|
Horizontal Merger
Table of Contents
Overview of Guidelines Analysis
1. Market Definition and Concentration
The Breadth of Relevant Markets Evidentiary Sources for Market Definition
Market Definition and Integrated Analysis
2. The Potential Adverse Competitive Effects of Mergers
Additional Market Characteristics Relevant to Competitive Analysis
Foreword Mergers between competing firms, i.e., "horizontal" mergers, are a significant dynamic force in the American economy. The vast majority of mergers pose no harm to consumers, and many produce efficiencies that benefit consumers in the form of lower prices, higher quality goods or services, or investments in innovation. Efficiencies such as these enable companies to compete more effectively, both domestically and overseas. Fourteen years ago, to describe their application of the antitrust laws to horizontal mergers, the Federal Trade Commission and the U.S. Department of Justice (collectively, the "Agencies")--the two federal Agencies responsible for U.S. antitrust law enforcement--jointly issued the 1992 Horizontal Merger Guidelines (the "Guidelines"). In 1997, the Agencies jointly issued revisions to the Guidelines' section on Efficiencies. Since these publications were issued, the Agencies have consistently applied the Guidelines' analytical framework to the horizontal mergers under their review. Today, to provide greater transparency and foster deeper understanding regarding antitrust law enforcement, the Agencies jointly issue this Commentary on the Guidelines. The Commentary continues the Agencies' ongoing efforts to increase the transparency of their decision-making processes. These efforts include the Agencies' joint publication of Merger Challenges Data, Fiscal Years 1999–2003 (issued December 18, 2003), the Commission's subsequent publication of Horizontal Merger Investigation Data, Fiscal Years 1996–2003 (issued February 2, 2004 and revised August 31, 2004), the Department's Merger Review Process Initiative (issued October 12, 2001 and revised August 4, 2004), the Reforms to the Merger Review Process at the Commission (issued February 16, 2006), and the Department's and Commission's increased use of explanatory closing statements following merger investigations. The Commentary follows on the Agencies' February 2004 Merger Enforcement Workshop. Over three days, leading antitrust practitioners and economists who have examined merger policy and the Guidelines' analytical framework discussed in detail all sections of the Guidelines. The Workshop focused on whether the analytical framework set forth by the Guidelines adequately serves the dual purposes of leading to appropriate enforcement decisions on proposed horizontal mergers, and providing the antitrust bar and the business community with reasonably clear guidance from which to assess the antitrust enforcement risks of proposed transactions. Workshop participants generally agreed that the analytical framework set out in the Guidelines is effective in yielding the right results in individual cases and in providing advice to parties considering a merger. Thus, the Agencies concluded that a revamping of the Guidelines is neither needed nor widely desired at this time. Rather, the Guidelines' analytic framework has proved both robust and sufficiently flexible to allow the Agencies properly to account for the particular facts presented in each merger investigation. The Agencies also have observed that the antitrust bar and business community would find useful and beneficial an explication of how the Agencies apply the Guidelines in particular investigations. This Commentary is intended to respond to this important public interest by enhancing the transparency of the analytical process by which the Agencies apply the antitrust laws to horizontal mergers.
Introduction The principal federal antitrust laws applicable to mergers are section 7 of the Clayton Act, section 1 of the Sherman Act, and section 5 of the Federal Trade Commission Act. Section 7 proscribes a merger the effects of which "may be substantially to lessen competition." Section 1 prohibits an agreement that constitutes an unreasonable "restraint of trade." Section 5, which the Federal Trade Commission enforces, proscribes "unfair methods of competition." Over many decades, the federal courts have provided an expansive body of case law interpreting these statutes within the factual and economic context of individual cases. The core concern of the antitrust laws, including as they pertain to mergers between rivals, is the creation or enhancement of market power. In the context of sellers of goods or services, "market power" may be defined as the ability profitably to maintain prices above competitive levels for a significant period of time. Market power may be exercised, however, not only by raising price, but also, for example, by reducing quality or slowing innovation. In addition, mergers also can create market power on the buying side of a market. Most mergers between rivals do not create or enhance market power. Many mergers, moreover, enable the merged firm to reduce its costs and become more efficient, which, in turn, may lead to lower prices, higher quality products, or investments in innovation. However, the Agencies challenge mergers that are likely to create or enhance the merged firm's ability--either unilaterally or through coordination with rivals--to exercise market power. Following their mandate under the antitrust statutory and case law, the Agencies focus their horizontal merger analysis on whether the transactions under review are likely to create or enhance market power. The Guidelines set forth the analytical framework and standards, consistent with the law and with economic learning, that the Agencies use to assess whether an anticompetitive outcome is likely. The unifying theme of that assessment is "that mergers should not be permitted to create or enhance market power or to facilitate its exercise." Guidelines § 0.1. The Guidelines are flexible, allowing the Agencies' analysis to adapt as business practices and economic learning evolve. In applying the Guidelines to the transactions that each separately reviews, the Agencies strive to allow transactions unlikely substantially to lessen competition to proceed as expeditiously as possible. The Agencies focus their attention on quickly identifying those transactions that could violate the antitrust laws, subjecting those mergers to greater scrutiny. Most mergers that pose significant risk to competition come to the Agencies' attention before they are consummated under the premerger notification and reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a ("HSR"). HSR requires that the parties to a transaction above a certain size notify the Agencies before consummation and prohibits consummation of the transaction until expiration of one or more waiting periods during which one of the Agencies reviews the transaction. The waiting periods provide the Agencies time to review a transaction before consummation. For more than 95% of the transactions reported under HSR, the Agencies promptly determine--i.e., within the initial fifteen- or thirty-day waiting period that immediately follows HSR filings--that a substantial lessening of competition is unlikely. The Agencies base such expeditious determinations on material provided as part of the HSR notification, experience from prior investigations, and other market information. For many industries, a wealth of information is available from government reports, trade directories and publications, and Internet resources. For some transactions, the parties volunteer additional information, and for some, the Agencies obtain information from non-public sources. The most important non-public sources are market participants, especially the parties' customers, who typically provide information voluntarily when the Agencies solicit their cooperation. Evidence that the merged firm would have a relatively high share of sales (or of capacity, or of units, or of another relevant basis for measurement) or that the market is relatively highly concentrated may be particularly significant to a decision by either of the Agencies to extend a pre-merger investigation pursuant to HSR by issuing a request for additional information (commonly referred to as a "second request"). A decision to issue a second request must be made within the initial HSR thirty-day waiting period (fifteen days for cash tender offers), or the parties will no longer be prevented under HSR from consummating their merger. A second request may be necessary when it is not possible within thirty days to gather and analyze the facts necessary to address appropriately the competitive concerns that may arise at the threshold of the investigation, such as when parties to a merger appear to have relatively high shares in the market or markets in which they compete. Although the ultimate decision of whether a merger likely will be anticompetitive is based heavily on evidence of potential anticompetitive effects, the Agencies find that only in extraordinary circumstances can they conduct an extensive competitive effects analysis within thirty days. That is why market shares and concentration levels, which have some predictive value, frequently are used as at least a starting point during the initial waiting period. Sometimes the Agencies also investigate consummated mergers, especially when evidence suggests that anticompetitive effects may have resulted from them. The Agencies apply Guidelines analysis to consummated mergers as well as to mergers under review pursuant to HSR. Overview of Guidelines Analysis The Guidelines' five-part organizational structure has become deeply embedded in mainstream merger analysis. These parts are: (1) market definition and concentration; (2) potential adverse competitive effects; (3) entry analysis; (4) efficiencies; and (5) failing and exiting assets. Each of the Guidelines' sections identifies a distinct analytical element that the Agencies apply in an integrated approach to merger review. The ordering of these elements in the Guidelines, however, is not itself analytically significant, because the Agencies do not apply the Guidelines as a linear, step-by-step progression that invariably starts with market definition and ends with efficiencies or failing assets. Analysis of efficiencies, for example, does not occur "after" competitive effects or market definition in the Agencies' analysis of proposed mergers, but rather is part of an integrated approach. If the conditions necessary for an anticompetitive effect are not present--for example, because entry would reverse that effect before significant time elapsed--the Agencies terminate their review because it would be unnecessary to address all of the analytical elements. The chapters that follow, in the context of specific analytical elements such as market definition or entry, describe many principles of Guidelines analysis that the Agencies apply in the course of investigating mergers. Three significant principles are generally applicable throughout. The Agencies' Focus Is on Competitive Effects The Guidelines' integrated process is "a tool that allows the