Jan 22, 2021 - 10:00am

Unlocking Antitrust: Evaluating Horizontal Mergers


Senior Vice President, International Regulatory Affairs

Fill me in: Last fall staffers on the House Judiciary Antitrust Subcommittee released a long-anticipated report outlining a series of recommendations intended to rewrite our country’s antitrust laws. The staff report, while initially intended to focus on four tech companies, makes a series of erroneous policy conclusions that, if implemented, would wield government control over the entire U.S. economy, hampering growth, and innovation to the detriment of consumers.

The staff report recommends blocking mergers that result in the merging parties obtaining a 30% or more market share.

Specifically, it recommends that Congress:

"consider codifying bright-line rules for merger enforcement, including structural presumptions. Under a structural presumption, mergers resulting in a single firm controlling an outsized market share, or resulting in a significant increase in concentration, would be presumptively prohibited under Section 7 of the Clayton Act. This structural presumption would place the burden of proof upon the merging parties to show that the merger would not reduce competition. A showing that the merger would result in efficiencies should not be sufficient to overcome the presumption that it is anticompetitive. It is the view of Subcommittee staff that the 30% threshold established by the Supreme Court in Philadelphia National Bank is appropriate, although a lower standard for monopsony or buyer power claims may deserve consideration by the Subcommittee."

This structural presumption would place the burden of proof on the merging parties to show that the merger would not reduce competition (i.e., prove a negative). The proposal would also overturn the current approach under which mergers are permissible where the merger would result in efficiencies that outweigh any harm to competition.

So how does current U.S. antitrust law treat horizontal mergers? 

A horizontal merger combines businesses that are either actual or potential competitors. The approach of antitrust agencies as stated in their Horizontal Merger Guidelines is that they will not challenge a merger if “cognizable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive in any relevant market.” In other words, when efficiencies, or consumer benefits, outweigh any likely anticompetitive harm.

They have gone on to explain, “a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products. For example, merger-generated efficiencies may enhance competition by permitting two ineffective competitors to form a more effective competitor, e.g., by combining complementary assets.”

What's the problem with the suggested changes? 

A structural presumption is a shortcut that undermines economics and relieves the government of conducting a rigorous, fact-specific analysis. The structural presumption proposed by the Staff Report is not supported by economics. It’s akin to a bias or preconceived notion that doesn’t hold up under real-world scrutiny. Factually unsupported presumptions have long been prohibited under U.S. antitrust law, which requires an actual examination of the specific facts of each case.

In support of the structural presumption, the staff report relies upon a merger retrospective study by John Kwoka—a study that has been widely criticized. The study’s fundamental flaws are perhaps most-well documented by FTC economists Michael Vita and David Osinski. The shortcomings include that the study focuses on mergers before 2000—a limited and now dated time period—and the selected set of mergers reflect only a subset of the industries evaluated by the DOJ and FTC. Vita and Osinski also point out that Kwoka’s study does not use generally accepted techniques for conducting meta analyses, including failing to weight the average and provide standard errors, which make it difficult to reject the null hypothesis. In other words, there’s a lack of consequential evidence that the existing U.S. approach has resulted in getting the approach to horizontal mergers wrong.

Why it matters: Following the suggestion of the Staff Report would result in antitrust law displaying a clear bias, ignoring market efficiencies, and removing consumer interests from being in the driver seat of merger review.  Economic freedoms that allow two companies to merge should not be blocked based on bias, but instead held to a legal standard that shows harm outweighing any benefits to consumers.

Such an approach would prohibit and deter beneficial mergers that result in significant efficiencies that benefit consumers. In fact, the Federal Trade Commission has done multiple merger retrospective studies to see whether they got it right.  The conclusion has overwhelming been that were correct.

Our take: Antitrust’s approach to mergers is economically-sound and takes into account modern economic learnings. Mergers where the harm to consumers clearly outweighs the benefits should be blocked. Otherwise, mergers that produce efficiencies and lead to lower prices and greater innovation, should move ahead without government interference.

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About the Author

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Senior Vice President, International Regulatory Affairs

Sean Heather is Senior Vice President for International Regulatory Affairs