last few decades but at much more moderate rates than the famous De Loecker and Eeckhout (2017) study. Other parts of the anticompetitive narrative have been challenged as well. Karabarbounis and Neiman (2018) finds that profits have increased, but are still within their historical range. Rinz (2018) shows decreased wages in concentrated markets but also points out that local concentration has been decreasing over the relevant time period.

None of this should be so surprising. Has antitrust enforcement gotten more lax, leading to greater concentration? According to Vita and Osinski (2018), not so much. And how about the stagnant rate of new firms? Are incumbent monopolists killing off new startups? The more likely — albeit mundane — explanation, according to Hopenhayn et al. (2018), is that increased average firm age is due to an aging labor force. Lastly, the paper from Hsieh and Rossi-Hansberg discussed above is only the latest in a series of papers, including Bessen (2017), Van Reenen (2018), and Autor et al. (2019), that shows a rise in fixed costs due to investments in proprietary information technology, which correlates with increased concentration. 

So what is the upshot of all this?

  • First, as noted, employment has not decreased because of increased concentration; quite the opposite. Employment has increased in the industries that have experienced the most concentration at the national level.
  • Second, this result suggests that the rise in concentrated industries has not led to increased market power over labor.
  • Third, concentration itself needs to be understood more precisely. It is not explained by a simple narrative that the economy as a whole has experienced a great deal of concentration and this has been detrimental for consumers and workers. Specific industries have experienced national level concentration, but simultaneously those same industries have become more specialized and expanded competition into local markets. 

Surprisingly (because their paper has been around for a while and yet this conclusion is rarely recited by advocates for more intervention — although they happily use the paper to support claims of rising concentration), Autor et al. (2019) finds the same thing:

Our formal model, detailed below, generates superstar effects from increases in the toughness of product market competition that raise the market share of the most productive firms in each sector at the expense of less productive competitors. . . . An alternative perspective on the rise of superstar firms is that they reflect a diminution of competition, due to a weakening of U.S. antitrust enforcement (Dottling, Gutierrez and Philippon, 2018). Our findings on the similarity of trends in the U.S. and Europe, where antitrust authorities have acted more aggressively on large firms (Gutierrez and Philippon, 2018), combined with the fact that the concentrating sectors appear to be growing more productive and innovative, suggests that this is unlikely to be the primary explanation, although it may important in some specific industries (see Cooper et al, 2019, on healthcare for example). (emphasis added).

The popular narrative among Neo-Brandeisian antitrust scholars that lax antitrust enforcement has led to concentration detrimental to society is at base an empirical one. The findings of these empirical papers severely undermine the persuasiveness of that story.

Today, Reuters reports that Germany-based ThyssenKrupp has received bids from three bidding groups for a majority stake in the firm’s elevator business. Finland’s Kone teamed with private equity firm CVC to bid on the company. Private equity firms Blackstone and Carlyle joined with the Canada Pension Plan Investment Board to submit a bid. A third bid came from Advent, Cinven, and the Abu Dhabi Investment Authority.

Also today — in anticipation of the long-rumored and much-discussed sale of ThyssenKrupp’s elevator business — the International Center for Law & Economics released The Antitrust Risks of Four To Three Mergers: Heightened Scrutiny of a Potential ThyssenKrupp/Kone Merger, by Eric Fruits and Geoffrey A. Manne. This study examines the heightened scrutiny of four to three mergers by competition authorities in the current regulatory environment, using a potential ThyssenKrupp/Kone merger as a case study. 

In recent years, regulators have become more aggressive in merger enforcement in response to populist criticisms that lax merger enforcement has led to the rise of anticompetitive “big business.” In this environment, it is easy to imagine regulators intensely scrutinizing and challenging or conditioning nearly any merger that substantially increases concentration. 

This potential deal provides an opportunity to highlight the likely challenges, complexity, and cost that regulatory scrutiny of such mergers actually entails — and it is likely to be a far cry from the lax review and permissive decisionmaking of antitrust critics’ imagining.

In the case of a potential ThyssenKrupp/Kone merger, the combined entity would face lengthy, costly, and duplicative review in multiple jurisdictions, any one of which could effectively block the merger or impose onerous conditions. It would face the automatic assumption of excessive concentration in several of these, including the US, EU, and Canada. In the US, the deal would also face heightened scrutiny based on political considerations, including the perception that the deal would strengthen a foreign firm at the expense of a domestic supplier. It would also face the risk of politicized litigation from state attorneys general, and potentially the threat of extractive litigation by competitors and customers.