Agency to answer the ultimate inquiry in merger analysis: whether the merger is likely to create or enhance market power or facilitate its exercise." Guidelines § 0.2. At the center of the Agencies' application of the Guidelines, therefore, is competitive effects analysis. That inquiry directly addresses the key question that the Agencies must answer: Is the merger under review likely substantially to lessen competition? To this end, the Agencies examine whether the merger of two particular rivals matters, that is, whether the merger is likely to affect adversely the competitive process, resulting in higher prices, lower quality, or reduced innovation. The Guidelines identify two broad analytical frameworks for assessing whether a merger between competing firms may substantially lessen competition. These frameworks require that the Agencies ask whether the merger may increase market power by facilitating coordinated interaction among rival firms and whether the merger may enable the merged firm unilaterally to raise price or otherwise exercise market power. Together, these two frameworks are intended to embrace every competitive effect of any form of horizontal merger. The Guidelines were never intended to detail how the Agencies would assess every set of circumstances that a proposed merger may present. As the Guidelines themselves note, the specific standards set forth therein must be applied to a broad range of possible factual circumstances. Investigations Are Intensively Fact-Driven, Iterative Processes Merger analysis depends heavily on the specific facts of each case. At the outset of an investigation, when Agency staff may know relatively little about the merging firms, their products, their rivals, or the applicable relevant markets, staff typically contemplates several broad hypotheses of possible harm. For example, based on initial information, staff may hypothesize that a merger would reduce the number of competitors from four to three and, in so doing, may foster or enhance coordination by enabling the remaining firms profitably to allocate customers based on prior sales. Staff also might hypothesize that the products of the merging firms are particularly close substitutes with respect to product characteristics or geographic location such that unilateral anticompetitive effects are likely. Staff evaluates potential competitive factors of this sort by gathering additional information and conducting intensive factual analysis to assess both the applicability of individual analytical frameworks and their implications for the likely competitive effects of the merger. As it learns more about the merging firms and the market environment in which they compete, staff rejects or refines its hypotheses of probable relevant markets and competitive effects, ultimately resulting in a conclusion about likelihood of harm. If the facts do not point to such a likelihood, the merger investigation is closed. In testing a particular postulated risk of competitive harm arising from a merger, the Agencies take into account pertinent characteristics of the market's competitive process using data, documents, and other information obtained from the parties, their competitors, their customers, databases of various sorts, and academic literature or private industry studies. The Agencies carefully consider the views of informed customers on market structure, the competitive process, and anticipated effects from the merger. The Agencies further consider any information voluntarily provided by the parties, which may include extensive analyses prepared by economists or in consultation with economists. The Agencies also carefully consider prospects for efficiencies that the proposed transaction may generate and evaluate the effects of any efficiencies on the outcome of the competitive process. The Same Evidence Often Is Relevant to Multiple Elements of the Analysis A single piece of evidence often is relevant to several issues in the assessment of a proposed merger. For example, mergers frequently occur in markets that have experienced prior mergers. Sometimes evidence exists concerning the effects of prior mergers on various attributes of competition. Such evidence may be probative, for example, of the scope of the relevant product and geographic markets, of the likely competitive effects of the proposed merger, and of the likelihood that entry would deter or counteract any attempted exercise of market power following the merger under review. Similarly, evidence of actual or likely anticompetitive effects from a merger could be used in addressing the scope of the market or entry conditions. An investigation involving potential coordinated effects may uncover evidence of past collusion and sustained supra-competitive prices in the market. This information can be relevant to several elements of the analysis. The product and geographic markets that were subject to collusion in the past may be probative of the relevant product and geographic markets today. That entry failed to undermine collusion in the past may be probative of whether entry is likely today. Of course, during its investigation, the Agency may discover facts that tend to negate these possibilities. For example, since collusion occurred, new production technologies may have emerged that have altered the ability or incentives of firms to coordinate their actions. Similarly, innovation may have led to the introduction of new products that compete with the incumbent products and constrain the ability of the merging firms and their rivals to coordinate successfully in the future. In the chapters that follow, the Commentary explains how the Agencies have applied particular Guidelines' provisions relating to market definition and concentration, competitive effects (including coordinated interaction and unilateral effects analysis), entry conditions, and efficiencies. Application of the Guidelines' provisions relating to failure and exiting assets is not discussed in the Commentary because those provisions are very infrequently applied. For convenience, the order of these chapters follows the order of the issues set forth in the Guidelines. Included throughout the Commentary are short summaries of matters that the Agencies have investigated. They have been included to further understanding of the principles under discussion at that point in the narrative. None of the summaries exhaustively addresses all the pertinent facts or issues that arose in the investigation. No other significance should be attributed to the selection of the matters used as examples. (In some instances in the Efficiencies chapter, names and other key facts of actual matters are changed to protect the confidentiality of business and proprietary information. Each is noted as a "Disguised Example.") An Index at the end of the Commentary lists all of the mergers discussed in these case examples and provides citations to additional public information. For the reader's convenience, the case examples briefly state how each investigation ended, i.e., whether it was closed because the Agency determined not to challenge the merger or because the parties abandoned the merger in response to imminent Agency challenge, or whether the investigation proceeded to a consent agreement or to litigation. The discussion within each case example pertains solely to the relevant Agency's analysis of the merger, and does not elaborate on any subsequent judicial or administrative proceedings.
1. Market Definition and Concentration The Agencies evaluate a merger's likely competitive effects "within the context of economically significant markets--i.e., markets that could be subject to the exercise of market power." Guidelines § 1.0. The purpose of merger analysis under the Guidelines is to identify those mergers that are likely to create or enhance market power in any market. The Agencies therefore examine all plausible markets to determine whether an adverse competitive effect is likely to occur in any of them. The market definition process is not isolated from the other analytic components in the Guidelines. The Agencies do not settle on a relevant market definition before proceeding to address other issues. Rather, market definition is part of the integrated process by which the Agencies apply Guidelines principles, iterated as new facts are learned, to reach an understanding of the merger's likely effect on competition. The mechanics of how the Agencies define markets using the Guidelines method has been the subject of extensive discussion in legal and economic literature and appears to be well understood in the antitrust community. This Commentary, accordingly, provides only a brief overview of the mechanics. The remainder of this chapter addresses a number of discrete topics concerning market definition issues that frequently arise in merger investigations. Mechanics of Market Definition The Guidelines define a market as "a product or group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future producer or seller of those products in that area likely would impose at least a 'small but significant and nontransitory' increase in price, assuming the terms of sale of all other products are held constant." Guidelines § 1.0. This approach to market definition is referred to as the "hypothetical monopolist" test. To determine the effects of this "'small but significant and nontransitory' increase in price" (commonly referred to as a "SSNIP"), the Agencies generally use a price increase of five percent. This test identifies which product(s) in which geographic locations significantly constrain the price of the merging firms' products. The Guidelines' method for implementing the hypothetical monopolist test starts by identifying each product produced or sold by each of the merging firms. Then, for each product, it iteratively broadens the candidate market by adding the next-best substitute. A relevant product market emerges as the smallest group of products that satisfies the hypothetical monopolist test. Product market definition depends critically upon demand-side substitution--i.e., consumers' willingness to switch from one product to another in reaction to price changes. The Guidelines' approach to market definition reflects the separation of demand substitutability from supply substitutability--i.e., the ability and willingness, given existing capacity, of firms to substitute from making one product to producing another in reaction to a price change. Under this approach, demand substitutability is the concern of market delineation, while supply substitutability and entry are concerned with current and future market participants. Definition of the relevant geographic market is undertaken in much the same way as product market definition--by identifying the narrowest possible market and then broadening it by iteratively adding the next-best substitutes. Thus, for geographic market definition, the Agencies begin with the area(s) in which the merging firms compete respecting each relevant product, and extend the boundaries of those areas until an area is determined within which a hypothetical monopolist would raise prices by at least a small but significant and non-transitory amount.
