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Effects of the 2010 Horizontal Merger Guidelines on Merger Review: Based on Ten Years of Practical Experience

Review of Industrial Organization volume 58, pages 213–234 (2021)Cite this article

Abstract

We assess how the 2010 Merger Guidelines have been applied by agencies and courts. We conclude that:

  • Increased reliance on direct evidence of market power has improved the analysis of mergers, but courts still sometimes overemphasize market definition.

  • Market concentration thresholds remain a reflection of agency practice rather than economic research.

  • The Upward Price Pressure concept yields useful intuition, but UPP can be overused.

  • The benefits that could arise from the renewed focus on coordinated effects are squandered by the lack of a rigorous economic framework recognizing the connection to unilateral effects.

  • The lack of merger retrospectives remains a problem.

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Notes

  1. The differentiated Bertrand model, more frequently used in practice, does not generally lead to the use of an HHI, though under logit demand one can show that diversion ratios are approximately related to the change in the pre-merger HHI (see, e.g., Miller et al. 2017).

  2. See Carlton 2007. Similarly, courts should dismiss vertical cases where there are many meaningful competitors at each affected stage of the vertical chain.

  3. Aside from the economic logic for deemphasizing market definition, we suspect that part of the motivation for this deemphasis was so that, in litigation, the government agencies would not be tied down to using only market definition to establish market power.

  4. The DOJ, which opposed the merger, did not deny that such studies could be relevant but argued that the past merger was different from the current one.

  5. The question of market power in a merger case is about whether the merger leads to a substantial increase in market power relative to the pre-merger situation. Similarly, the question of market definition in a merger case is based on whether a hypothetical monopolist would raise prices relative to pre-merger prices. In our experience, the ability to focus on changes relative to the pre-merger case makes the evaluation of market definition and market power more manageable and useful in merger cases than in Sect. 2 cases, where the appropriate comparisons are to a counterfactual world without the alleged conduct being challenged. This means that the evaluation of market definition and market power in Sect. 2 cases is really entirely the same exercise as the evaluation of competitive effects from the conduct.

  6. We were not involved in the Sabre/Farelogix matter and take no position on the merits of the case. Carlton worked adverse to Sabre in American Airlines, Inc., vs. Travelport Inc. et al. (2011–2013).

  7. We offer no opinion here on the merits of any arguments that were advanced in the Amex case, but rather comment only on the fact that excessive reliance on market definition got in the way of assessing those effects. In particular, that case involved allegations with regard to certain practices of American Express that restricted merchants’ ability to steer customers away from using American Express cards in favor of cards that were less costly to the merchants. The Court wrestled with what is an admittedly complicated issue of how to define an antitrust market when the platform is multi-sided. But the focus on market definition was largely a distraction—which was mandated by the Court’s overreliance on market definition. Where one comes out on the market definition question is irrelevant to an examination of the total economic effect of the restrictions in the case. Yet, by focusing on market definition, the Court ignored relevant economic evidence on the effect of the restrictions. For a discussion of market definition and effects in Amex, see: Justice Breyer’s dissent in Ohio et al. v. American Express et al. (2018); Hovenkamp (2019); Carlton (2019); Carlton and Winter (2018); and Katz (2019). For a different view, see Evans and Schmalensee (2019). Carlton has served as an expert adverse to credit card companies.

  8. We were not involved in the Evonik matter and take no position on the merits of the case.

  9. For a more extended discussion of vertical effects, see Carlton (2020).

  10. It is the curvature of demand together with any other efficiencies that will matter. This point is well understood, including by Farrell and Shapiro. Indeed, they are aware of all these criticisms.

  11. UPP requires fewer own- and cross-elasticities than are required for merger simulation (only requiring them for the merging parties’ products); but often when the data are available to estimate the relevant elasticities for UPP in a reliable way, the data are also available to estimate the relevant elasticities for merger simulation.

  12. Based on Monte Carlo experiments, Miller et al. (2017) show that UPP is a good predictor of price effects from a merger simulation that uses several different demand systems. But that paper makes clear that one circumstance in which UPP is not likely to be a reliable predictor is when there are efficiencies.

  13. Indeed, in such models, the pass-through rate depends on the relative bargaining strength of the two parties; the second-score auction implicitly gives all of the bargaining strength to the seller and none to the buyer.

  14. Seven hospital mergers were challenged by federal or state antitrust authorities in the late 1990s/early 2000s, but allowed by the courts (U.S. Department of Justice and Federal Trade Commission 2004, Chapter 4, p. 1). FTC retrospectives of one of these seven mergers (which had been challenged only by the state of California) and three other consummated mergers (which had not been challenged) found that, in at least two of the studied mergers, post-merger prices increased. These studies were: Tenn (2008) which finds price increases at one of the merged hospitals, relative to a control group; Garmon and Haas-Wilson (2011) which finds price increases following the Evanston-Highland Park merger, but mixed results following the St. Terese-Victory merger; and Thompson (2009) which finds mixed results. See also, Vita and Sacher (2001) finding price increases following the 1990 Dominican-AMI merger.

  15. See, e.g., FTC Chairwoman Ramirez’s (2013) statement that the retrospectives “played a crucial role in reinvigorating the agency’s hospital merger enforcement efforts after a string of losses.”

  16. We are aware of three other published studies that compare the predictions of merger simulations to post-merger price increases that are estimated with the use of difference-in-differences techniques: Weinberg (2011); Weinberg and Hosken (2013); and Björnerstedt and Verboven (2016). These studies find mixed results for the performance of the merger simulation models that are tested; in some cases, the simulations’ predicted price increases were in the same range as the actual price increases (which are themselves econometric estimates), but in other cases the simulations underpredict or overpredict the actual price increases. All of these authors call for further study, and we concur.

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Acknowledgements

We thank Joseph Farrell, Nathan Miller, Gregory Pelnar, Carl Shapiro, Gloria Sheu, Theresa Sullivan, and Larry White for their assistance and very helpful comments.

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Authors and Affiliations

  1. Booth School of Business, University of Chicago, Chicago, IL, 60637, USA

    Dennis W. Carlton

  2. NBER, Cambridge, MA, USA

    Dennis W. Carlton

  3. Compass Lexecon, 332 S. Michigan Avenue, Suite 1300, Chicago, IL, 60604, USA

    Dennis W. Carlton

  4. Compass Lexecon, 555 12th Street, NW, Washington, DC, 20004, USA

    Mark A. Israel

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Carlton, D.W., Israel, M.A. Effects of the 2010 Horizontal Merger Guidelines on Merger Review: Based on Ten Years of Practical Experience. Rev Ind Organ 58, 213–234 (2021). https://doi.org/10.1007/s11151-020-09798-4

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Keywords

  • Horizontal merger guidelines
  • Market definition
  • Merger retrospectives
  • Merger review
  • Unilateral and coordinated effects
  • Upward price pressure