Eleanor Fox provides her round-one comments on the draft Merger Guidelines.
The Department of Justice and Federal Trade Commission (the Agencies) draft Merger Guidelines would both revive law and address the new issues posed by the evolving digital economy and new financial strategies. The Agencies — overtly more aggressive than their predecessors in identifying mergers as anticompetitive — face a challenge. The challenge is to resuscitate the dynamic, pro-competition, lost perspective while applying the best of modern economics. Do the draft Guidelines meet the challenge? I conclude that they go a good way, but success depends on three things — two of which are within the Agencies’ control: (1) The Agencies should specify more clearly when each of the red flags in their 13 guidelines threaten significant harm to competition, (2) the Agencies should diligently assess the potential pro-consumer, pro-market virtues, as well as harms, of the mergers they vet, and (3) the courts would have to accept the dynamic pro-competition vision despite years of excessive hospitality to mergers.
This piece begins with history. It focuses on a preceding, dramatic inflection point: the Merger Guidelines of 1982, which decisively changed the course of antitrust for 40 years. They wiped away a worldview. The new Guidelines aim to resuscitate the worldview compatibly with sound modern economics.
I first make a brief comment on 1950s/1960s/1970s antitrust law including the first set of Merger Guidelines, which synthesized the then Supreme Court case law. Second, I turn to the dramatic change ushered in by the Merger Guidelines of 1982 at the start of the Reagan administration, and I recall what the Reagan Guidelines excised from the law. Third, I comment on how the draft Guidelines would restore the earlier dynamic vision and how well they do so consistently with modern economics. I do not address the coverage of the new issues but welcome it, for coverage of evolving economic concerns is exactly what a modernizing process should do.
II. The ’50s to ’70s
The 1950 statute, the 1960s caselaw, and the 1968 Guidelines. The Celler-Kefauver amendment to the Clayton Act of 1950 is our current statutory merger law. By enacting this law, Congress clearly meant to stop economic concentration in its incipiency. Its main goal was a political economy goal— to preserve democracy. The Cellar-Kefauver Amendment was a post-World War II law, driven by the specter of how Hitler used concentrated corporate power in the service of fascism. It also had economic ends. The United States had high trade barriers, as did most nations. Most major U.S. industries were highly concentrated, the industry leaders were seldom challenged, and the few big players had become both chummy and sleepy. Steel and cars were Exhibits A and B. It took Ralph Nader’s 1965 book Unsafe at Any Speed to alert the public to the scandalously low safety standards of Big Auto. High concentration accompanied by poor performance were laboratory facts that gave birth to the Harvard School of antitrust economics and the structure-conduct-performance paradigm that informed antitrust economics for years to come. In 1968, Harvard professor Donald Turner was Assistant Attorney General in charge of the DOJ Antitrust Division. Reportedly, with the guidance of his Harvard colleague Carl Kaysen, Turner and his staff wrote the 1968 Merger Guidelines, which were understood to be more conservative than the case law, giving it boundaries. (Of course, by today’s standards, it was very aggressive against mergers.)
The 1970s were a critical decade. The trading nations party to the General Agreement on Tariffs and Trade concluded the Tokyo Round of the agreement in 1979. Trade barriers went down dramatically. Strong and efficient German and Japanese firms threatened the complacent U.S. giants. As the world became more global, the U.S. became more concerned with global competitiveness, and the public and policymakers began to attack overregulation in all segments of life and economy. Overbreadth of antitrust law came into the crosshairs. Ronald Reagan won the presidential election of 1980 on the promise to get government off the back of business. The Chicago School of economics (trust the market, not the government) gained major traction. Reagan appointed distinguished Stanford Professor William Baxter as Assistant Attorney General of the Antitrust Division, and Baxter and team set out to change the course of antitrust. Two of the most powerful tools to do so were to be a program of filing amicus briefs in favor of antitrust defendants and revised Merger Guidelines. Also, 1974 was the first year of the business-friendly Supreme Court led by Chief Justice Warren Burger.
III. The Reagan Revolution
The antitrust laws did need a course correction. One logical corrective would have been a limiting principle, capping antitrust where it had gone too far. This corrective would mean listening to defendants’ and merging parties’ claims about why their conduct and transactions were good for the market and would improve the delivery of goods and services, and accepting those arguments where they made sense. But that was not the course chosen.
The course chosen was a U-turn: Economists would become king. Antitrust would be driven by price/output theory embellished with the presumptions that power to reduce output was rare and that business acts were efficient. Conduct and transactions would be prohibited only if they impaired the efficient allocation of resources, given the presumptions.
This was a wrenching change. The only concerns of the 1982 Merger Guidelines were merger to monopoly and mergers likely to produce collusion, with skepticism of the former and stress on the latter. While the Reagan Administration allayed criticism by labeling the Guidelines “evolutionary, not revolutionary,” antitrust experts understood. Professor Louis Schwartz of the University of Pennsylvania declared the 1982 Guidelines a device for “smuggling” the Chicago School into antitrust.