Whether the merger would actually entail anticompetitive risk may, unfortunately, be of only secondary importance in determining the likelihood and extent of a merger challenge or the imposition of onerous conditions.

A “highly concentrated” market

In many jurisdictions, the four to three merger would likely trigger a “highly concentrated” market designation. With the merging firms having a dominant share of the market for elevators, the deal would be viewed as problematic in several areas:

  • The US (share > 35%, HHI > 3,000, HHI increase > 700), 
  • Canada (share of approximately 50%, HHI > 2,900, HHI increase of 1,000), 
  • Australia (share > 40%, HHI > 3,100, HHI increase > 500), 
  • Europe (shares of 33–65%, HHIs in excess of 2,700, and HHI increases of 270 or higher in Sweden, Finland, Netherlands, Austria, France, and Luxembourg).

As with most mergers, a potential ThyssenKrupp/Kone merger would likely generate “hot docs” that would be used to support the assumption of anticompetitive harm from the increase in concentration, especially in light of past allegations of price fixing in the industry and a decision by the European Commission in 2007 to fine certain companies in the industry for alleged anticompetitive conduct.

Political risks

The merger would also surely face substantial political risks in the US and elsewhere from the perception the deal would strengthen a foreign firm at the expense of a domestic supplier. President Trump’s administration has demonstrated a keen interest in protecting what it sees as US interests vis-à-vis foreign competition. As a high-rise and hotel developer who has shown a willingness to intervene in antitrust enforcement to protect his interests, President Trump may have a heightened personal interest in a ThyssenKrupp/Kone merger. 

To the extent that US federal, state, and local governments purchase products from the merging parties, the deal would likely be subjected to increased attention from federal antitrust regulators as well as states’ attorneys general. Indeed, the US Department of Justice (DOJ) has created a “Procurement Collusion Strike Force” focused on “deterring, detecting, investigating and prosecuting antitrust crimes . . . which undermine competition in government procurement. . . .”

The deal may also face scrutiny from EC, UK, Canadian, and Australian competition authorities, each of which has exhibited increased willingness to thwart such mergers. For example, the EU recently blocked a proposed merger between the transport (rail) services of EU firms, Siemens and Alstom. The UK recently blocked a series of major deals that had only limited competitive effects on the UK. In one of these, Thermo Fisher Scientific’s proposed acquisition of Roper Technologies’ Gatan subsidiary was not challenged in the US, but the deal was abandoned after the UK CMA decided to block the deal despite its limited connections to the UK.

Economic risks

In addition to the structural and political factors that may lead to blocking a four to three merger, several economic factors may further exacerbate the problem. While these, too, may be wrongly deemed problematic in particular cases by reviewing authorities, they are — relatively at least — better-supported by economic theory in the abstract. Moreover, even where wrongly applied, they are often impossible to refute successfully given the relevant standards. And such alleged economic concerns can act as an effective smokescreen for blocking a merger based on the sorts of political and structural considerations discussed above. Some of these economic factors include:

  • Barriers to entry. IBISWorld identifies barriers to entry to include economies of scale, long-standing relationships with existing buyers, as well as long records of safety and reliability. Strictly speaking, these are not costs borne only by a new entrant, and thus should not be deemed competitively-relevant entry barriers. Yet merger review authorities the world over fail to recognize this distinction, and routinely scuttle mergers based simply on the costs faced by additional competitors entering the market.
  • Potential unilateral effects. The extent of direct competition between the products and services sold by the merging parties is a key part of the evaluation of unilateral price effects. Competition authorities would likely consider a significant range of information to evaluate the extent of direct competition between the products and services sold by ThyssenKrupp and its merger partner. In addition to “hot docs,” this information could include won/lost bid reports as well as evidence from discount approval processes and customer switching patterns. Because the purchase of elevator and escalator products and services involves negotiation by sophisticated and experienced buyers, it is likely that this type of bid information would be readily available for review.
  • A history of coordinated conduct involving ThyssenKrupp and Kone. Competition authorities will also consider the risk that a four to three merger will increase the ability and likelihood for the remaining, smaller number of firms to collude. In 2007 the European Commission imposed a €992 million cartel fine on five elevator firms: ThyssenKrupp, Kone, Schindler, United Technologies, and Mitsubishi. At the time, it was the largest-ever cartel fine. Several companies, including Kone and UTC, admitted wrongdoing.

