The first two papers in this special issue discuss the 2010 Guidelines from the perspective of the DOJ and the FTC respectively. These two papers are invaluable—especially because so much merger enforcement is not visible to the public, as it involves confidential information and the antitrust agencies seldom explain publicly their reasons when they do not bring an enforcement action. Both papers report that the 2010 Guidelines continue to provide an accurate description of how the two agencies analyze horizontal mergers. Both papers emphasize the centrality of Section 2 of the 2010 HMGs—“Evidence of Anticompetitive Effects” – to merger investigations.
“Ten Years of the 2010 HMG: A Perspective from the Department of Justice,” by Craig Peters and Jeff Wilder
Craig Peters and Jeff Wilder report on the DOJ experience with the 2010 Guidelines over the past 10 years. They summarize the DOJ perspective this way: “In our view, the 2010 HMG have aged well. They continue accurately to describe Agency practice and reflect current legal and economic principles of antitrust. Over the past 10 years, the 2010 HMG have only grown in force, as a number of courts have issued opinions endorsing the Agencies’ analytical approach to horizontal merger enforcement as outlined in the 2010 HMG.”
Peters and Wilder report that from August 2010 through the first quarter of 2020, the DOJ filed 91 complaints in federal court, 71 of which involved consent decrees that resolved the DOJ’s concerns, and 20 of which were “litigation” complaints. They dismiss concerns that the 2010 Guidelines would reduce the ability of the DOJ to challenge mergers based on their impact on market concentration; they cite data and state: “The structural presumption has remained an important element in the Division’s horizontal merger cases in the years since.” They further report: “In all six of the litigated Division horizontal merger cases that yielded a judicial opinion, the opinions directly cited the 2010 HMG concentration thresholds.” They go on to detail various ways in which DOJ merger enforcement has tracked the 2010 Guidelines. Their section on how the DOJ has continue to improve its evaluation of unilateral price effects, following Section 6.1 from the 2010 Guidelines, is especially valuable for antitrust economists.
“The 2010 Horizontal Merger Guidelines at Ten: A View from the FTC’s Bureau of Economics,” by Alison Oldale, Joel Schrag, Christopher Taylor
Alison Oldale, Joel Schrag, and Christopher Taylor report on the FTC experience with the 2010 Guidelines over the past 10 years. Their overall view is that “the revised Guidelines have contributed positively to the Commission’s merger enforcement program.” (abstract) Like their DOJ counterparts, they emphasize that Section 2 of the 2010 HMGs, “Evidence of Competitive Effects,” has proven to be a very valuable addition to the Guidelines, because it continues to reflect actual FTC practice in assessing mergers and because it helps guide and frame many merger investigations. They detail a number of examples that establish this point.
These authors also confirm what experienced practitioners know: There is a significant distinction between how mergers are investigated and how they are evaluated in court. Merger litigation places considerable weight on market definition and market shares: the means by which the government establishes a prima facie case that the merger is likely to substantially harm competition. The FTC authors explain that market definition and market concentration often play a much smaller role in merger investigations: “If direct evidence of the likely effects of a merger is available, less direct inferences from structural measures of concentration may add little to the analysis and therefore may be of secondary importance in investigations.”
The authors go on to explain how the FTC has implemented Section 6 of the HMGs when evaluating mergers where the primary concern is with unilateral effects, “which represent the bulk of Commission merger cases in recent years.” These examples help bring alive the analytical techniques that are described in Section 6 of the HMG and show how they work in practice. They indicate that Section 7 of the 2010 HMGs, “Coordinated Effects,” has had less impact, in part because “there may be some confusion” about how to interpret the concept of parallel accommodating conduct.
“Judicial Response to the 2010 Horizontal Merger Guidelines,” by Carl Shapiro and Howard Shelanski
Shapiro and Shelanski focus on how the 2010 Guidelines have fared in court. Historically, the merger guidelines have been treated with respect by the courts, and have (gradually) influenced the development of the case law. Shapiro and Shelanski observe this same pattern for the 2010 Guidelines. They find an especially clear shift in how the courts have analyzed unilateral effects. After the DOJ’s 2004 loss in its challenge to Oracle’s acquisition of PeopleSoft, the DOJ was skittish about challenging mergers based on unilateral effects, and the ability of the government to win in court based on showing significant head-to-head competition between the merging parties was in doubt.
That reluctance dramatically changed following the release and application of the 2010 HMGs—starting with the DOJ’s 2011 success in blocking H&R Block proposed acquisition of TaxACT.