DaVita–Gambro (FTC 2005) DaVita Inc., proposed to acquire Gambro Healthcare, Inc. The firms competed across the United States in the provision of outpatient dialysis services for persons with end stage renal disease ("ESRD"). Commission staff found that the relevant geographic markets within which to analyze the transaction's likely competitive effects were local. Most ESRD patients receive treatments about 3 times per week, in sessions lasting 3–5 hours, and in general either are unwilling or unable to travel more than 30 miles or 30 minutes to receive kidney dialysis treatment. In the process of defining the geographic market, staff identified the Metropolitan Statistical Areas ("MSAs") within which both firms had outpatient dialysis clinics, then examined each area to determine if geographic factors such as mountains, rivers, and bays, and travel conditions, were such that the scope of the relevant market differed from the MSA's boundaries. The Breadth of Relevant Markets Defining markets under the Guidelines' method does not necessarily result in markets that include the full range of functional substitutes from which customers choose. That is because, as the Guidelines provide, a "relevant market is a group of products and a geographic area that is no bigger than necessary to satisfy [the hypothetical monopolist] test." Guidelines § 1.0. This is one of several points at which the Guidelines articulate what is referred to in section 1.21 as the "'smallest market' principle" for determining the relevant market. The Agencies frequently conclude that a relatively narrow range of products or geographic space within a larger group describes the competitive arena within which significant anticompetitive effects are possible.
Nestle–Dreyer's (FTC 2003) Nestle Holdings, Inc., proposed to merge with Dreyer's Grand Ice Cream, Inc. The firms were rivals in the sale of superpremium ice cream. Ice cream is differentiated on the basis of the quality of ingredients. Compared to premium and non-premium ice cream, superpremium ice cream contains more butterfat, less air, and more costly ingredients. Superpremium ice cream sells at a substantially higher price than premium ice cream. Using scanner data, Commission staff estimated demand elasticities for the superpremium, premium, and economy ice cream segments. Staff's analysis showed that a hypothetical monopolist of superpremium ice cream would increase prices significantly. This, together with other documentary and testimonial evidence, indicated that the relevant market in which to analyze the transaction was superpremium ice cream. The Commission entered into a consent agreement with the merging firms, requiring divestiture of two brands and of key distribution assets. In sections 1.12 and 1.22, the Guidelines explain that the Agencies may define relevant markets on the basis of price discrimination if a hypothetical monopolist likely would exercise market power only, or especially, in sales to particular customers or in particular geographic areas. The Agencies address the same basic issues for any form of discrimination: Would price discrimination, if feasible, permit a significantly greater exercise of market power? Could competitors successfully identify the transactions to be discriminated against? Would customers or third parties be able to undermine substantially the discrimination through some form of arbitrage in which a product sold at lower prices to some customer groups is resold to customer groups intended by the firms to pay higher prices? In cases in which a hypothetical monopolist is likely to target only a subset of customers for anticompetitive price increases, the Agencies are likely to identify relevant markets based on the ability of sellers to price discriminate.
Quest–Unilab (FTC 2003) Quest Diagnostics, Inc. and Unilab Corp., the two leading providers of clinical laboratory testing services to physician groups in Northern California, proposed to merge. Their combined market share would have exceeded 70%; the next largest rival had a market share of 4%. Clinical laboratory testing services are marketed and sold to various groups of customers, including physicians, health insurers, and hospitals. Commission staff determined that purchasers of these services cannot economically resell them to other customers, and that suppliers of the services can potentially identify the competitive alternatives available to physician group customers according to the group's base of physicians and geographic coverage. This information indicated that a hypothetical monopolist could discriminate on price among customer types. Suppliers' ability to price discriminate, combined with the fact that some types of customers had few competitive alternatives to contracting with suppliers that had a network of locations, led staff to define markets based on customer categories. The Commission issued a complaint alleging that the transaction would lessen competition substantially in one of the customer categories: the provision of clinical laboratory testing services to physician groups in Northern California. An accompanying consent order required divestiture of assets used to provide clinical laboratory testing services to physician groups in Northern California. The Guidelines indicate that the relevant market is the smallest collection of products and geographic areas within which a hypothetical monopolist would raise price significantly. At times, the Agencies may act conservatively and focus on a market definition that might not be the smallest possible relevant market. For example, the Agencies may focus initially on a bright line identifying a group of products or areas within which it is clear that a hypothetical monopolist would raise price significantly and seek to determine whether anticompetitive effects are--or are not--likely to result from the transaction in such a candidate market. If the answer for the broader market is likely to be the same as for any plausible smaller relevant market, there is no need to pinpoint the smallest market as the precise line drawn does not affect the determination of whether a merger is anticompetitive. Also, when the analysis is identical across products or geographic areas that could each be defined as separate relevant markets using the smallest market principle, the Agencies may elect to employ a broader market definition that encompasses many products or geographic areas to avoid redundancy in presentation. The Guidelines describe this practice of aggregation "as a matter of convenience." Guidelines § 1.321 n.14. Evidentiary Sources for Market Definition The Importance of Evidence from and about Customers Customers typically are the best source, and in some cases they may be the only source, of critical information on the factors that govern their ability and willingness to substitute in the event of a price increase. The Agencies routinely solicit information from customers regarding their product and supplier selections. In selecting their suppliers, customers typically evaluate the alternatives available to them and can often provide the Agencies with information on their functional needs as well as on the cost and availability of substitutes. Customers also provide relevant information that they uniquely possess on how they choose products and suppliers. In some investigations, customers provide useful information on how they have responded to previous significant changes in circumstances. In some investigations, the Agencies are able to explore consumer preferences with the aid of price and quantity data that allow econometric estimation of the relevant elasticities of demand.
Dairy Farmers–SODIAAL (DOJ 2000) The Department challenged the proposed acquisition by Dairy Farmers of America, Inc. of SODIAAL North America Corp. on the basis of likely anticompetitive effects in the sale of "branded stick and whipped butter in the Philadelphia and New York metropolitan areas." DFA sold the Breakstone brand, and SODIAAL sold the Keller's and Hotel Bar brands. The Department concluded that consumers of branded butter in these metropolitan areas so preferred it over private-label butter, as well as margarine and other substitutes, that a hypothetical monopolist over just branded butter in each of those areas would raise price significantly. This conclusion was supported by econometric evidence, derived from data collected from supermarkets, on the elasticity of demand for branded butter in Philadelphia and New York. The Department's complaint was resolved by a consent decree transferring the SODIAAL assets to a new company not wholly owned by DFA and containing additional injunctive provisions. In the vast majority of cases, the Agencies largely rely on non-econometric evidence, obtained primarily from customers and from business documents.
