Ten years of Merger Guidelines: A retrospective,critique, and prediction

The period since the 1982 Merger Guidelines is surveyed and assessed, including the 1992 Merger Guidelines. The 1982 Guidelines were an improvement in economic underpinnings and in merger policy, but the Guidelines' focus on short run market power is not a sensible basis for merger policy. The 1992 Guidelines continue this focus on short run market power, attempt to provide some clarifications of current enforcement policy, but add some questionable economics to the stew. The merger policy laid out in the 1992 Guidelines will not survive, since it does not suitably come to grips with the fundamental bases of the social costs and benefits of mergers and ignores ‘competitiveness’ issues.     

The Supreme Court and Beer Mergers: From <Emphasis Type="Italic">Pabst/Blatz</Emphasis> to the DOJ–FTC Merger Guidelines

The beer industry in the U.S. has undergone significant structural change in the post-WWII period. The industry also was the object of prominent antitrust challenges to horizontal mergers proposed during this time frame. This paper documents the trend of increasing seller concentration in the brewing industry and assesses the role that mergers played in this structural transformation. We also analyze the change in merger policy that has taken place since the Supreme Court originally addressed mergers in the beer industry as compared to current antitrust enforcement under the DOJ–FTC Merger Guidelines and recent judicial decisions.     

The Horizontal Merger Guidelines of 1992

The 1992 Horizontal Merger Guidelines of the Department of Justice and the Federal Trade Commission outline an enforcement policy which makes a long overdue break with its predecessors in awarding no decisive or predominant role to market concentration as a criterion of anticompetitive effect. However, the new policy does not provide an adequate substitute criterion: the tests that it prescribes for screening merger proposals are so specified that a potentially large proportion of anticompetitive mergers can escape challenge without showing any promise of improving efficiency. The time is ripe for a comprehensive inquiry aimed at formulating a more satisfactory policy.     

Reliable guidelines? A European comment

Merger guidelines mean to reduce the uncertainty related to the possible anti-competitive impact of mergers/takeovers by businesses undertaking them. It is doubtful, according to the author, whether the Revised Merger Guidelines of two US Antitrust Authorities achieve that goal. They would seem to be too ‘theoretical’ in the face of inevitably unique merger events; moreover, the theory in the Guidelines has some important weaknesses and limitations. From an EC competition policy point of view, an efficiency trade-off for a dominant-firm merger is considered dubious procedure.     

Estimating Differential Dynamic Merger Effects on Market Structure and Entry in Related Markets

The U.S. and EU merger guidelines emphasize “ease of entry” arguments but little is known about the dynamic impact of realized mergers on market structure. This study provides insights on this topic with the use of detailed firm-level data on the memory chip market. Our estimation results provide evidence for differential merger effects on market structure. These effects depend on whether the mergers are dominated by market-power or efficiency gains. While efficiency-dominated mergers cause exit, market-power-dominated mergers attract entrants, and these effects are increasing over time. We also find that market-power mergers have a larger effect on entry than efficiency mergers have on exit. Our results show that mergers can reduce the number of potential entrants into related product markets and serve as an instrument to “reduce the likelihood of entry”.

     

Airline horizontal mergers and productivity: Empirical evidence from a quasi-natural experiment in China

The identification of possible efficiency gains is a core issue in the analysis of mergers. However, empirical studies are generally subject to bias caused by merger endogeneity. In the early 2000s, the Chinese government pursued a strategy of merging small firms in key industries to create large enterprise groups. Mergers created by this policy provide a rare quasi-natural experiment to investigate the effect of mergers. We take the opportunity to apply the difference-in-differences approach to identify the effect of mergers on the efficiency of Chinese airlines. Overall, our analysis suggests that the mergers increased the productivity of Chinese airlines.     

Innovation and Merger Decisions in the Pharmaceutical Industry

There is increasing public policy concern about the potentialeffects of mergers on innovation. This paper provides acomparative analysis of approaches to innovational competitiontaken by the E.U. and U.S. merger authorities in a sample of threerecent, major, pharmaceutical mergers. The European Commission'sapproach appears lighter handed and places more explicit emphasison effects in downstream markets. The uncertainties in the analysisof dynamic effects of mergers on innovation, even in pharmaceuticals,suggest the need for a cautious approach and for careful framingof any merger remedies where R & D projects and components, ratherthan approved drugs, are involved.     