Conclusion

As “populist” antitrust gains more traction among enforcers aiming to stave off criticisms of lax enforcement, superficial and non-economic concerns have increased salience. The simple benefit of a resounding headline — “The US DOJ challenges increased concentration that would stifle the global construction boom” — signaling enforcers’ efforts to thwart further increases in concentration and save blue collar jobs is likely to be viewed by regulators as substantial. 

Coupled with the arguably more robust, potential economic arguments involving unilateral and coordinated effects arising from such a merger, a four to three merger like a potential ThyssenKrupp/Kone transaction would be sure to attract significant scrutiny and delay. Any arguments that such a deal might actually decrease prices and increase efficiency are — even if valid — less likely to gain as much traction in today’s regulatory environment.

Wall Street Journal commentator, Greg Ip, reviews Thomas Philippon’s forthcoming book, The Great Reversal: How America Gave Up On Free Markets. Ip describes a “growing mountain” of research on industry concentration in the U.S. and reports that Philippon concludes competition has declined over time, harming U.S. consumers.

In one example, Philippon points to air travel. He notes that concentration in the U.S. has increased rapidly—spiking since the Great Recession—while concentration in the EU has increased modestly. At the same time, Ip reports “U.S. airlines are now far more profitable than their European counterparts.” (Although it’s debatable whether a five percentage point difference in net profit margin is “far more profitable”). 

On first impression, the figures fit nicely with the populist antitrust narrative: As concentration in the U.S. grew, so did profit margins. Closer inspection raises some questions, however. 

For example, the U.S. airline industry had a negative net profit margin in each of the years prior to the spike in concentration. While negative profits may be good for consumers, it would be a stretch to argue that long-run losses are good for competition as a whole. At some point one or more of the money losing firms is going to pull the ripcord. Which raises the issue of causation.

Just looking at the figures from the WSJ article, one could argue that rather than concentration driving profit margins, instead profit margins are driving concentration. Indeed, textbook IO economics would indicate that in the face of losses, firms will exit until economic profit equals zero. Paraphrasing Alfred Marshall, “Which blade of the scissors is doing the cutting?”

While the concentration and profits story fits the antitrust populist narrative, other observations run contrary to Philippon’s conclusion. For example, airline prices, as measured by price indexes, show that changes in U.S. and EU airline prices have fairly closely tracked each other until 2014, when U.S. prices began dropping. Sure, airlines have instituted baggage fees, but the CPI includes taxes, fuel surcharges, airport, security, and baggage fees. It’s not obvious that U.S. consumers are worse off in the so-called era of rising concentration.

Regressing U.S. air fare price index against Philippon’s concentration information in the figure above (and controlling for general inflation) finds that if U.S. concentration in 2015 was the same as in 1995, U.S. airfares would be about 2.8% lower. That a 1,250 point increase in HHI would be associated with a 2.8% increase in prices indicates that the increased concentration in U.S. airlines has led to no significant increase in consumer prices.

Also, if consumers are truly worse off, one would expect to see a drop off or slow down in the use of air travel. An eyeballing of passenger data does not fit the populist narrative. Instead, we see airlines are carrying more passengers and consumers are paying lower prices on average.

While it’s true that low-cost airlines have shaken up air travel in the EU, the differences are not solely explained by differences in market concentration. For example, U.S. regulations prohibit foreign airlines from operating domestic flights while EU carriers compete against operators from other parts of Europe. While the WSJ’s figures tell an interesting story of concentration, prices, and profits, they do not provide a compelling case of anticompetitive conduct.

A recent NBER working paper by Gutiérrez & Philippon attempts to link differences in U.S. and EU antitrust enforcement and product market regulation to differences in market concentration and corporate profits. The paper’s abstract begins with a bold assertion:

Until the 1990’s, US markets were more competitive than European markets. Today, European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry.

The authors are not clear what they mean by lower, however its seems they mean lower today relative to the 1990s.

This blog post focuses on the first claim: “Today, European markets have lower concentration …”

At the risk of being pedantic, Gutiérrez & Philippon’s measures of market concentration for which both U.S. and EU data are reported cover the period from 1999 to 2012. Thus, “the 1990s” refers to 1999, and “today” refers to 2012, or six years ago.