Cemex–RMC (FTC 2005) The proposed acquisition of RMC Group PLC by Cemex, S.A. de C.V. would have combined two of the three independent ready-mix concrete suppliers in Tucson, Arizona. Ready-mix concrete is a precise mixture of cement, aggregates, and water. It is produced at local plants and delivered as a slurry in trucks with revolving drums to construction sites, where it is poured and formed into its final shape. Commission staff determined from information received from customers that a hypothetical monopolist over ready-mix concrete would raise price significantly in the relevant area. Asphalt and other building materials were found not to be good substitutes for ready-mix concrete, due in significant part to concrete's pliability when freshly mixed and strength and permanence when hardened. Concerned that the transaction likely would result in coordinated interaction in the Tucson area, the Commission, pursuant to a consent agreement, ordered Cemex, among other things, to divest RMC's Tucson-area ready-mix concrete assets. In determining whether to challenge a transaction, the Agencies do not simply tally the number of customers that oppose a transaction and the number of customers that support it. The Agencies take into account that all customers in a relevant market are not necessarily situated similarly in terms of their incentives. For example, intermediate resellers' views about a proposed merger between two suppliers may be influenced by the resellers' ability profitably to pass along a price increase. If resellers can profitably pass along a price increase, they may have no objection to the merger. End-users, by contrast, generally lack such an incentive because they must absorb higher prices. In all cases, the Agencies credit customer testimony only to the extent the Agencies conclude that there is a sound foundation for the testimony. Evidence of Effects May Be the Analytical Starting Point In some investigations, before having determined the relevant market boundaries, the Agencies may have evidence that more directly answers the "ultimate inquiry in merger analysis," i.e., "whether the merger is likely to create or enhance market power or facilitate its exercise." Guidelines § 0.2. Evidence pointing directly toward competitive effects may arise from statistical analysis of price and quantity data related to, among other things, incumbent responses to prior events (sometimes called "natural experiments") such as entry or exit by rivals. For example, it may be that one of the merging parties recently entered and that econometric tools applied to pricing data show that the other merging party responded to that entry by reducing price by a significant amount and on a nontransitory basis while the prices of some other sellers that might be in the relevant market did not. To be probative, of course, such data analyses must be based on accepted economic principles, valid statistical techniques, and reliable data. Moreover, the Agencies accord weight to such analyses only within the context of the full investigatory record, including information and testimony received from customers and other industry participants and from business documents. Evidence pertaining more directly to a merger's actual or likely competitive effects also may be useful in determining the relevant market in which effects are likely. Such evidence may identify potential relevant markets and significantly reinforce or undermine other evidence relating to market definition.
Staples–Office Depot (FTC 1997) Staples, Inc. proposed to acquire Office Depot, Inc., a merger that would have combined two of the three national retail chains of office supply superstores. The Commission found that in metropolitan areas where Staples faced no office superstore rival, it charged significantly higher prices than in metropolitan areas where it faced competition from Office Depot or the other office supply superstore chain, OfficeMax. Office Depot data showed a similar pattern: its prices were lowest where Staples and OfficeMax also operated, and highest where they did not. These patterns held regardless of how many non-superstore sellers of office supplies operated in the metropolitan area under review. In some cases, competitive effects analysis may eliminate the need to identify with specificity the appropriate relevant market definition, because, for example, the analysis shows that anticompetitive effects are unlikely in any plausibly defined market.
Federated–May (FTC 2005) Federated Department Stores, Inc. proposed to acquire The May Department Stores Co., thereby combining the two largest chains in the United States of so-called "traditional" or "conventional" department stores. Conventional department stores typically anchor enclosed shopping malls, feature products in the mid-range of price and quality, and sell a wide range of products. The transaction would create high levels of concentration among conventional department stores in many metropolitan areas of the United States, and the merged firm would become the only conventional department store at certain of the 1,200 malls in the United States. Industry Usage of the Word "Market" Is Not Controlling Relevant market definition is, in the antitrust context, a technical exercise involving analysis of customer substitution in response to price increases; the "markets" resulting from this definition process are specifically designed to analyze market power issues. References to a "market" in business documents may provide important insights into the identity of firms, products, or regions that key industry participants consider to be sources of rivalry, which in turn may be highly probative evidence upon which to define the "relevant market" for antitrust purposes. The Agencies are careful, however, not to assume that a "market" identified for business purposes is the same as a relevant market defined in the context of a merger analysis. When businesses and their customers use the word "market," they generally are not referring to a product or geographic market in the precise sense used in the Guidelines, although what they term a "market" may be congruent with a Guidelines' market.
Staples–Office Depot (FTC 1997) In the blocked Staples–Office Depot transaction described above in this Chapter, the Commission alleged, and the district court found, that the relevant product market was "the sale of consumable office supplies through office supply superstores," with "consumable" meaning products that consumers buy recurrently, like pens, paper, and file folders. Industry members in the ordinary course of business did not describe the "market" using this phrase. The facts showed that a hypothetical monopolist office supply superstore would raise price significantly on consumable office supplies. Many retail firms that are not office supply superstores--such as discount and general merchandise stores--sold consumable office supplies in areas near the merging firms. Despite the existence of such other sellers, evidence, including the facts identified above, justified definition of the relevant product market as one limited to the sale of consumable office products solely through office supply superstores. It is unremarkable that "markets" in common business usage do not always coincide with "markets" in an antitrust context, inasmuch as the terms are used for different purposes. The description of an "antitrust market" sometimes requires several qualifying words and as such does not reflect common business usage of the word "market." Antitrust markets are entirely appropriate to the extent that they realistically describe the range of products and geographic areas within which a hypothetical monopolist would raise price significantly and in which a merger's likely competitive effects would be felt.
Waste Management–Allied (DOJ 2003) Waste Management, Inc. agreed to acquire assets from Allied Waste Industries, Inc. that were used in its municipal solid waste collection operations in Broward County, Florida. The Department challenged the proposed acquisition on the basis of anticompetitive effects in "small container commercial hauling." Commercial haulers serve customers such as office buildings, apartment buildings, and retail establishments. Small containers have capacities of 1–10 cubic yards, and waste from them is collected using specialized, front-end loading vehicles. The Department found that this market was separate and distinct from markets for other municipal solid waste collection services. The Department concluded that a hypothetical monopolist in just small container commercial hauling would have raised prices significantly because it was uneconomical for homeowners to use the much larger containers used by commercial customers and uneconomical for commercial customers using large "roll-off" containers to switch to small commercial containers. The Department's challenge to the merger was resolved by a consent decree requiring divestiture of specified collection routes and the assets used on them. Market Definition and Integrated Analysis Market Definition Is Linked to Competitive Effects Analysis The process of defining the relevant market is directly linked to competitive effects analysis. In analyzing mergers, the Agencies identify specific risks of potential anticompetitive harm, and delineate the appropriate markets within which to evaluate the likelihood of such potential harm. This process could lead to different conclusions about the relevant markets likely to experience competitive harm for two similar mergers within the same industry.
Thrifty–PayLess (FTC 1994) A proposed merger of Thrifty Drug Stores and PayLess Drug Stores would have combined retail drug store chains with store locations near one another in towns in California, Oregon, and Washington. Commission staff identified two potential anticompetitive effects from the merger: (1) that "cash" customers, i.e., individual consumers who pay out of pocket for prescription drugs, likely would pay higher prices; and (2) that third-party payers, such as health plans and pharmacy benefit managers ("PBMs"), likely would pay higher dispensing fees to chain pharmacy firms to obtain their participation in provider networks. Many mergers, in a wide variety of industries, potentially have effects in more than one relevant geographic market or product market and require independent competitive assessments for each market.
