Abstract
This paper is on the new (2023) Merger Guidelines. It makes several arguments: First, that the Guidelines should be understood as existing in a political equilibrium. Second, that the new structural presumption of the Merger Guidelines–HHI = 1,800—is too strict, and that an economically reasonable revision in the structural presumption would have increased rather than decreased the threshold. Whereas the new Guidelines lowers the threshold to HHI 1,800 from HHI 2,500, an economically reasonable revision would have increased the threshold to HHI 3,200. I justify this argument using a bare-bones model of Cournot competition. Third, it seems unlikely, as an empirical matter, that merger enforcement under the existing Guidelines is socially desirable. Fourth, that federal merger enforcement raises serious constitutional issues–which were originally discussed in 1904—and that it may be time now, in view of the new Guidelines, to return to these foundational constitutional questions.
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Notes
Clayton Antitrust Act of 1914. Section 7 is codified at 15 U.S.C. § 18.
Hart-Scott-Rodino Antitrust Improvements Act of 1976. Codified at 15 U.S.C. § 18a.
Oliver E. Williamson The Merger Guidelines of the U.S. Department of Justice–In Perspective, available at https://www.justice.gov/archives/atr/merger-guidelines-us-department-justice-perspective.
I refer to the dissents of Justices Oliver Wendell Holmes and Edward Douglass White. See Northern Securities Co. v. United States, 193 U.S. 197 (1904).
U.S. Dep't of Justice & Fed. Trade Comm'n, Merger Guidelines (2023), available at: https://www.justice.gov/atr/2023-merger-guidelines.
I am setting to the side the question whether the market is measured accurately, or indeed whether it is possible to define accurately a market for purposes of calculating HHIs. See Kaplow (2021).
Merger Guidelines (2023), at 4 (“Similarly, the factors contemplated in these Merger Guidelines neither dictate nor exhaust the range of theories or evidence that the Agencies may introduce in merger litigation.”). Also, the end of Guideline 2 of the 2023 Guidelines – which describes the ways that mergers can violate the law by eliminating competition – notes that the analyses that are covered within the Guideline are merely common scenarios and that “a wide range of evidence can show that a merger may lessen competition.” Merger Guidelines (2023), at 29.
Justin Hurwitz, Premerger Notification Proposal Faces a Rocky Path, The Regulatory Review (Aug 28, 2023), https://www.theregreview.org/2023/08/28/hurwitz-premerger-notification-proposal-faces-a-rocky-path/.
Id.
Oliver Williamson, supra note 3 (“One of the consequences of issuing Guidelines is that firms considering merger would face less antitrust enforcement uncertainty. Inasmuch, however, as such uncertainty served mainly to deter mergers, many of the career staff viewed uncertainty as an ‘advantage.’ Of greater concern is that the issuance of Guidelines would serve to introduce a floor, below which the burden of bringing a case would have to be borne by the Division. The previous practice of progressively ratcheting down admissible market shares would be brought to a halt. That the 1968 Guidelines were stringent can thus be thought of as a compromise. To propose more permissive market shares would, in effect, concede error–by the antitrust enforcement agencies and the courts–in earlier cases.”).
One question this argument generates is why merger enforcement occurred for 54 years – 1914 to 1968 – before the first Guidelines appeared? Why didn’t large firms lobby to curtail agency discretion during the period before 1968? Probably the most important reason is that for most of this 54 year period, Clayton Act Section 7 was easily avoided because of statutory loopholes. See Hylton (2003), at 318.
The question of notice under the antitrust laws was first raised in Nash v. United States, 229 U.S. 373 (1913).
See FTC v. Staples, Inc., 970 F. Supp. 1066, 1088–90 (D.D.C 1997).
United States v. Bertelsmann SE & Co. KGaA, 646 F. Supp. 3d 1 (D.D.C. 2022).
Guideline 3.3, Procompetitive Efficiencies, requires the merging parties to show verifiability.
One could easily modify this framework by introducing a general weighting scheme where λ = N/(N + K). In this general weighting scheme, the contributions of consumer welfare and producer welfare can be weighted differently in measuring the total welfare impact. On the basis for such a weighting scheme, see Hylton (2010).
Bureau of Economic Analysis. Gross Domestic Product, Fourth Quarter and Year 2022 (Third Estimate), GDP by Industry, and Corporate Profits. Available at: https://www.bea.gov/sites/default/files/2023-03/gdp4q22_3rd_0.pdf.
FTC v. Staples, 970 F. Supp. 1066, 1089 (1997).
Id (after subtracting industries such as banking, telecommunications, and utilities that are not subject to exclusive merger enforcement by the DOJ and FTC).
One might object that there are income distribution effects that should be considered, even in the case where consumers stand on both sides of the transaction – that is, as purchasers of the product and as owners of the product seller. Suppose the firms in the industry in which the merger occurs are effectively owned by the retirement funds of public school teachers. Under this assumption, there is no reason to believe, in the absence of concrete evidence, that the income distribution effects of the merger would be undesirable. Suppose, further, that the products produced by firms in the industry are luxuries, such as yachts (Hylton, 2010). With this added assumption, the wealth transfer effect on the distribution of income would appear to be desirable.
Admittedly, the actual cases that the FTC and DOJ have litigated over the last two decades have typically involved HHI levels far in excess of the structural triggers (Rose and Shapiro, 2022). However, with respect to proposed mergers’ falling below the structural triggers there is also the deterrent threat of enforcement: the mergers that are deterred by actual enforcement; the mergers that are deterred by investigation and by the threat of investigation, with associated burdens; and the mergers that are deterred by the prospect of enforcement after consummation.
Northern Securities Co. v. United States, 193 U.S. 197 (1904).
In White’s dissent in Northern Securities, 193 U.S. at 377, White denounces the majority decision because “the very definition of the power to regulate commerce... excludes the conception that it extends to stock ownership.”.
Holmes’s dissent, 193 U.S. at 410, asserts partnerships are not “contract or combination in restraint of trade” because the partnership lacks requisite proximity to that illegal act.
For a brief discussion of the constitutional infirmities of the federal antitrust statutes, see Hylton (2003), at 52–55. The extent to which the statutory framework is constitutional in application depends on the willingness of enforcers to play by long-established norms. However, a decision by an enforcement agency to deviate from such norms should immediately invite a closer scrutiny by the courts of the constitutional and statutory basis for such a deviation.
The Supreme Court warned against reading the antitrust laws to cobble together lawful acts to create a new unlawful act in Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009) (no cobbling together a Sherman Act Section 2 violation, by a vertically-integrated dominant firm, out of a combination of high pricing of inputs and low pricing of outputs).
See, e.g., Hylton (2003), at 54–55.
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Acknowledgements
I thank Katelyn Lee for research assistance. I thank Roger Blair, Michael Meurer, Steve Marks, Ben Pyle, and Sepehr Shashahani for comments on an early draft.
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Hylton, K.N. Getting Merger Guidelines Right. Rev Ind Organ (2024). https://doi.org/10.1007/s11151-024-09967-9
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DOI: https://doi.org/10.1007/s11151-024-09967-9