Against the backdrop of a "remarkable" merger wave in the United States, Federal Trade Commission Chairman Robert Pitofsky today offered a group of business executives his analysis of two recent high-profile investigations -- of the Staples/Office Depot merger, which the Commission challenged, and the Boeing/McDonnell Douglas merger, which the Commission did not challenge. The number of mergers reported to the federal antitrust authorities has doubled in five years, Pitofsky said, and a larger percentage of these transactions involve direct competitors and so raise "the threat of increased market power, and abusive effects on consumer welfare." That was the case in both the Staples and the Boeing mergers: in the former, the Commission showed the court hard economic data from cities where the two companies did not already compete, proving that the merger would raise consumer prices as much as 13 percent. Because in the latter case, McDonnell Douglas was found not be a competitor in the commercial aircraft industry in the future, "the Commission had little basis to mount a challenge."
Pitofsky was speaking before the Business Development Associates in Washington, D.C.
As of Sept. 30, Pitofsky reported, there will have been about 3,500 transactions valued at more than $15 million dollars reported to the federal enforcement agencies and 128 valued at more than $1 billion. The reasons for the large numbers, the Chairman suggested, are changes in the world economy, the sharp increase in global competition, the new economic conditions produced by deregulation, over capacity in some industries and an effort through mergers to bring supply more in line with demand.
With regard to the Staples case, the Chairman pointed to two issues of particular importance -- the definition of relevant product market, and how to treat claims of efficiency in defense of a merger. "Ordinarily in antitrust analysis, market power is measured by examining the characteristics of a given set of products or markets, defining differences between that set and actual or potential competitors, and then predicting that prices could be raised a substantial amount without losing sufficient business to make the price rise unprofitable," the Chairman said (emphasis added). In Staples, however, the Commission argued and the Court, in effect, agreed that "various office supply super stores [already] had raised prices a significant amount over a substantial period of time, in those cities where one chain faced no other super store competition, and had not lost sufficient business to other kinds of rivals to make those prices unprofitable." This difference in approach -- using economic data to show what price effects in fact were across markets rather than predicting price effects -- nonetheless does not ultimately lead to a departure from conventional merger analysis in that the price effect data simply demonstrated that super stores are a separate product market.
Pitofsky pointed out that as data becomes increasingly available, the price comparisons across both product and geographic markets will be available to enforcement agencies as it was in Staples. "When such data is available," he said, "it surely offers a more reliable description of the 'competitive arena' in which rivalry occurs than we have sometimes seen in past merger cases."
In rejecting Staples' efficiencies argument, Pitofsky said the District Court not only found that the claims were not based on creditable evidence, but also noted that they were not merger specific. The Chairman added that in mergers leading to monopoly or near monopoly, "the view of the new merger guidelines, and the appropriate approach in my view, is that efficiencies cannot trump anticompetitive effects."
In reference to the Boeing case, Pitofsky said that the FTC's decision broke no new ground. The critical question for the Commission, he said, was "whether Douglas Aircraft, McDonnell Douglas' commercial arm, had prospects of playing a significant competitive role in the commercial aircraft market in the future." Given that the courts have said that "future market potential is a critical factor rather than past market shares," he concluded, "the Commission had little basis to mount a challenge."
Pitofsky also commented on the "divergence of view between the U.S. and the E.U." in the Boeing matter, explaining that antitrust authorities in Brussels and in Washington enforce two different statutes with different emphases.
He said: "In Europe, the concern is with mergers that increase the leverage that can be exercised by a dominant firm and the possible impact of the merger on competitors. . . . In the United States, the emphasis is less on competitors and 'competitive leverage,' and more on the effect of a merger on future prices."
Chairman Pitofsky's remarks reflect his own views and not necessarily those of the Commission or any other individual Commissioner.
Copies of the remarks, and Commission documents associated with the Staples and McDonnell cases, are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.