The table below is based on Figure 26 in Gutiérrez & Philippon. In 2012, there appears to be no significant difference in market concentration between the U.S. and the EU, using either the 8-firm concentration ratio or HHI. Based on this information, it cannot be concluded broadly that EU sectors have lower concentration than the U.S.

2012U.S.EU
CR826% (+5%)27% (-7%)
HHI640 (+150)600 (-190)

Gutiérrez & Philippon focus on the change in market concentration to draw their conclusions. However, the levels of market concentration measures are strikingly low. In all but one of the industries (telecommunications) in Figure 27 of their paper, the 8-firm concentration ratios for the U.S. and the EU are below 40 percent. Similarly, the HHI measures reported in the paper are at levels that most observers would presume to be competitive. In addition, in 7 of the 12 sectors surveyed, the U.S. 8-firm concentration ratio is lower than in the EU.

The numbers in parentheses in the table above show the change in the measures of concentration since 1999. The changes suggests that U.S. markets have become more concentrated and EU markets have become less concentrated. But, how significant are the changes in concentration?

A simple regression of the relationship between CR8 and a time trend finds that in the EU, CR8 has decreased an average of 0.5 percentage point a year, while the U.S. CR8 increased by less than 0.4 percentage point a year from 1999 to 2012. Tucked in an appendix to Gutiérrez & Philippon, Figure 30 shows that CR8 in the U.S. had decreased by about 2.5 percentage points from 2012 to 2014.

A closer examination of Gutiérrez & Philippon’s 8-firm concentration ratio for the EU shows that much of the decline in EU market concentration occurred over the 1999-2002 period. After that, the change in CR8 for the EU is not statistically significantly different from zero.

A regression of the relationship between HHI and a time trend finds that in the EU, HHI has decreased an average of 12.5 points a year, while the U.S. HHI increased by less than 16.4 points a year from 1999 to 2012.

As with CR8, a closer examination of Gutiérrez & Philippon’s HHI for the EU shows that much of the decline in EU market concentration occurred over the 1999-2002 period. After that, the change in HHI for the EU is not statistically significantly different from zero.

Readers should be cautious in relying on Gutiérrez & Philippon’s data to conclude that the U.S. is “drifting” toward greater market concentration while the EU is “drifting” toward lower market concentration. Indeed, the limited data presented in the paper point toward a convergence in market concentration between the two regions.

 

 

Ioannis Lianos is Professor of Global Competition Law and Public Policy, UCL Faculty of Laws and Chief Researcher, HSE-Skolkovo Institute for Law and Development

The recently notified mergers in the seed and agro-chem industry raise difficult questions that competition authorities around the world would need to tackle in the following months. Because of the importance of their markets’ size, the decision reached by US and EU competition authorities would be particularly significant for the merging parties, but the perspective of a number of other competition authorities in emerging and developing economies, in particular the BRICS, will also play an important role if the transactions are to move forward.

The factors of production segment of the food value chain, which has been the focus of most recent merger activity, has been marked by profound transformations the last three decades. One may note the development of new technologies, starting with deliberate hybridization to marker-assisted breeding and the most recent advances in genetic engineering or genetic editing with CRISPR/Cas technology, as well as the advent of “digital agriculture” and “precision farming”. These technologies are of course protected by IP rights consisting of patents, plant variety rights, trademarks, trade secrets, and geographical indications.

These IP rights enable seed companies to prevent farmers from saving seeds of the protected variety, sharing it with their neighbours or selling it informally (“brown bagging”), but also to prevent competing plant breeders from using a protected variety in the development of a new variety (cumulative innovation), as well as to prevent competing seed producers from multiplying and marketing the protected variety without a license or using a protected product name and logos. Seed laws requiring compulsory seed certification with the aim to police seed quality also offer some form of protection to breeders, in the absence of IPRs.

Technology-driven growth has not been the only major transformation of this economic sector. Its consolidation, in particular in the factors of production segment, has been particularly important in recent years.

The consolidation of the factors of production segment

Concentration in the world and EU markets for seeds

In the seeds sector, a number of merger waves, starting in the mid-1980s, have led to the emergence of a relatively concentrated market structure of 6 big players thirty years later (Monsanto, Syngenta, DuPont, BASF, Bayer, and Dow).