Suiza–Broughton (DOJ 1998) The Department challenged the proposed acquisition of Broughton Foods Co. by Suiza Foods Corp. Suiza was a nationwide operator of milk processing plants with four dairies in Kentucky and Tennessee. Broughton operated two dairies, including the Southern Belle Dairy in Pulaski County, Kentucky. The two companies competed in the sale of milk and other dairy products to grocery stores, convenience stores, schools, and institutions. The Department's investigation focused on schools, many of which require daily, or every-other-day, delivery. School districts procured the milk through annual contracts, each of which the Department found to be an entirely separate competition. Thus, the Department defined 55 relevant markets, each consisting of a school district in south central Kentucky in which the proposed merger threatened competition. The Department's complaint was resolved by a consent decree requiring divestiture of the Southern Belle Dairy. Market Definition and Competitive Effects Analyses May Involve the Same Facts Often the same information is relevant to multiple aspects of the analysis. For example, regarding mergers that raise the concern that the merged firm would be able to exercise unilateral market power, the Agencies often use the same data and information both to define the relevant market and to ascertain whether the merger is likely to have a significant unilateral anticompetitive effect.
General Mills–Pillsbury (FTC 2001) General Mills, Inc. proposed to acquire The Pillsbury Co. General Mills owned the Betty Crocker brand of pancake mix and the Bisquick brand of all-purpose baking mix, a product that can be used to make pancakes as well as other products. Pillsbury owned the Hungry Jack pancake mix brand. An issue was whether the relevant product market for pancake mixes included Bisquick. General Mills' Betty Crocker pancake mix had a relatively small share of a candidate pancake mix market that excluded Bisquick, suggesting that the merger likely would not raise significant antitrust concerns in the candidate pancake mix market should the relevant market exclude Bisquick. Integrated Analysis Takes into Account that Defined Market Boundaries Are Not Necessarily Precise or Rigid For mergers involving relatively homogeneous products and distinct, identifiable geographic areas, with no substitute products or locations just outside the market boundaries, market definition is likely to be relatively easy and uncontroversial. The boundaries of a market are less clear-cut in merger cases that involve products or geographic areas for which substitutes exist along a continuum. The simple dichotomy of "in the market" or "out of the market" may not adequately capture the competitive interaction either of particularly close substitutes or of relatively distant substitutes. Even when no readily apparent gap exists in the chain of substitutes, drawing a market boundary within the chain may be entirely appropriate when a hypothetical monopolist over just a segment of the chain of substitutes would raise prices significantly. Whenever the Agencies draw such a boundary, they recognize and account for the fact that an increase in prices within just that segment could cause significant sales to be lost to products or geographic areas outside the segment. Although these lost sales may be insufficient to deter a hypothetical monopolist from raising price significantly, combined with other factors, they may be sufficient to make anticompetitive effects an unlikely result of the merger. Significance of Concentration and Market Share Statistics Section 2 of the Guidelines explains that "market share and concentration data provide only the starting point for analyzing the competitive impact of a merger." Indeed, the Agencies do not make enforcement decisions solely on the basis of market shares and concentration, but both measures nevertheless play an important role in the analysis. A merger in an industry in which all participants have low shares--especially low shares in all plausible relevant markets--usually requires no significant investigation, because experience shows that such mergers normally pose no real threat to lessen competition substantially. For example, if the merging parties are small producers of a homogeneous product, operating in a geographic area where many other producers of the same homogeneous product also are located, the Agencies may conclude that the merger likely raises no competition concerns without ever determining the precise contours of the market. By contrast, mergers occurring in industries characterized by high shares in at least one plausible relevant market usually require additional analysis and consideration of factors in addition to market share. Section 1.51 of the Guidelines sets out the general standards, based on market shares and concentration, that the Agencies use to determine whether a proposed merger ordinarily requires further analysis. The Agencies use the Herfindahl-Hirschman Index ("HHI"), which is the sum of the squares of the market shares of all market participants, as the measure of market concentration. In particular, the Agencies rely on the "change in the HHI," which is twice the product of the market shares of the merging firms, and the "post-merger HHI," which is the HHI before the merger plus the change in the HHI. Section 1.51 sets out zones defined by the HHI and the change in the HHI within which mergers ordinarily will not require additional analysis. Proposed mergers ordinarily require no further analysis if (a) the post-merger HHI is under 1000; (b) the post-merger HHI falls between 1000 and 1800, and the change in the HHI is less than 100; or (c) the post-merger HHI is above 1800, and the change in the HHI is less than 50. The Agencies' joint publication of Merger Challenges Data, Fiscal Years 1999–2003 (issued December 18, 2003), and the Commission's publication of Horizontal Merger Investigation Data, Fiscal Years 1996–2003 (issued February 2, 2004 and revised August 31, 2004), document that the Agencies have often not challenged mergers involving market shares and concentration that fall outside the zones set forth in Guidelines section 1.51. This does not mean that the zones are not meaningful, but rather that market shares and concentration are but a "starting point" for the analysis, and that many mergers falling outside these three zones nevertheless, upon full consideration of the factual and economic evidence, are found unlikely substantially to lessen competition. Application of the Guidelines as an integrated whole to case-specific facts--not undue emphasis on market share and concentration statistics--determines whether the Agency will challenge a particular merger. As discussed in section 1.521 of the Guidelines, historical market shares may not reflect a firm's future competitive significance.
Boeing–McDonnell Douglas (FTC 1997) The Boeing Co., the world's largest producer of large commercial aircraft with 60% of that market, proposed to acquire McDonnell Douglas Corp., which through Douglas Aircraft had a share of nearly 5% in that market. Airbus S.A.S. was the only other significant rival, and obstacles to entry were exceptionally high. Although McDonnell Douglas was not a failing firm, staff determined that McDonnell Douglas' significance as an independent supplier of commercial aircraft had deteriorated to the point that it was no longer a competitive constraint on the pricing of Boeing and Airbus for large commercial aircraft. Many purchasers of aircraft indicated that McDonnell Douglas' prospects for future aircraft sales were close to zero. McDonnell Douglas' decline in competitive significance stemmed from the fact that it had not made the continuing investments in new aircraft technology necessary to compete successfully against Boeing and Airbus. Staff's investigation failed to turn up any evidence that this situation could be expected to be reversed. The Commission closed the investigation without taking any action. Indeed, market concentration may be unimportant under a unilateral effects theory of competitive harm. As discussed in more detail in Chapter 2's discussion of Unilateral Effects, the question in a unilateral effects analysis is whether the merged firm likely would exercise market power absent any coordinated response from rival market incumbents. The concentration of the remainder of the market often has little impact on the answer to that question.