Merger policy greatly simplified: Building on keyes

This comment urges a recognition of the fact that the main goal of antitrust, as revealed in a century of consequences, is not economic efficiency or consumer protection but the dispersion of power and decision-making in the business world. Building on Lucile S. Keyes' proposal for improving merger guidelines, it argues that the “true” aims of merger policy can be more efficiently pursued by disallowing all mergers involving very large firms that cannot be justified on efficiency grounds and ignoring mergers involving all other firms.     

Harm to Competition Under the 2010 Horizontal Merger Guidelines

In August, 2010, the Antitrust Division and the Federal Trade Commission issued new Guidelines for assessing horizontal mergers under the antitrust laws. These Guidelines were long awaited not merely because of the lengthy interval between them and previous Guidelines but also because enforcement policy had drifted far from the standards articulated in the previous Guidelines. The 2010 Guidelines are distinctive manly for two things. One is briefer and less detailed treatment of market delineation. The other is an expanded set of theories of harm that justify preventing mergers or reversing mergers that have already occurred. The 2010 Guidelines reflect a growing belief that in markets where product differentiation is minimal competition tends to be robust and the structural presumptions stated in previous Guidelines were too harsh. By contrast, where product differentiation is substantial the Guidelines?? approach tended to define markets too broadly, overlooking significantly anticompetitive possibilities. Under the 2010 Guidelines unilateral effects analysis relevant markets can be very small, often limited to three or four firms, and excluding some obvious substitutes. Markets in merger analysis are not defined for their own sake, however, but rather to ascertain whether a particular alteration in market structure covered by the merger provisions will be likely to facilitate a price increase. The 2010 Guidelines address four substantive merger concerns: exclusion, restraints on innovation, unilateral effects, and coordinated effects. The Guidelines have a separate section on mergers limiting ??innovation and product variety,?? treated mainly in the category of unilateral effects. The 2010 Guidelines are more flexible than previous Guidelines and also more catholic about the types of harms that mergers might cause and the techniques that can be used to assess them. Older Guidelines were excessively wed to methodologies that were at the forefront of applied merger analysis when they were drafted, but that tended to make the Guidelines obsolete as new methodologies became available. Not only do methodologies change, they are also specific to the situation. Further, they tend to be well developed in the literature and accessible to experts consulted by those defending a merger as well as to the government economists who employ them. To be sure, there is a tradeoff between flexibility and guidance. Often we can have more of one only by giving up some of the other, and that tradeoff is clearly present in the 2010 Guidelines.     

The Gradual Response of Market Power to Mergers in the U.S. Steel Industry

Studies of the impact of horizontal mergers on market power typically impose an immediate adjustment of market power following a merger. This paper adopts an alternative procedure to estimate the effect of four mergers on market power in the U.S. steel industry. Namely, by estimating a switching regression model that incorporates profit-maximizing behavior, the results show that mergers generally increased market power in the steel industry. However, it did take some time for market power to fully adjust after each merger.     

The Australian merger guidelines: A comparison with the U.S. merger guidelines

Modern Australian antitrust had not begun when the first U.S. merger guidelines appeared in 1968. Even now, twenty five years later, no similarly detailed, formal administrative guidelines have been developed in Australia. This paper reviews the way in which the AustralianTrade Practices Act 1974 handles mergers and market definition, and considers how the Courts and the Trade Practices Commission, Australia's sole antitrust enforcement agency, have handled market definition and evaluated mergers. The key role played by the Trade Practices Tribunal, a quasi-judicial body, in influencing the Australian approach to mergers and market definition is highlighted. Contrasts are made with the 1992 American guidelines, and reasons for the different approaches are suggested.     

Merger law,policy, and enforcement guidelines in Canada

The paper describes Canada's merger law, policy, and enforcement activity. The contents of Canada's recently issuedMerger Enforcement Guidelines are explained, analyzed, and compared to the U.S. Merger Guidelines. The roles of concentration, market share, entry conditions, and efficiency defenses in Canadian merger cases are assessed. Reference is made to some recent decisions of Canada's Competition Tribunal, a body created as a part of the major competition policy reforms contained in the 1986 Competition Act.     

Comment on “Merger Policy in the United States”

This paper comments briefly on a merger policy article by Dennis Mueller. It concurs with Mueller's judgment that X-efficiency consequences are of crucial relevance in developing a sound antitrust policy toward mergers. It agrees also that firms proposing mergers overstepping structural guidelines should be permitted an efficiencies defense, but it stresses the difficulties of making ex ante efficiency predictions.     