Other areas where the 2010 Merger Guidelines have supported stronger antitrust enforcement include market definition, with clarifications of how to implement the hypothetical monopolist test properly—including defining markets around targeted customers—and greater skepticism towards arguments by the merging parties that entry will replace the competition that is lost through the merger.
In contrast, the expanded treatment of coordinated effects that is found in the 2010 Guidelines—including “parallel accommodating conduct” as a form of coordination—has not yet had a significant impact on the case law.
“The 2010 HMGs After Ten Years: Where Do We Go From Here?” by Steven Salop and Fiona Scott Morton
Salop and Scott Morton build on the 2010 Guidelines by identifying further changes that they believe would support stricter merger enforcement. Their starting point is that Congress intended to prohibit mergers that “may” substantially lessen competition; consequently, effective merger enforcement should not place an undue burden of proof on the government to prevail in court when challenging a merger—especially given the resource constraints that face the government. They acknowledge that some of the changes that they advocate would require new legislation—and not merely a change in merger enforcement policy at the DOJ and the FTC.
Salop and Scott Morton recommend creating a presumption against mergers that generate a Gross Upward Pricing Pressure Index (GUPPI) of more than 10%—with no safe harbor based on a low GUPPI. They also favor reversing the increase in the HHI thresholds that was made in the 2010 Guidelines. Complementing these changes, they recommend expanding potential competition analysis to take a tougher approach to mergers between firms that might compete in the future. In particular, they urge the agencies and the courts to focus on the expected impact of possible future competition between the two merging firms—not just on its probability.
Salop and Scott Morton call to “improve the analysis of coordinated effects” as one way to support stricter merger enforcement. They justify this recommendation in part to address what they see as a growing danger of algorithmic coordination.Footnote 9 They point out that “except where there is a maverick, coordinated effects analysis has been stuck in a process of weighing a checklist of facilitating and complicating market factors.” However, they do not indicate how their desired improvement can be accomplished—other than to recommend a presumption against mergers that involve the acquisition of a “maverick.” Further economic research on this topic could be quite valuable—and arguably necessary—to identify workable and effective improvements in the treatment of coordinated effects that could be written into future merger guidelines.
Salop and Scott Morton recommend adding a section to the HMGs to address common ownership by financial funds. This would be a natural extension of Section 13 in the 2010 HMGs, “Partial Acquisitions,” which introduced the issue of partial ownership into the HMGs.
“Natural Oligopoly Responses and Coordinated Effects in Merger Analysis,” by Joseph Farrell and Jonathan Baker
Farrell and Baker argue that coordinated effects should be understood in the 2010 Guidelines’ broad sense: the competitive implications of rivals’ responses to oligopolists’ price changes. For example, if a firm cuts its price, it probably intends to gain volume from rivals, and that gain can be largely neutralized if those rivals match the price cut.
Farrell and Baker argue that earlier Guidelines—and the way that the game theory revolution in industrial organization economics played out over the past 40 years—inadvertently caused a focus that was too exclusively on two ways to think of oligopoly: Since the 1992 Guidelines, “unilateral effects” are almost always modeled as Nash equilibria in simultaneous-move games, in which each player takes its rivals’ moves as given. “Coordinated effects,” by contrast, hinge on rivals’ responses, but the standard supergame approach emphasizes conscious common understanding and purposive deterrence of deviations, and its standard model often drastically over-predicts highly collusive (such as shared monopoly) outcomes. Farrell and Baker first suggest making that standard model more flexible and realistic by allowing for stochastic transitions between cooperative and competitive states.
They then turn to what the 2010 Guidelines (Section 7) call “parallel accommodating conduct”: a pattern of competitive responses that is “individually rational, and not motivated by retaliation or deterrence nor intended to sustain an agreed-upon market outcome, but nevertheless emboldens price increases and weakens competitive incentives to reduce prices.” Farrell and Baker develop this concept by considering Stackelberg leader-and-follower price dynamics, which they argue may often align with firms’ “non-purposive” responses. They show how the strength of the “emboldening/weakening” effect relates to the familiar antitrust concept of diversion ratios, and illustrate by simulating two simple three-to-two mergers.
“Quantitative Methods for Evaluating the Unilateral Effects of Mergers,” by Nathan Miller & Gloria Sheu
The final three papers focus on the analysis of unilateral effects: the section of the 2010 Guidelines that has received by far the most attention in recent years in the economics literature.