2. The Potential Adverse Competitive Effects of Mergers Section 2 of the Guidelines identifies two broad analytical frameworks for assessing whether a merger between rival firms may substantially lessen competition: "coordinated interaction" and "unilateral effects." A horizontal merger is likely to lessen competition substantially through coordinated interaction if it creates a likelihood that, after the merger, competitors would coordinate their pricing or other competitive actions, or would coordinate them more completely or successfully than before the merger. A merger is likely to lessen competition substantially through unilateral effects if it creates a likelihood that the merged firm, without any coordination with non-merging rivals, would raise its price or otherwise exercise market power to a greater degree than before the merger. Normally, the likely effects of a merger within a particular market are best characterized as either coordinated or unilateral, but it is possible to have both sorts of competitive effects within a single relevant market. This possibility may be most likely if the coordinated and unilateral effects relate to different dimensions of competition or would manifest themselves at different times. Although these two broad analytical frameworks provide guidance on how the Agencies analyze competitive effects, the particular labels are not the focus. What matters is not the label applied to a competitive effects analysis, but rather whether the analysis is clearly articulated and grounded in both sound economics and the facts of the particular case. These frameworks embrace every competitive effect of any form of horizontal merger. The Agencies do not recognize or apply narrow readings of the Guidelines that could cause anticompetitive transactions to fall outside of, or fall within a perceived gap between, the coordinated and unilateral effects frameworks. In evaluating the likely competitive effects of a proposed merger, the Agencies assess the full range of qualitative and quantitative evidence obtained from the merging parties, their competitors, their customers, and a variety of other sources. By carefully evaluating this evidence, the Agencies gain an understanding of the setting in which the proposed merger would occur and how best to analyze competition. This understanding draws heavily on the qualitative evidence from documents and first-hand observations of the industry by customers and other market participants. In some cases, this understanding is enhanced significantly by quantitative analyses of various sorts. One type of quantitative analysis is, as explained in Chapter 1, the "natural experiment" in which variation in market structure (e.g., from past mergers) can be empirically related to changes in market performance. The Agencies examine whatever evidence is available and apply whatever tools of economics would be productive in an effort to arrive at the most reliable assessment of the likely effects of proposed mergers. Because the facts of merger investigations commonly are complex, some bits of evidence may appear inconsistent with the Agencies' ultimate assessments. The Agencies challenge a merger if the weight of the evidence establishes a likelihood that the merger would be anticompetitive. The type of evidence that is most telling varies from one merger to the next, as do the most productive tools of economics. In assessing a merger between rival sellers, the Agencies consider whether buyers are likely able to defeat any attempts by sellers after the merger to exercise market power. Large buyers rarely can negate the likelihood that an otherwise anticompetitive merger between sellers would harm at least some buyers. Most markets with large buyers also have other buyers against which market power can be exercised even if some large buyers could protect themselves. Moreover, even very large buyers may be unable to thwart the exercise of market power. Although they generally focus on the likely effects of proposed mergers on prices paid by consumers, the Agencies also evaluate the effects of mergers in other dimensions of competition. The Agencies may find that a proposed merger would be likely to cause significant anticompetitive effects with respect to innovation or some other form of non-price rivalry. Such effects may occur in addition to, or instead of, price effects. The sections that follow address in greater detail the Agencies' application of the Guidelines' coordinated interaction and unilateral effects frameworks. A horizontal merger changes an industry's structure by removing a competitor and combining its assets with those of the acquiring firm. Such a merger may change the competitive environment in such a way that the remaining firms--both the newly merged entity and its competitors--would engage in some form of coordination on price, output, capacity, or other dimensions of competition. The coordinated effects section of the Guidelines addresses this potential competitive concern. In particular, the Agencies seek to identify those mergers that are likely either to increase the likelihood of coordination among firms in the relevant market when no coordination existed prior to the merger, or to increase the likelihood that any existing coordinated interaction among the remaining firms in the relevant market would be more successful, complete, or sustainable. A merger could reduce competition substantially through coordinated interaction and run afoul of section 7 of the Clayton Act without an agreement or conspiracy within the meaning of the Sherman Act. Even if a merger is likely to result in coordinated interaction, or more successful coordinated interaction, and violates section 7 of the Clayton Act, that coordination, depending on the circumstances, may not constitute a violation of the Sherman Act. As section 2.1 of the Guidelines states, coordinated interaction "includes tacit or express collusion, and may or may not be lawful in and of itself." Most mergers have no material effect on the potential for coordination. Some may even lessen the likelihood of coordination. To identify those mergers that enhance the likelihood or effectiveness of coordination, the Agencies typically evaluate whether the industry in which the merger would occur is one that is conducive to coordinated behavior by the market participants. The Agencies also evaluate how the merger changes the environment to determine whether the merger would make it more likely that firms successfully coordinate. In conducting this analysis, the Agencies attempt to identify the factors that constrain rivals' ability to coordinate their actions before the merger. The Agencies also consider whether the merger would sufficiently alter competitive conditions such that the remaining rivals after the merger would be significantly more likely to overcome any pre-existing obstacles to coordination. Thus, the Agencies not only assess whether the market conditions for viable coordination are present, but also ascertain specifically whether and how the merger would affect market conditions to make successful coordination after the merger significantly more likely. This analysis includes an assessment of whether a merger is likely to foster a set of common incentives among remaining rivals, as well as to foster their ability to coordinate successfully on price, output, or other dimensions of competition. Successful coordination typically requires rivals (1) to reach terms of coordination that are profitable to each of the participants in the coordinating group, (2) to have a means to detect deviations that would undermine the coordinated interaction, and (3) to have the ability to punish deviating firms, so as to restore the coordinated status quo and diminish the risk of deviations. Guidelines § 2.1. Punishment may be possible, for example, through strategic price-cutting to the deviating rival's customers, so as effectively to erase the rival's profits from its deviation and make the rival less likely to "cheat" again. Coordination on prices tends to be easier the more transparent are rivals' prices, and coordination through allocation of customers tends to be easier the more transparent are the identities of particular customers' suppliers. It may be relatively more difficult for firms to coordinate on multiple dimensions of competition in markets with complex product characteristics or terms of trade. Such complexity, however, may not affect the ability to coordinate in particular ways, such as through customer allocation. Under Guidelines analysis, likely coordination need not be perfect. To the contrary, the Agencies assess whether, for example, it is likely that coordinated interaction will be sufficiently successful following the merger to result in anticompetitive effects.
LaFarge–Blue Circle (FTC 2001) A merger of LaFarge S.A. and Blue Circle Industries PLC raised coordinated interaction concerns in several relevant markets, including that for cement in the Great Lakes region. In that market, the merger would have created a firm with a combined market share exceeding 40% and a market in which the top four firms would control approximately 90% of the supply. The post-merger HHI would have been greater than 3,000, with a change in the HHI of over 1,000. Cement is widely viewed as a homogeneous, highly standardized commodity product over which producers compete principally on price. Industry practice was that suppliers informed customers of price increases months before they were to take effect, making prices across rival suppliers relatively transparent. Coordination that reduces competition and consumer welfare could be accomplished using many alternative mechanisms. Coordinated interaction can occur on one or more competitive dimensions, such as price, output, capacity, customers served, territories served, and new product introduction. Coordination on price and coordination on output are essentially equivalent in their effects. When rivals successfully coordinate to restrict output, price rises. Similarly, when rivals successfully coordinate on price--that is, they maintain price above the level it would be absent the coordination--the rate of output declines because consumers buy fewer units. Coordination on either price or output may pose difficulties that can be avoided by coordinating on customers or territories served. Rivals may coordinate on the specific customers with which each does business, or on the general types of customers with which they seek to do business. They also may coordinate on the particular geographic areas in which they operate or concentrate their efforts. Coordination also can occur with respect to aspects of rivalry, such as new product introduction. Rivals are likely to adopt the form of coordination for which it is easiest to spot deviations from the agreed terms of coordination and easiest to punish firms that deviate from those terms. Industry-specific factors thus are likely to influence firms' choices on how to coordinate their activities. The number of rival firms remaining after a merger, their market shares, and market concentration are relevant factors in determining the effect of a merger on the likelihood of coordinated interaction. The presence of many competitors tends to make it more difficult to achieve and sustain coordination on competitive terms and also reduces the incentive to participate in coordination. Guidelines § 2.0. The Guidelines' market share and concentration thresholds reflect this reality. The Agencies do not automatically conclude that a merger is likely to lead to coordination simply because the merger increases concentration above a certain level or reduces the number of remaining firms below a certain level. Although the Agencies recently have challenged mergers when four or more competitors would have remained in the market, see, e.g., LaFarge–Blue Circle, described above, when the evidence does not show that the merger will change the likelihood of coordination among the market participants or of other anticompetitive effects, the Agencies regularly close merger investigations, including those involving markets that would have fewer than four firms. As discussed in Chapter 1, enforcement data released by the Agencies show that market shares and concentration alone are not good predictors of enforcement challenges, except at high levels. Market shares and concentration nevertheless are important in the Agencies' evaluation of the likely competitive effects of a merger. Investigations are almost always closed when concentration levels are below the thresholds set forth in section 1.51 of the Guidelines. In addition, the larger the market shares of the merging firms, and the higher the market concentration after the merger, the more disposed are the Agencies to concluding that significant anticompetitive effects are likely. Additional Market Characteristics Relevant to Competitive Analysis Section 2.1 of the Guidelines sets forth several general market characteristics that may be relevant to the analysis of the likelihood of coordinated interaction following a merger: "the availability of key information concerning market conditions, transactions and individual competitors; the extent of firm and product heterogeneity; pricing or market practices typically employed by firms in the market; the characteristics of buyers and sellers; and the characteristics of typical transactions." Section 2.11 of the Guidelines states that the ability of firms to reach terms of coordination "may be facilitated by product or firm homogeneity and by existing practices among firms, practices not necessarily themselves antitrust violations, such as standardization of pricing or product variables on which firms could compete." Further, "[k]ey information about rival firms and the market may also facilitate reaching terms of coordination." Id. These market characteristics may illuminate the degree of transparency and complexity in the competitive environment. The existence or absence of any particular characteristic (e.g., product homogeneity or transparency in prices) in a relevant market, however, is neither a necessary nor a sufficient basis for the Agencies to determine whether successful coordination is likely following a merger. In other words, these factors are not simply put on the left or right side of a ledger and balanced against one another. Rather, the Agencies identify the specific factors relevant to the particular mechanism for coordination being assessed and focus on how those factors affect whether the merger would alter the likelihood of successful coordination.