The most recent merger wave started in July 2014 when Monsanto made a number of acquisition offers to Syngenta. These offers were rejected, but the Monsanto bid triggered a number of other M&A transactions that were announced in 2015 and 2016 between the various market leaders in the factors of production segment. In November 2015, Syngenta accepted the offer of ChemChina (which owns ADAMA, one of the largest agrochemical companies in the world). In December 2015, Dupont and Dow announced their merger. In September 2016, Bayer put forward a merger deal with Monsanto. During the same month, a deal was announced between two of the leaders in the market for fertilizers, Potash Corp and Agrium. In November 2015, it was reported that Deere & Co. (the leader in agricultural machinery) had agreed to buy Monsanto’s precision farming business. This deal was opposed by the US Department of Justice as it would have led Deere to control a significant part of the already highly concentrated US high-speed precision planting systems market.

The level of concentration varies according to the geographical market and the type of crop. If one looks at the situation in Europe, with regard to the sale of seeds, the market appears to be less concentrated than the global seed market. The picture is also slightly different for certain types of crop. For instance, it is reported that the seed market for sugar beets shows the largest concentration, with the first three companies (CR3) controlling a staggering 79% of the market (HHI: 2444), while for Maize seeds CR3 is 56% (HHI: 1425). High levels of concentration are also noted in the market for tomato seeds with Monsanto controlling 20% of registered seed varieties. What is more striking, however, is the speed of this consolidation process, as the bulk of this increase in the concentration level of the industry occurred in the last twenty years, the levels of concentration in the mid-1990s being close to those in 1985.

But the existence of a relatively concentrated market constitutes the tip of a much bigger consolidation iceberg between the market leaders that takes various forms: joint ventures, various cross-licensing and trait licensing agreements between the “Big Six”, distribution agreements, collaborations, research agreements and R&D strategic alliances, patent litigation settlements, to which one may add the recently concluded post-patent genetic trait agreements. Furthermore, one may not exclude the possibility of consolidation by stealth, in view of the important growth in common ownership in various sectors of the economy, as institutional investors simultaneously hold large blocks of other same-industry firms.

Which concentration level will be considered for merger purposes?

Market structure and concentration is, of course, just one step in the assessment of mergers and should be followed by a more thorough analysis of the possible anticompetitive effects and efficiencies, if the level of concentration resulting from the merger raises concerns. While the EU market for seeds could not be characterized as highly concentrated before this most recent merger wave, if one applies the conventional HHI measure, it remains possible that if the mergers first notified to the European Commission are approved without conditions with regard to seed markets, the concentration level that the Commission will consider when assessing the following notified merger will respectively increase. One may project that, as the Dow/Dupont merger has been recently cleared without conditions relating to the seed industry, it will be more difficult for the ChemChina/Syngenta merger to be approved without conditions, and even more so for the Bayer/Monsanto merger that will be the last one examined. Indeed, as the Commission made clear in its press release announcing its decision on the Dow/Dupont transaction,

The Commission examines each case on its own merits. In line with its case practice, the Commission assesses parallel transactions according to the so-called “priority rule” – first come, first served. The assessment of the merger between Dow and DuPont has been based on the currently prevailing market situation.

The assessment as to whether a merger would give rise to a Significant Impediment of Effective Competition (SIEC) is based on a counterfactual analysis where the post-merger scenario is compared to a hypothetical scenario absent the merger in question. The latter is normally taken to be the same as the situation before the merger is consummated. However, the Commission may take into account future changes to the market that can “reasonably be foreseen”. The identification of the proper counterfactual can be complicated by the fact that there can be more than one merger occurring in parallel in the same relevant market. Under the mandatory notification regime, the Commission does not factor into the counterfactual analysis a merger notified after the one under assessment. On the basis of the identified counterfactual, the Commission then proceeds with the definition of the relevant product and geographic market. That means that when assessing the Dow/Dupont merger, the Commission did not take into account the (future) market situation that would result from the notified merger between ChemChina and Syngenta, which was a known fact during the period of the assessment of the Dow/Dupont merger, as this was notified a few months after the notification of the Dow/Dupont transaction.

Explaining concentration levels

The consolidation of the industry may be explained by various factors at play. One may put forward a “natural” causes explanation, in view of the existence of endogenous sunk costs that may lead to a reduction in the number of firms active in this industry. John Sutton has famously argued that high concentration may persist in many manufacturing industries, even in the presence of a substantial increase in demand and output, when firms in the industry decide to incur, in addition to “exogenous sunk costs”, that is the costs that any firm will have to incur upon entry into the market, “endogenous sunk costs”, which include cost for R&D and other process innovations, with the aim to increase their price-cost margin. If all firms invest in endogenous sunk costs, in the long run this investment will produce little or no profit, as the competitive advantage gained by each firm’s investment will be largely ineffective if all other firms make a similar investment. This may lead to a fall in the industry’s profitability in the long-term and to a concentrated market. The recent consolidation movement in the industry may also be understood as a way to deal with externalities arising out of the expansion of the IP protection in recent decades.