Miller and Sheu provide an extremely valuable guide to the methods that are actually used in practice to assess unilateral effects, as updated and expanded in the 2010 Guidelines. They “describe the quantitative modeling techniques that are used in horizontal merger review for the evaluation of unilateral effects, and discuss how the 2010 Horizontal Merger Guidelines helped legitimize these methods and motivate scholarly research.” As they point out, “the modeling techniques we describe here are the result of an ongoing interplay between current academic research and antitrust practice.” Miller and Sheu’s impressive treatment is both sophisticated and accessible.
Miller and Sheu consider pricing competition in markets with differentiated products, procurement auctions, and quantity competition in markets with homogeneous products. For each topic, they demonstrate the basic theory that has been developed in the academic literature and explain how that theory is implemented in practice. By far the most work involves pricing competition in markets with differentiated products. Miller and Sheu explore in depth the relationship between measures of upward pricing pressure, pass-through rates, and the price effects of mergers that are based on a full merger simulation. They make a convincing case that measures of upward pricing pressure often can be used to generate a first-order approximation of the merger simulation’s predictions of a merger’s impact on prices. They recommend a presumption against mergers that increase the HHI by at least 200 points.Footnote 10
“Mergers with Differentiated Products: Where Do We Stand?” by Tommaso Valletti & Hans Zenger
This paper also focuses on unilateral effects—including effects on innovation—with the use of illustrations from a number of European merger cases. Valletti and Zenger emphasize that the analytical techniques that relate to unilateral effects that were introduced, clarified, or emphasized in the 2010 Guidelines have since evolved into standard practice: both in the United States and in Europe. The 2010 Guidelines helped spur the evolution toward a greater use of economic tools in merger assessment that was already ongoing in 2010 at the European Commission.
Valletti and Zenger helpfully introduce the idea of “implied market shares” that are associated with diversion ratios between the products that are sold by the two merging firms. These are the market shares that would give the same diversion ratios if diversion were proportional to market share. Many observers who are familiar with using market shares may find these “implied market shares” more intuitive and easier to interpret than are diversion ratios. They explain the practical virtues of two tools that have seen much greater usage in Europe since 2010: the Gross Upward Pricing Pressure Index (GUPPI) and the Compensating Marginal Cost Reduction (CMCR). In some cases, the European Commission has used these tools at the initial screening stage, and later use merger simulation to inform its final decision.
Valletti and Zenger go on to offer a highly instructive “comparative analysis” of the various analytical tools that are used to assess unilateral price effects. As they point out, there is a tradeoff between complexity and precision: The more complex and more precise tools—notably merger simulation—require more data and more assumptions. GUPPIs tend to understate a merger’s impact on price by ignoring feedback effects. They report that at the European Commission there has been a trend toward using merger simulation with linear demand—in contrast with the U.K. Competition and Markets Authority, which has more often relied on price pressure indices.
Valletti and Zenger also discuss at length unilateral innovation effects; the authors build on Section 6.4 in the 2010 Guidelines, which introduced innovation effects into the HMGs. They demonstrate how much progress has been made in this area over the past 10 years: both in the academic literature and in practice. While innovation effects are inherently difficult to predict, we have much more experience evaluating these effects now than we did prior to the release of the 2010 Guidelines.
“Effects of the 2010 Horizontal Merger Guidelines on Merger Review, Based on Ten Years of Practical Experience,” by Dennis Carlton & Mark Israel
The third and final paper that focuses on unilateral effects offers a contrarian view: Carlton and Israel articulate many of the arguments that merging firms typically make in defense of their deals. The authors support the exercise of defining relevant markets and measuring market shares to establish safe harbors, but not to establish strong anti-competitive presumptions: “a finding that a market has a large number of significant competitors should be a safe harbor for a merger, but finding high market shares for the merging parties should, at most, point to the need for further analysis and should create, at most, a weak presumption in favor of finding harm from the merger.”
Carlton and Israel also express considerable skepticism about price pressure tools such as upward pricing pressure (UPP), stating: “we believe UPP has been overused, leading the agencies to focus scarce investigative time and resources on UPP even when more direct evidence from natural experiments is available.” They further state: “UPP analysis is a type of (incomplete) structural approach. A superior structural approach is merger simulation.” They further assert that “the attention UPP has garnered detracts from the use of ‘natural experiments,’ which are much less structural and instead look at what happened to price after some event.”
We agree that natural experiments can be highly valuable, as is explained in Section 2.1.2 of the 2010 Guidelines. Carlton and Israel also call for more merger retrospectives; this is a widely held view that we share. The FTC recently announced additional efforts in this direction.