Formica–International Paper (DOJ 1999) Formica Corp. and International Paper Co. were two producers of high-pressure laminates used to make durable surfaces such as countertops, work surfaces, doors, and other interior building products. Formica sought to acquire the high-pressure laminates business of International Paper Co. There were just four competitors in the United States, and the acquisition of International Paper Co.'s business would have given Formica and its largest remaining competitor almost 90% of total sales between them. The market appeared to have been performing reasonably competitively, but the Department was concerned that two dominant competitors would coordinate pricing and output after the acquisition. Although coordination may be less likely the greater the extent of product heterogeneity, mergers in markets with differentiated products nonetheless can facilitate coordination. Although a merger resulting in closer portfolio conformity may prompt more intense, head-to-head competition among rivals that benefits consumers, an enhanced mutual understanding of the production and marketing variables that each rival faces also may result. Better mutual understanding can increase the ability to coordinate successfully, thus diminishing the benefits to consumers that the more intense competition otherwise would have provided. Sellers of differentiated products also may coordinate in non-price dimensions of competition by limiting their product portfolios, thereby limiting the extent of competition between the products of rival sellers. They also may coordinate on customers or territories rather than on prices.
Diageo–Vivendi (FTC 2001) The Commission challenged a merger between Diageo plc and Vivendi Universal S.A., competitors in the manufacture and sale of premium rum--a product that is heterogeneous as to brand name and the type of rum, e.g., light or gold, flavored or unflavored--on the grounds, among others, that the transaction was likely to lead to coordinated interaction among premium rum rivals. Diageo, which owned the Malibu Rum brand with about an 8% share, was seeking to acquire Seagram's, which marketed Captain Morgan Original Spiced Rum and Captain Morgan Parrot Bay Rum brands and had about a 33% share. Bacardi USA, with its Bacardi Light and Bacardi Limon brands, was the largest competitor with about a 54% share. Thus, after the acquisition, Diageo and Bacardi USA would have had a combined share of about 95% in the U.S. premium rum market. Role of Evidence of Past Coordination Facts showing that rivals in the relevant market have coordinated in the past are probative of whether a market is conducive to coordination. Guidelines § 2.1. Such facts are probative because they demonstrate the feasibility of coordination under past market conditions. Other things being equal, the removal of a firm via merger, in a market in which incumbents already have engaged in coordinated behavior, generally raises the risk that future coordination would be more successful, durable, or complete. Accordingly, the Agencies investigate whether the relevant market at issue has experienced such behavior and, if so, whether market conditions that existed when the coordination took place--and thus were conducive to coordination--are still in place. A past history of coordination found unlawful can provide strong evidence of the potential for coordination after a merger.
Air Products–L'Air Liquide (FTC 2000) Two of the four largest industrial gas suppliers, Air Products and Chemicals, Inc. and L'Air Liquide S.A., proposed acquisitions that would result in splitting between them the assets of a third large rival, The BOC Group plc. The proposed asset split would have resulted in three remaining industrial gas suppliers that were nearly the same in size, cost structure, and geographic service areas. Products involved in the asset split included bulk liquid oxygen, bulk liquid nitrogen, and bulk liquid argon (together referred to as atmospheric gases), various electronic specialty gases, and helium--each of which is a homogeneous product. Bulk liquid oxygen and nitrogen trade in regional markets, and the transactions would have affected multiple regional areas. In these areas, the four largest producers accounted for between 70% and 100% of the markets. The four suppliers also accounted for about 90% of the national market for bulk liquid argon. Even when firms have no prior record of antitrust violations, evidence that firms have coordinated at least partially on competitive terms suggests that market characteristics are conducive to coordination.
Rhodia–Albright & Wilson (FTC 2000) Rhodia entered into an agreement to acquire Albright & Wilson PLC, a wholly owned subsidiary of Donau Chemie AG. The merging firms were industrial phosphoric acid producers. The Commission developed evidence that the market was highly concentrated, that the relevant product was homogenous, and that timely competitive intelligence was readily available--all conditions that are generally conducive to coordination. Incumbent marketing strategies suggested a tendency to curb aggressive price competition and suggested a lack of competition. When investigating mergers in industries characterized by collusive behavior or previous coordinated interaction, the Agencies focus on how the mergers affect the likelihood of successful coordination in the future. In some instances, a simple reduction in the number of firms may increase the likelihood of effective coordinated interaction. Evidence of past coordination is less probative if the conduct preceded significant changes in the competitive environment that made coordination more difficult or otherwise less likely. Such changes might include, for example, entry, changes in the manufacturing processes of some competitors, or changes in the characteristics in the relevant product itself. Events such as these may have altered the incumbents' incentives or ability to coordinate successfully. Although a history of past collusion may be probative as to whether the market currently is conducive to coordination, the converse is not necessarily true, i.e., a lack of evidence of past coordination does not imply that future coordination is unlikely. When the Agencies conclude that previous episodes of coordinated interaction are not probative in the context of current market conditions--or when they find no evidence that rivals coordinated in the past--an important focus of the investigation becomes whether the merger is likely to cause the relevant market to change from one in which coordination did not occur to one in which such coordination is likely.