Consolidation may also occur because of the merging companies’ quest for market share by purchasing potential competition, acquiring local market leaders or companies with diversified distribution networks and an established customer base. Market leaders may also strive to constitute one-stop shop platforms for farmers, combining an offering of seeds, traits, and chemicals, that would enhance the farmers’ technological dependence vis-à-vis large agrochemical and seed companies.

These large agro-chem groups forming a tight oligopoly will be able to exploit eventual network effects that may result from the shift towards data-driven agriculture and to block new entry in the factors of production markets. It is increasingly clear that market players in this industry have made the choice of positioning themselves as fully integrated providers, or the orchestrators/partners of an established network, offering a package of genetic transformation technology and genomics, traits, seeds, and chemicals. One may argue that this package of ‘complementary’ products and technologies may form a system competing with other systems (‘systems competition’). A question that would need to be tackled, when assessing the plausibility of the “system competition” thesis, would be to determine the existence of distinct relevant markets affected by the mergers. Could research, breeding and development/marketing of the various kinds of seeds be considered as part of the same or of different relevant markets? I address this question and the effects of these mergers on output, prices, and consumer choice in more detail in a separate paper (I. Lianos & D. Katalevsky, Merger Activity in the Factors of Production Segments of the Food Value Chain: A Critical Assessment (forthcoming)).

Theories and assessment of harm to innovation

Because of space constraints, I will only focus here on the assessment of the possible effects of these mergers on innovation. The emergence of integrated technology/traits/seeds/chemicals platforms may place barriers to new entry, as companies wishing to enter the market(s) would need to offer an integrated solution to farmers. This may stifle disruptive innovation if, in the absence of the merger, firms were able to enter one or two segments of the market (e.g. research and breeding) without the need to offer an “integrated” platform product. One should also take note of the fact that although traditional breeding methods required important resources and a considerable investment of time (because of long breeding cycles) and thus provided large economies of scale leading to the emergence of large market players, the latest genome-editing technologies, particularly CRISPR/Cas, may constitute more efficient and less resource intensive and time-consuming breeding methods, that offer opportunities for the emergence of more competitive and less integrated market structures in the traits/seeds segment(s).

Assessing the effects on innovation will be a crucial part of the merger assessment, for the European Commission as well as for all other competition authorities with jurisdiction to examine the specific merger(s). It is true that the EU market is mainly a conventional seed market, and not a GM seeds market, but it is also clear that all of the Big Six have an integrated strategy for R&D for all types of crops, working on “traditional” marker-assisted breeding, or the more recent forms of predictive breeding that have become commercially possible with the reduction of the cost of genome sequencing and the use of IT, but also on genetically engineered seeds. Assessing the possible effects of each merger on innovation will be a quite complex exercise in view of the need to focus not only on existing technologies but also on the possibility of new technologies emerging in the future.

Competition authorities may use different methodologies to assess these future effects: the definition of innovation markets as it is the case in the US, or a more general assessment of the existence of an effect on innovation constituting a SIEC in Europe. In its recent decision on the Dow/Dupont merger, the European Commission found that the merger may have reduced innovation competition for pesticides by looking to the ability and the incentive of the parties to innovate. The Commission emphasised that this analysis was not general but was based on “specific evidence that the merged entity would have lower incentives and a lower ability to innovate than Dow and DuPont separately” and “that the merged entity would have cut back on the amount they spent on developing innovative products”. That said, the Commission also mentioned the following, which I think may be of relevance to the competition assessment of the other pending mergers:

Only five companies (BASF, Bayer, Syngenta and the merging parties) are globally active throughout the entire R&D process, from discovery of new active ingredients (molecules producing the desired biological effect), their development, testing and regulatory registration, to the manufacture and sale of final formulated products through national distribution channels. Other competitors have no or more limited R&D capabilities (e.g. as regards geographic focus or product range). After the merger, only three global integrated players would remain to compete with the merged company, in an industry with very high barriers to entry. The number of players active in specific innovation areas would be even lower than at the overall industry level.