Threshold tests for the control of mergers: The Australian experience

Merger policy in Australia has been formulated for a small open economy. Tight merger control has been avoided in order not to impede rationalisation and improved international competitiveness. From 1977 to early 1993 a merger or acquisition was only prohibited if it would lead to a firm gaining a dominant position in a substantial market. As a result, few mergers were stopped and some which would probably have substantially lessened competition were allowed to proceed without detailed investigation. Since January 1993 a threshold test of substantial lessening of competition has applied — a reversion to the test included in the original 1974 Trade Practices Act. This is likely to mean that more proposed mergers will come under scrutiny and the trade-offs between efficiency gains and anti-competitive detriments will need to be evaluated in a greater number of individual cases. New draft merger guidelines released in November 1992 generally reflect contemporary thinking in industrial economics.     

Merger efficiency gains: Evidence from a large transport merger in france

Many industries are seeing an increase in concentration, leading to a discussion on the effectiveness of horizontal merger enforcement. The policy debate shows that one of the key arguments put forward when supporting potential mergers is the possibility of realization of merger efficiency gains, specifically in the transport industry. Yet, there exists little empirical evidence on the actual effects of realized mergers on cost efficiencies. We exploit a large and highly debated merger that took place in the French transport industry to evaluate whether a merger between two major transport groups may give rise to merger efficiency gains. We exploit the industry setting to employ a difference-in-differences methodology evaluating the effect of the merger on operating costs of merging transport groups. Our results show that, no matter the specification considered, we cannot conclude that the merger resulted in any merger specific efficiency gains for the merging parties. Our study relies on the use of several control groups and is robust to a great number of robustness checks as well as to the introduction of heterogeneous treatment effects, depending on the identity of the merging party, as well as the closeness of competition of local operators. Overall, our study contributes to a growing number of case studies undertaken by economists that can help determine whether horizontal merger policy is being properly enforced.     

Merger Guidelines and the Limits of Our Understanding

The merger guidelines have evolved from a structural standard for determining the legality of mergers to an open-ended evaluation that attempts to predict whether some specific harm to competition is likely. These efforts have been unsuccessful; moreover, mergers generally contribute no positive economic gain. Blocking mergers that may have little or no adverse effect on competition will not cause significant economic harm; but the failure to interdict mergers that do cause harm imposes significant costs on the economy. Merger enforcement policy should return to the structural method of the 1968 Guidelines as well as impose stricter structural standards.     

EFFICIENCY GAINS AND STRUCTURAL REMEDIES IN MERGER CONTROL*

This paper studies the role of structural remedies in merger control in a Cournot setting where (endogenous) mergers are motivated by prospective efficiency gains and must be submitted to an Antitrust Authority (AA) which might require partial divestiture for approval. From a merger policy perspective, this paper's main contribution is two‐fold. First, it shows that if mergers do not involve all firms in the industry, then merger remedies help the AA to increase consumer surplus only if assets are divested to competitors already in the market. Second, it presents a model which clarifies that there can only exist social costs to ‘over‐fixing’ the anticompetitive effects of a merger if merger review policy treats mergers as one‐time events. When a more dynamic view is taken of sequential merger review, then there can never be an ‘over‐fixing’ problem. In this case, however, remedies are shown to be needed to make myopic merger review optimal.     

Analytical Screens for Electricity Mergers

Electricity mergers pose distinct challenges for competition policy. Electricity demand is highly inelastic in the short run, storage is limited, and transmission constraints limit the ability to substitute generation at other locations. As a result, a merger can affect prices in many different markets and even generators with small market shares may be able to exercise market power. The U.S. Federal Energy Regulatory Commission’s approach for screening horizontal mergers, based on the concentration thresholds in the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines, can fail to identify mergers that lessen competition, and mergers that fail the FERC screen may have no significant anticompetitive effect. We propose competitive residual demand (CRD) analysis, which examines the supply curves of the markets affected by a merger and considers the ability and incentive of firms to raise prices before and after a proposed merger. CRD analysis is a relatively easy way to address the incentives for generators to exercise market power and relies on data that are often available. Vertical (convergent) mergers between electricity and gas raise additional concerns, and we propose a methodology to screen vertical mergers.     

Industry costs and consolidation: efficiency gains and mergers in the U.S. railroad industry

Since partial deregulation in 1980, there has been a massive consolidation of firms in the U.S. railroad industry premised largely on efficiency gains. We estimate a cost function and use it to calculate cost effects for specific mergers and for all mergers at the industry level from 1983–2003. Our central results are that consolidation in the railroad industry accounts for about an 11.4 percent reduction in industry costs (more than $4 Billion in 1992 prices), and that while there are tremendous differences across mergers with respect to the direction, level, timing, and source of cost impacts, most mergers result in cost savings.