Premdor–Masonite (DOJ 2001) Premdor Inc. sought to acquire (from International Paper Co.) Masonite Corp., one of two large producers of "interior molded doorskins," which form the front and back of "interior molded doors." Interior molded doors provide much the same appearance as solid wood doors but at a much lower cost, and Premdor was the world's largest producer. Premdor also held a substantial equity stake in a firm that supplied some of its doorskins. The vast majority of doorskins, however, were produced by Masonite and by a third party that was also Premdor's only large rival in the sale of interior molded doors. The Department concluded that the upstream and downstream markets for interior molded doorskins and interior molded doors were highly concentrated and that the proposed acquisition would have removed significant impediments to coordination. Maverick and Capacity Factors in Coordination A merger may make coordination more likely or more effective when it involves the acquisition of a firm or asset that is competitively unique. In this regard, section 2.12 of the Guidelines addresses the acquisition of "maverick" firms, i.e., "firms that have a greater economic incentive to deviate from the terms of coordination than do most of their rivals (e.g., firms that are unusually disruptive and competitive influences in the market)." If the acquired firm is a maverick, its acquisition may make coordination more likely because the nature and intensity of competition may change significantly as a result of the merger. In such a case, the Agency's investigation examines whether the acquired firm has behaved as a maverick and whether the incentives that are expected to guide the merged firm's behavior likely would be different. Similarly, a merger might lead to anticompetitive coordination if assets that might constrain coordination are acquired by one of a limited number of larger incumbents. For example, coordination could result if, prior to the acquisition, the capacity of fringe firms to expand output was sufficient to defeat the larger firms' attempts to coordinate price, but the acquisition would shift enough of the fringe capacity to a major firm (or otherwise eliminate it as a competitive threat) so that insufficient fringe capacity would remain to undermine a coordinated price increase.
Arch Coal–Triton (FTC 2004) The Commission challenged Arch Coal, Inc.'s acquisition of Triton Coal Co., LLC's North Rochelle mine in the Southern Powder River Basin of Wyoming ("SPRB"). Prior to the acquisition, three large companies--Arch, Kennecott, and Peabody (the "Big Three")--owned a large majority of SPRB mining capacity. The remaining capacity, including the North Rochelle mine, was owned by fringe companies with smaller market shares. The Commission's competitive concern was that, by transferring ownership of the North Rochelle mine from the fringe to a member of the Big Three, the acquisition would significantly reduce the supply elasticity of the fringe and increase the likelihood of coordination to reduce Big Three output. As a result of the reduction in fringe supply elasticity, a given reduction in output by the Big Three would be more profitable to each member of that group after the acquisition than would have been the case before the acquisition. Mine operators had, in the past, announced their future intentions with regard to production and had publicly encouraged "production discipline." The court denied the Commission's preliminary injunction request and, after further investigation, the Commission decided not to pursue further administrative litigation. Section 2.2 of the Guidelines states that "merging firms may find it profitable to alter their behavior unilaterally following the acquisition by elevating price and suppressing output." The manner in which a horizontal merger may generate unilateral competitive effects is straightforward: By eliminating competition between the merging firms, a merger gives the merged firm incentives different from those of the merging firms. The simplest unilateral effect arises from merger to monopoly, which eliminates all competition in the relevant market. Since the issuance of the Guidelines in 1992, a substantial proportion of the Agencies' merger challenges have been predicated at least in part on a conclusion that the proposed mergers were likely to generate anticompetitive unilateral effects. Section 2.2 of the Guidelines explains: "Unilateral competitive effects can arise in a variety of different settings. In each setting, particular other factors describing the relevant market affect the likelihood of unilateral competitive effects. The settings differ by the primary characteristics that distinguish firms and shape the nature of their competition." Section 2.2 does not articulate, much less detail, every particular unilateral effects analysis the Agencies may apply. The Agencies' analysis of unilateral competitive effects draws on many models developed by economists. The simplest is the model of monopoly, which applies to a merger involving the only two competitors in the relevant market. One step removed from monopoly is the dominant firm model. That model posits that all competitors but one in an industry act as a "competitive fringe," which can economically satisfy only part of total market demand. The remaining competitor acts as a monopolist with respect to the portion of total industry demand that the competitive fringe does not elect to supply. This model might apply, for example, in a homogeneous product industry in which the fringe competitors are unable to expand output significantly. In other models, two or more competitors interact strategically. These models differ with respect to how competitors interact. In the Bertrand model, for example, competitors interact in the choice of the prices they charge. Similar to the Bertrand model are auction models, in which firms interact by bidding. There are many auction models with many different bidding procedures. In the Cournot model, competitors interact in the choice of the quantities they sell. And in bargaining models, competitors interact through their choices of terms on which they will deal with their customers. Formal economic modeling can be useful in interpreting the available data (even with natural experiments). One type of modeling the Agencies use is "merger simulation," which "calibrates" a model to match quantitative aspects (e.g., demand elasticities) of the industry in which the merger occurs and uses the calibrated model to predict the outcome of the competitive process after the merger. Merger simulation can be a useful tool in determining whether unilateral effects are likely to constitute a substantial lessening of competition when a particular model mentioned above fits the facts of the industry under review and suitable data can be found to calibrate the model. The fit of a model is evaluated on the basis of the totality of the evidence. Section 2.2 of the Guidelines does not establish a special safe harbor applicable to the Agencies' consideration of possible unilateral effects. Section 2.2.1 provides that significant unilateral effects are likely with differentiated products when the combined market share of the merging firms exceeds 35% and other market characteristics indicate that market share is a reasonable proxy for the relative appeal of the merging products as second choices as well as first choices. Section 2.2.2 provides that significant unilateral effects are likely with undifferentiated products when the combined market share of the merging firms exceeds 35% and other market characteristics indicate that non-merging firms would not expand output sufficiently to frustrate an effort to reduce total market output. As an empirical matter, the unilateral effects challenges made by the Agencies nearly always have involved combined shares greater than 35%. Nevertheless, the Agencies may challenge mergers when the combined share falls below 35% if the analysis of the mergers' particular unilateral competitive effects indicates that they would be likely substantially to lessen competition. Combined shares less than 35% may be sufficiently high to produce a substantial unilateral anticompetitive effect if the products are differentiated and the merging products are especially close substitutes or if the product is undifferentiated and the non-merging firms are capacity constrained. Unilateral Effects from Merger to Monopoly The Agencies are likely to challenge a proposed merger of the only two firms in a relevant market. The case against such a merger would rest upon the simplest of all unilateral effects models. Relatively few mergers to monopoly are proposed. Some proposed mergers affecting many markets would have resulted in monopolies in one or more of these markets.
Franklin Electric–United Dominion (DOJ 2000) Subsidiaries of Franklin Electric Co. and United Dominion Industries were the only two domestic producers of submersible turbine pumps used for pumping gasoline from underground storage tanks at retail stations. The parent companies entered into a joint venture agreement that would have combined those subsidiaries. The Department found that entry was difficult and that other pumps, including foreign-produced pumps, were not good substitutes. Hence, the Department concluded that the formation of the joint venture likely would create a monopoly and thus give rise to a significant unilateral anticompetitive effect. After trial, the district court granted the Department's motion for a permanent injunction. Unilateral Effects Relating to Capacity and Output for Homogeneous Products In markets for homogeneous products, the Agencies consider whether proposed mergers would, once consummated, likely provide the incentive to restrict capacity or output significantly and thereby drive up prices.
Georgia-Pacific–Fort James (DOJ 2000) Georgia-Pacific Corp. and Fort James Corp. were the two largest producers in the United States of "away-from-home" tissue products (i.e., paper napkins, towels, and toilet tissue used in commercial establishments). These products are produced in a two-stage process, the first stage of which is the production of massive parent rolls, which also are used to make at-home tissue products. Georgia-Pacific's proposed acquisition of Fort James would have increased Georgia-Pacific's share of North American parent roll capacity to 36%. Investigation revealed that the industry was operating at nearly full capacity, that capacity could not be quickly expanded, and that demand was relatively inelastic. These factors combined to create a danger that, after the merger, Georgia-Pacific would act as a dominant firm by restricting production of parent rolls and thereby forcing up prices for away-from-home tissue products. Merger simulation indicated that the acquisition would cause a significant price increase. The Department's challenge to the acquisition was settled by a consent decree requiring the divestiture of Georgia-Pacific's away-from-home tissue business. |
