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.     

Efficiencies,market power and horizontal merger

In June 1982 the Justice Department issued itsMerger Guidelines which specify in terms of the Herfindahl index (H) what combinations of merger size and post-merger H are likely to lead to a merger challenge. This paper assesses theseGuidelines using Williamson's (1968) well-known model in which an optimal merger policy is viewed as one that considers both the price and cost consequences of merger. The Williamson model is recast in terms of H and changes in H and linked to theGuidelines. This allows an assessment of the welfare congequences of an industry merger for any given level of concentration and merger-produce changes in concentration. Among the conclusions are that, consistent with theGuidelines, higher values of H make socially successful mergers less likely, and a more appropriate, if perhaps not more feasible, focus for theGuidelines are coordination adjusted measures of concentration and merger size.     

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.     

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.     

Economics at the FTC: Mergers,Dominant-Firm Conduct,and Consumer Behavior

Economists at the Federal Trade Commission (FTC) pursue the agency’s competition and consumer protection missions. In this year’s essay, in antitrust, we discuss the new Merger Guidelines, three exclusion cases, and R&D issues in the Thoratec/HeartWare merger and the Google/AdMob merger. In consumer protection, we discuss the FTC’s new rule on debt settlement, our efforts to improve disclosures, and our recent work on appliance energy disclosures.     

The 1984 justice department guidelines toward horizontal mergers

This paper examines the treatment of economic efficiency in the 1984 revision of the Department of Justice's antitrust Merger Guidelines. An overview of the evolution of the guidelines toward horizontal mergers is presented emphasizing three key areas where changes have occurred. A model is developed following O. Williamson framework is extended to link changes in market concentration (as measured by the Herfindahl-Hirschman Index) that result from a horizontal merger to changes in market power (as measured by price-cost margins). Finally, the cost reductions (economies) required to offset increases in market power are developed in a simulation model. The paper concludes with an application of the model to the LTV-Republic Steel merger.     

Recent Developments at DG Competition: 2013–2014

The Directorate General for Competition at the European Commission enforces competition law in the areas of antitrust, merger control, and state aids. In 2013–2014 important antitrust decisions (Samsung and Motorola) were in the area of standard essential patents. In merger control the European Commission carried out an ex-post evaluation of past mergers in the INEOS/Solvay case in order to obtain valuable insights for the merger under review. In state aid, as a part of the State Aid Modernisation programme, guidelines were prepared to help EU member states to design and carry out ex post assessments of state aid schemes.     

The 1968 Merger Guidelines: In Praise of Committing to Restraint

The 1968 Merger Guidelines of the U.S. Department of Justice remain a model for competition agencies around the world because they courageously articulated when the Department would exercise its prosecutorial discretion by not challenging a horizontal merger.     

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.     

The efficiencies defense and commercial bank merger regulation

A binomial probit model is used to estimate the Board of Governors' commercial bank merger policy during the pre-deregulation era from 1963 to 1980. The Board's merger policy is shown to be consistent with a ‘Williamsonian’ efficiencies policy. This contrasts with the merger antitrust environment of the time in which merger-induced efficiencies were not considered. The results also suggest that the Board was influenced by the empirical cost studies of the time.     

Efficiency and competition: The reagan administration's legacy in merger policy

The full effects of the latest merger wave will not be evident for a number of years. Further, many forces other than the Reagan administration's permissive policy contributed to the surge in asset redeployment that characterized the 1980s. Nevertheless, the rationale for this policy should be evaluated as promptly as possible, since antitrust remains the nation's primary policy instrument for dealing with untoward effects of merger. Both empirical evidence and underlying theory contradict beliefs in the efficiency-enhancing character of most mergers and of the market for control. Several emerging and potential harmful effects are noted.     

Recent Developments at DG Competition: 2017/2018

The Directorate General for Competition at the European Commission enforces competition law in the areas of antitrust, merger control, and state aids. This year’s article provides first a general presentation of the role of the Chief Competition Economist’s team and surveys some of the main achievements of the Directorate General for Competition over 2017/2018. The article then reviews: the Google Search (Shopping) case, the role of price discrimination in state aid cases; and the use of counterfactuals in merger cases where alternative transactions might have occurred absent the merger.     

Economics at DG Competition, 2011–2012

This paper discusses a selection of cases and important policy developments in the enforcement activities of the Directorate General for Competition at the European Commission during the past year (2011?C2012). In particular, it illustrates the importance of competition policy in the area of financial markets based on the Deutsche B?rse/NYSE Euronext merger decision, discusses the role that the analysis of innovation can play in merger cases based on recent transactions in the hard disk drive industry, and illustrates the rising role of economic analysis in European state aid control.     

Electricity Merger Analysis: Market Screens, Market Definition, and Other Lemmings

Much discussion and effort have been devoted to the use of market power screens to detect market power that might arise from existing generation asset portfolios or utility acquisition of new generation assets. The quest is to find the “Holy Grail”: a market power detection mechanism that minimizes the costs to all parties involved while finding the majority of market power exercises. This article contends that market power screens should be utilized with caution in policy and litigation applications because while they meet the criteria of minimizing enforcement costs, they are often unable to detect many types of market power exercises that an electric utility might undertake. The article begins with a discussion of the polestar for all screens—the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines—and its limitations. Next, the article examines the accidentally correct, absolutely incorrect, and other outcomes that arise from the application of screens using FERC’s merger policy statement, “contestable load” analysis, and other examples. The Article concludes by noting that many types of market power exercises are undetectable with market power screens, and that better approaches would increase the probability of detection, given the low level of penalty current imposed upon those that wield market power.     

Using merger simulation models: Testing the underlying assumptions

Merger simulation is now widely used by economists to evaluate the likely competitive effects of a proposed merger. However, the reliability of a given merger simulation depends crucially on the reliability of the data used and the assumptions made. We discuss tests that can be used to assess the reliability of a merger simulation and show how these tests were applied in the context of the Volvo–Scania merger.     

Recent Developments at DG Competition: 2016/2017

The Directorate General for Competition at the European Commission enforces competition law in the areas of antitrust, merger control, and state aids. This year’s article provides first a general presentation of the role of the Chief Competition Economist’s team and surveys the main achievements of the Directorate General for Competition over 2016/2017. The article then reviews the economic work undertaken in one merger case between Dow/DuPont, which raised specific issues related to innovation, as well as in an antitrust case on parity clauses related to Amazon e-books.     

Entry-timing,business groups and early-mover advantage within industry merger waves in emerging markets: A study of Indian firms

Merger waves are periods of intense and concentrated merger activity which exhibit a wave-like pattern. Drawing upon the resource-based view, we examine the timing of entry and early-mover advantage within merger waves. Following a robust simulation-based methodology of wave analysis, we identify merger waves in eight industries during the time period 2000–2014. Firms affiliated to business groups were found to be early movers. A higher degree of internationalization is also associated with early movement of a firm. Within business groups, their multi-entity character is positively associated with early entry whereas their board interlock was negatively related with entry-timing. Further, early moving acquirers reap superior post-acquisition performance, thereby suggesting that early-mover advantages exist within merger waves.     

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 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.     

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.