This type of assessment looks close to the filter of the existence of at least four independent technologies that constitute a commercially viable alternative, in addition to the licensed technology controlled by the parties to the agreement, that the Commission usually employs in its Transfer of Technology Guidelines in order to exclude the possibility that a licensing agreement may restrict competition and thus infringe Article 101 TFEU. There is no reason why the Commission would apply a different approach in the context of merger control. The above indicate that the Commission may view more negatively mergers that lead to less than four or three independent technologies in the relevant market(s).

Hidden/Not usually considered social costs

One may also assess the mergers in the seeds and agro-chem market from a public interest perspective, in view of the broader concerns animating public policy in this context and the existence of a nexus of international commitments with regard to biodiversity, sustainability, the right to food, as well as the emphasis put by some competition law regimes on public interest analysis (e.g. South Africa). The aim will be to assess the full social costs of these transactions, to the extent, of course, this is practically possible. This may be more achievable in merger control regimes where it is not courts that make the final decisions to clear, or not to clear, the merger, as there may be limits to the adjudication of certain broader public interest concerns, but integrated competition law agencies, or branches of the executive power, as it is formally the case in the EU.

Although public interest considerations do not form part of the substantive test of EU merger control, Article 21(4) EUMR includes a legitimate interest clause, which provides that Member States may take appropriate measures to protect three specified legitimate interests: public security, plurality of the media and prudential rules, and other unspecified public interests that are recognised by the Commission after notification by the Member State. If a Member State wishes to claim an additional legitimate interest, other than the ones listed above, it shall communicate this to the Commission. And the Commission must then decide, within 25 working days, whether the additional interest is compatible with EU law, and qualifies as an article 21(4) legitimate interest. This should not be excluded a priori, in particular in view of the importance of biodiversity, environmental protection, and employment in the EU treaties as well as broader international commitments to the right to food.

Food production is, of course, an area of great economic and geopolitical importance. According to UN estimates, by 2050 the world population will increase to nine billion, and catering to this additional demand would require an increase of 70% more food. This puts a strong pressure to increase output, which intensifies even more environmental impact, given increasing sustainability challenges (degradation of soil and reduction of arable land due to urban sprawl, water scarcity, biofuel consumption, climate change, etc.). Food security becomes an increasingly important issue on the agenda of the developing world.

The projected mergers in the seed and agro-chem industry will greatly affect the future control of food production and innovation in order to improve yields and feed the world. One may ask if such important decisions should be based on a narrowly confined test that mostly focuses on effects on output, price and to a certain extent innovation, or if one should adopt a broader consideration of the full social costs of such transactions, to the extent that these may be assessed and eventually quantified.

This may have the additional benefit to enable the participation in the merger process as third parties of a number of NGOs representing broader citizens’ interests in environmental protection and biodiversity, which is currently impossible with the quite narrow procedural requirements for third party intervenors in EU merger control (as the test for admission as third party intervenors is usually met only by competitors, suppliers, and customers). I think that all the affected interests and stakeholders should be offered an opportunity to participate in the decision-making process, thus increasing its efficiency (if one takes a participation-centred approach) and legitimacy, in particular for matters of major social importance as is the control of the global food supply chain(s).

It may be argued, if one takes a pessimistic, Malthusian perspective, that we are doomed to face famine and malnutrition, unless considerable amounts of investment are made in R&D in this sector. In view of the fall of public investments and the important role private investments have played in this area, one may argue that higher levels of consolidation in the sector could lead to higher profitability (at the expense of farmers) without necessarily leading to immediate effects on food prices, as the farming segment is driven by atomistic competition in most markets, and therefore farmers will not have the ability to pass on, at least in the short term, the eventual overcharges to the final consumers. Of course, such an approach may not factor in the effects of these mergers to the livelihood of around half a billion farmers in the world and their families, most of whom do not benefit from subsidies guaranteeing an acceptable standard of living.

It also assumes that higher profitability would lead to higher investments in R&D, a claim that has been recently questioned by research indicating that large firms prefer to retain earnings and distribute them to shareholders and the management rather than invest them in R&D. But, more generally, a simple question that one may ask is “are the projected mergers necessary in order to promote innovation in this sector”? Answering this question may bring a great sense of clarity as to the various dimensions of these mergers competition authorities would need to take into account. And the burden of proof to provide a convincing answer to this question remains on the notifying parties!