The Federal Trade Commission and the Department of Justice (together, the Agencies) have come out with proposed Merger Guidelines (the Guidelines)1 that abandon the enforcement policy of the Obama administration, and several before it, and reflect the "mandate of Congress that tendencies toward concentration in industry are to be curbed in their incipiency." If a merger "would significantly increase concentration and result in a highly concentrated market," the Agencies will "presume that a merger may substantially lessen competition based on market structure alone. This is a return to structuralism and will put the Agencies at odds not only with decades of practice but with half a century of court decisions.
Departures
The Guidelines state, for example, that a merger that results in a party holding more than 30 percent market share with a Herfindahl-Hirschman Index delta of 100 or more is presumptively anticompetitive. Among the transactions that would be presumptively illegal under the proposed guides are these. There are seven companies in a relevant market, six with 15 percent market share and the seventh with 10 percent. Two of the 15 percent participants merge. They have a combined share of 30 percent and a delta of 450. They can expect a challenge. So could any firm with a 28 percent share if acquiring another with 2 percent, even if three strong competitors had more than 20 percent each and new entrants were nibbling at the market. These guidelines say the Agencies will try to stop mergers of equals in any markets of five or six similarly sized firms. Few courts would find these problematic. Indeed, no court has enjoined such a deal in decades.
There are other departures. Guideline 4 states that "[m]ergers should not eliminate a potential entrant in a concentrated market." The Agencies do put some guardrails around that guideline like requiring evidence the potential entrant was in fact a potential entrant. Guideline 5 states that "[m]ergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete." That statement is a bit broad and suggests that any vertical merger where rivals purchase goods or services from the upstream entity would be a substantial lessening of competition. The Agencies do suggest that they will examine whether the merged firm "can control access to those products or services," suggesting a more traditional foreclosure although the word "those" could just mean the products or services the target sells. Guideline 6 requires at least a 50 percent market share or above the merger would necessarily substantially lessen competition.
Guideline 7, the Guideline the Amgen case seems to be brought under, suggests that mergers that entrench or extend a dominant position substantially lessen competition because they can create a monopoly in another market. The Agencies explain that "the merger might lead the merged firm to leverage its position by tying, bundling, conditioning, or otherwise linking sales of two products, excluding rival firms and ultimately substantially lessening competition in the related market. The Agencies will not attempt to assess whether such tying, bundling, conditioning, or other linkage of the two products would itself violate any law, but instead will assess whether such conduct, if it were to occur, may tend to extend the firm's dominant position." Any monopolist could otherwise "link" products. This articulation basically forbids monopolists from engaging in any mergers and acquisitions.
They also say some things that may not be entirely correct. In discussing coordination, the Agencies state "[e]vidence of failed attempts at coordination in the relevant market suggest that successful coordination was not so difficult as to deter attempts, and a merger reducing the number of rivals may tend to make success more likely." It is entirely possible that the people who attempted to coordinate could not because the market was unconcentrated. In that case, an attempt to coordinate is not evidence the market is concentrated. In discussing market transparency, they assert "[a] market is more susceptible to coordination if a firm's behavior can be promptly and easily observed by its rivals. Rivals' behavior is more easily observed when the terms offered to customers are readily discernible and relatively transparent (that is, known to rivals)." A transparent market also means that consumers can see prices easily, compare competitive offerings more efficiently, and reward more effective rivals. An atomistic market could have perfect transparency and not be susceptible to coordination. It simply is not the case that transparency necessarily means concentration. The Agencies also state that "[u]se of algorithms or artificial intelligence to track or predict competitor prices or actions likewise increases the transparency of the market." An algorithm is a method by which a firm sets a price. When there were not any computers, humans would do this on paper, sometimes on clay tablets. Humans would decide on the inputs they valued and use them to determine price. Nowadays, computers do it. They just do it much faster and can handle more inputs. The only implication this process has for antitrust is that markets in which these algorithms are used will arrive at an equilibrium price more quickly. If the market is unconcentrated, that equilibrium price will be at marginal cost. If an algorithm comes up with a price that reflects a rent in an unconcentrated market, no one will buy it.
Types of Evidence
The Agencies also characterize the types of evidence they will find persuasive:
Evidence that the merging parties intend or expect the merger to lessen competition, such as plans to coordinate with other firms, raise prices, reduce output or capacity, reduce product quality or variety, lower wages, cut benefits, exit a market, cancel plans to enter a market without a merger, withdraw products or delay their introduction, or curtail research and development efforts after the merger, can be highly informative in evaluating the effects of a merger on competition. The Agencies give little weight, however, to the lack of such evidence or the expressed contrary intent of the merging parties.
This is an attempt to revive the notion that the parties' documents are admissions as to things like market power, and therefore are conclusive proof of such market power. Courts mostly look at this evidence as circumstantial that can be rebutted by other evidence like economic data. The Agencies' position will not change a court's opinion as to the evidentiary value of a particular piece of evidence. It does mean, though, that one's documents, including drafts under the Hart-Scott-Rodino (HSR) rules, will have a greater effect at the Agencies and will require more time to review.
The Agencies keep the hypothetical monopolist test but open up the analysis to a wide variety of methodologies for defining markets. These changes are designed mostly to give them more flexibility in investigating and prosecuting cases.
There also appears to be some new guidance directed at companies like Amazon. "A platform operator may acquire a platform participant, which can entrench the operator's position by depriving rivals of participants and, in turn, depriving them of network effects." They also state that "[a] platform operator that is also a platform participant has a conflict of interest from the incentive to give its own products and services an advantage against other competitors participating on the platform, harming competition in the product market for that product or service." Amazon sells but also allows third parties to sell on its website. As a preliminary matter, "conflicts of interest" is not a defined term in antitrust jurisprudence. It is not really a violation of the antitrust laws to have a conflict of interest. It is also unclear how a transaction could deprive rivals of "network effects." Some types of networks become more valuable the more participants there are. In theory, at some point there will be so many participants that the market tips to that platform. In its statement on b2bs, the Commission suggested that exclusive dealing arrangements in network markets could be anticompetitive because it would preclude other b2bs from accessing those customers. Presumably, the Agencies are saying the acquisition of a participant would eliminate a potential participant from rival platforms because the merged entity would not sell on rival platforms, creating a de facto exclusivity. It seems unlikely that Amazon could acquire enough retailers to foreclose other platforms from providing retail services.
Conclusion
Irrespective of what this administration says are the rules that underpin antitrust, it is the courts that decide whether a particular activity is illegal under Section 7. A lot of what the Agencies want to do with these guidelines will be stopped by the courts. And that is what they are doing. The Commission lost Microsoft/Activision. It suspended the Part 3 litigation in Intercontinental and Amgen. All the Agencies are doing with these guidelines and the new HSR rules is imposing a transaction tax, which will inure only to the benefit of the lawyers, on parties that wish to merge rather than grow organically. This tax will not deter the 1.9 percent of transactions that have meaningful antitrust issues.
In fact, for those transactions, it will have no effect whatsoever. Deals that go through the second request process now will do the same thing under the new rules and guidelines. It is the parties to otherwise legal transactions that will bear all of the costs because they are the ones that would not have had to bear them in the first place.
So, the only things these changes do are impede procompetitive transactions that the Agencies will not be able to stop. Even if you are pro-enforcement, these rules make little sense, and may be ripe for Congressional action under the Congressional Review Act.
Footnotes
1. https://www.ftc.gov/system/files/ftc_gov/pdf/p859910draftmerger-guidelines2023.pdf
Previously published in The Journal of Federal Agency Action.
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