The Supreme Court’s 1962 Brown Shoe decision, which found a merger to be anticompetitive even though it would have reduced prices for consumers, remains one of the most controversial precedents in merger case law. However, Herbert Hovenkamp writes that subsequent Supreme Court decisions enervated the 1962 decision, rendering Brown Shoe obsolete.
The Supreme Court’s 1962 Brown Shoe decision is sharply at odds with what courts do today in merger cases. Its troublesome doctrine was that antitrust law should be concerned about market concentration without regard to prices. It even indicated approval for the district court’s conclusion that the merger was harmful because it resulted “in lower prices or in higher quality for the same price….” Under that rationale, the principal beneficiaries of merger enforcement are not consumers or labor. The main benefits accrue to firms who are not integrated or are dedicated to older technologies.
Today, by contrast, merger policy is heavily focused on mergers that threaten price increases or sometimes reduced innovation. Brown Shoe is indefensible if antitrust is concerned about competitive market performance and innovation. It retains vitality only to the extent that it is dictated by precedent. To be sure, Brown Shoe has never been explicitly overruled, but neither have any of the decisions discussed below.
Brown Shoe was the product of a brief period in which the Supreme Court lost touch with antitrust goals of protecting competition by facilitating lower prices, higher output, and unrestrained innovation. The Supreme Court produced more than a dozen merger decisions subsequent to Brown Shoe, however, and many speak to these issues. An important one is Philadelphia Bank, a year later, which created the important structural presumption for assessing mergers. The banks argued that while the merger might limit competition in the local market around Philadelphia, it actually led to increased competition in a larger market that included New York. The Court responded with its “single market” rule, noting that the Clayton Act condemns a merger whose anticompetitive effects are felt in any market, without considering possible tradeoffs that might occur in a different market.
Philadelphia Bank’s diagnosis of harm was critical: not concentration for its own sake. Rather, the Court was concerned that greater concentration in the affected market would lead small businesses to face “greater difficulty in obtaining credit.” Whether one regards that as an output reduction or a price increase, the Court’s focus was on injury to the banks’ business customers, who in this case were small businesses. A single year after Brown Shoe, the Philadelphia Bank decision already began to flip the script. The Court also rejected the argument that the merger might stimulate economic development in the long run. Merger law does not depend “on some ultimate reckoning of social or economic debits and credits…. A social choice of such magnitude is beyond the ordinary limits of judicial competence.” So much for the view that merger law should look beyond effects on price or product quality to some broader set of social or economic concerns.
A year later, the Supreme Court decided the El Paso Natural Gas case. El Paso sold natural gas via pipeline to California. Its nettlesome competitor was Pacific Northwest, who repeatedly bid against El Paso for contracts. Although El Paso won all of the bids, it lowered some prices in order to do so. In one instance, El Paso had initially bid 40 cents/Mcf (thousand cubic feet), but then lowered its bid to 30 cents/Mcf in response to Pacific. Justice William Douglas’ opinion concluded that one must be wearing “blinders” not to see the influence of Pacific Northwest on El Paso’s pricing. The Court cited Brown Shoe only for the proposition that the Clayton Act deals with “probabilities, not certainties.” The merger was condemned because it would have led to higher prices.
In the Continental Can decision that same year, the Court condemned a merger between a maker of metal cans and one of glass bottles, looking entirely from the perspective of customers who chose between them. “This may not be price competition but it is nevertheless meaningful competition between interchangeable containers.” As a result, the Court concluded, each product served as a “deterrent” limiting the firms’ power “to reap the possible benefits of their position by raising prices above the competitive level….” Concerns with price and variety competition dominated.
When these cases were decided in the mid-sixties, neither the antitrust agencies nor the courts had useful empirical theory about the link between mergers and market performance. That would come later. Even the 1968 Merger Guidelines did not expressly tie merger policy to the threat of higher prices, although the 1982 Guidelines did. As the El Paso case made clear, when the Court had evidence relating mergers to higher prices for customers, it used it.
The Court’s subsequent General Dynamics decision (1974) is often cited for its conclusion that market share data can be misleading. That is true, but why was it misleading? Because the defendant’s depleted reserves and contractual commitments showed “that its power to affect the price of coal” was limited. That is, the concern was not concentration for its own sake but market price manipulation, something that only a firm with a significant market share could pull off.
Then in Marine Bancorporation, the same year as General Dynamics, the Court rejected a merger challenge claiming that the Spokane banking market was a highly concentrated oligopoly “with the capacity effectively to determine price and total output.” The acquired firm, located outside the market, was perceived by incumbents to be a potential entrant whose presence served to “temper” their oligopolistic behavior. The government’s theory was that the “elimination of such present procompetitive effects” coming from just outside the market could lead to higher prices. The Supreme Court rejected the government’s claim as too speculative, but not the underlying concern about higher prices. Further, the Court observed, the parties never “undertook any significant study of the performance, as compared to the structure of the commercial banking market in Spokane.” As in Philadelphia Bank and General Dynamics, that crucial observation meant that a concentrated structure could not be condemned for its own sake. Its role was to provide evidence about performance.
If these decisions were not enough, the Supreme Court also addressed three questions of private plaintiff standing to challenge mergers. The question was what kind of injury must a private plaintiff show in order to challenge a merger. In Brunswick, the Court held that a plaintiff complaining that after a merger the defendant invested in and rehabilitated the plaintiff’s competitor was not a victim of “antitrust injury.” The rationale for the plaintiff’s claim—that it was forced to compete with a superior firm—was “inimical to the purposes” of the antitrust laws. The author of the opinion was Thurgood Marshall, an aggressive pro-enforcement liberal. So much for Brown Shoe’s indication that a merger should be condemned because it enabled the post-merger firm to produce better quality shoes, injuring competitors.
Then, in Cargill, the Court, speaking through liberal Justice William Brennan, applied the Brunswick rationale to the claim that after a merger, the post-merger firm would charge lower (but nonpredatory) prices. The plaintiff claimed that the post-merger firm “would lower its prices to a level at or only slightly above its costs.” In order to compete, the plaintiff would have to lower its own prices in return and would “suffer a loss in profitability.” The Court quoted Brunswick: “It is inimical to the purposes of these [antitrust] laws to award damages for the type of injury claimed here.” A few years later, the Supreme Court granted standing to a state, which federal antitrust law treats as a private plaintiff, to obtain an injunction against a grocery store merger. The state’s theory was that “the prices of food and non-food products might be increased.” Antitrust’s private action provisions for damages and injunctions purport to grant standing to every person who is injured by an antitrust violation. Justice John Paul Stevens held, however, that the injury must be one that is consistent with antitrust’s purpose. That includes higher prices, but not lower prices or product improvements.
Through a series of merger decisions stretching from the mid-sixties through the mid-eighties, the Supreme Court, often led by its pro-enforcement justices, demolished any indication in Brown Shoe that mergers should be condemned for reasons other than their threat to raise prices or reduce competition in quality or innovation. The policy stated in the 2010 Horizontal Merger Guidelines got it right. As other zombies, Brown Shoe should be put back in its coffin.
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