In summer/fall 1982 I published a special supplement to my merger book (Fox & Fox) describing the new Merger Guidelines in some detail for practitioners, and ending with this caveat:
“The Justice Department’s merger policy is confined to mergers that are ‘inefficient’ because they tend to produce lower output and higher prices relative to costs. The concern of the Congress that enacted the principal antimerger law, as reflected in numerous Supreme Court opinions, is broader. Congress was concerned with preserving, for social, political, and economic reasons, a dispersion of centers of decision-making, diversity, ease of access and freedom of choice, as well as price near cost. Congress wished to fulfill these ends by preserving a dynamic process of rivalry, always protecting opportunities for change by a maverick.” … June 18, 1982
The 1982 supplement advised business managers and antitrust counsellors to be cognizant not just of risks of collusion, but also the risks identified by the case law for mergers that block opportunities to deconcentrate markets in which firms already hold market power, remove important innovative forces, substantially increase concentration among top firms in highly concentrated markets, and significantly foreclose competitors from access to scarce inputs or to a substantial share of the business in a concentrated high-barrier market. The law was specially concerned with mergers between major firms that were important competitors of one another and which would take off the market the dynamic force of the rivalry between them.
As it turned out, the caveat to be alert to the risks spelled out in the case law and overwritten by the 1982 Guidelines was not too important for too long, for these were the days when the judiciary was deferent to the expert agencies, and hundreds of new judges were appointed by Reagan and presumably sympathetic to his laissez faire views. The 1982 Guidelines were soon absorbed into the law.
It was inevitable that antitrust would become more economically sophisticated. But it was never inevitable that its bite would become almost undetectable because of ideological premises that defied market realities and would make the law a paper tiger in the face of new waves of business consolidation, especially palpable in markets of necessities such as food, health care, energy, transportation, communications, and information.
IV. Picking up the Pieces
In the years following 1982, periodic revisions of the Merger Guidelines took up some of the slack. For example, eventually, the Guidelines recognized a violation based on the lost competition between leading merging firms, which the Agencies called “unilateral effects”—as if the concern were newly discovered. This concern was recognized from at least 1960 to 1982 as a basic, common-sense ground for concluding that a merger may lessen competition. Antitrust practitioners— as I then was— would flag this scenario as at the forefront of agency concern, and probably illegal.
The new draft Guidelines pick up the concerns that the 1982 Guidelines dropped. Red flags are raised for mergers that significantly increase concentration in highly concentrated markets; for mergers that eliminate substantial competition between firms; for mergers that increase the risk of coordination; for mergers that eliminate a potential entrant in a concentrated market; for mergers creating a firm that controls products or services that its rivals may use to compete; for vertical mergers that create market structures that foreclose competition and that create “a clog on competition … which deprives rivals of a fair opportunity to compete”; for mergers that entrench or extend a dominant position; for mergers that undermine innovation incentives, and others.
The tried-and-true concern that mergers may facilitate coordination has survived through the years. Concern for collusion was the heart of the 1982 Guidelines and is the subject of new Guideline 3. Collusion among rivals is the conduct and harm on which liberals, conservatives, and neo-liberals agree. Indeed, many conservatives and neoliberals would limit antitrust interventions to stopping cartels and mergers that are basically understandable as cartels. (Thus, the 1982 Guidelines.) The ground of controversy is the level of concentration at which harm to competition is a threat. The 1982 Guidelines introduced an HHI benchmark. The thresholds crept up through the years. The draft Guidelines would return to the 1982 level, while also expressing the same concern in market shares — greater than 30% — matching the guidance of Philadelphia National Bank, which remains good law. A return to a lower threshold for possible intervention is sensitive to increasing possibilities for collusion through use of artificial intelligence, as well as to new forms of market power that may not fit classic monopoly but is very real power that should be controlled.
Each of the 13 new draft guidelines states a concern, and a later section invites rebuttal evidence showing that no substantial lessening of competition is threatened by the merger.
The draft Guidelines faithfully state the variety of ways in which important forces that spur competition are softened or eliminated. But there is a problem of omission. All of the Guidelines are not created equal. Some specify (or imply) circumstances sufficient to infer that competition will probably be lessened (e.g., the merger removes head-on competition between market leaders in concentrated high-barrier markets, or it increases the risk of coordination). In these cases, a shift to rebuttal evidence is entirely appropriate and supported by case law. Others, (e.g., the merger eliminates a potential entrant, or furthers a trend towards concentration, or entrenches a dominant firm – without more facts) need specification of the conditions necessary to give rise to an inference of probable harm to competition. Yet, by one reading, each of the guidelines creates a presumption and shifts the burden to the parties to explain. Some but not all of the gap is filled by the text under the black letter commands— Thou shalt not ….” If the final iteration of the Guidelines fills the gaps — distinguishing presumptions from mere red flags from mere triggers to further analysis — the Guidelines could be a useful guide.
With the caveat above, the draft Guidelines are fully consistent with modern economics. The legal principles are in service of the aim to make markets work; to prevent mergers from taking off the market important forces that keep firms responsive, innovative, and resilient. The spirit of the Guidelines, if appreciated by the judiciary, could help turn the corner by shifting merger control from the reductionist paradigm of 1982, embellished incrementally thereafter, to a dynamic vision: merger law should safeguard the forces of competition, and mergers should not be allowed to compromise them. If the new Merger Guidelines make headway in shifting the perspective and in taking the neoliberal vision and presumptions out of the merger law, that will be success.
Author Disclosure: I do not have any conflicts. I am not working for any parties interested in the guidelines.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.