GLOBAL AND INNOVATION-BASED COMPETITION
HEARINGS BEFORE THE FEDERAL TRADE COMMISSION
ANTITRUST AND COMPETITIVENESS: EFFICIENCIES,
FAILING FIRMS, AND THE WORLD ARENA
Eleanor M. Fox
December 13, 1994
My name is Eleanor Fox. I am Walter Derenberg Professor of Trade Regulation at New York University School of Law.
I am honored to appear before you today, and to participate in these important hearings on whether adjustments to U.S. antitrust law are needed to take account of the changes in the global economy.
In this testimony I wish to make five preliminary observations and then to focus on the specific question posed: Should there be an efficiencies or failing firm defense?
I. Preliminary Observations
First, United States antitrust law has been uniquely responsive to changes in the world environment. In virtually all areas of law — monopolization, distribution, joint ventures, alliances and mergers — U.S. law is (95%) world class.
Particularly is this so if the objective is to facilitate business responsiveness to buyers needs and thereby to increase the robustness of business while condemning businesses' attempts to control markets especially by cartel conduct.
Second, U.S. business has had to and has commendably adjusted to world competition. Indeed the greater engagement of foreign competitors, combined with increasingly lower levels of trade barriers through successive rounds of the GATT (now WTO), has dissipated power and inertia of once monopolistic or oligopolistic U.S. firms. In low barrier markets, these phenomena have decreased competitive concerns about high domestic concentration.
Third, the notion that the U.S. antitrust law handicaps "good" business activity is a myth, and quite a dramatic one in the mid 1990s. The notion that U.S. law, compared with our trading partners' laws, differentially handicaps U.S. business is an even more extravagant myth. A study of European Community competition law as applied to private enterprise leads down an interesting path but not a particularly fruitful one if our object is to make business more competitive. EC law is much more concerned than U.S. law with protecting smaller firms against abuses of dominance,(1) and merger and other decisions are much more subject to politics and (therefore) national industrial policies.(2) The political content of competition decision-making in the European Union has led to proposals by some that the Competition Directorate of the Commission be reconstituted as an independent agency; and while this proposal does not seem to have overwhelming support, it is sufficiently serious that it may be on the agenda of the Intergovernmental Conference in 1996.(3) A study of other nations' precedents and procedures as well should make us proud of our law and even more surely proud of our process.
Fourth, there is an "us against them" flavor in some of the testimony presented during these hearings. The suggestion is made or implied that the United States can and should structure its law so as to empower United States businesses to be national champions in the world at the expense of trading partners' businesses. This is a nationalistic view of the world (even if one could define "U.S. business" and even if government could design a plan that would work). If good is defined in terms of advancing interests of consumers and robust business, what is good for the world is good for America.(4)
Fifth, by unilateralism and a sense of antitrust hegemony,(5) the United States appears to be losing antitrust leadership in the world. Perhaps half of the competition problems experienced in the United States today are problems of an international dimension. In some cases the problems demand a greater than national vision and a greater than national solution. In some cases national solutions are unequal to the task not only because they lack legitimacy with the trading partners they directly impact (e.g., the uranium cartel cases) but also because national solutions may involve parochial policy (e.g., antidumping duties, non-transparent standards, and regulation with discriminatory impact) that can be surmounted only by a cosmopolitan conception.
It is in this latter area — international problems that demand international solutions — that the United States has much to learn from the basic economic blueprint for the EC internal market, which tore down frontier barriers, conceptualized competition, trade and national industrial policy issues as a seamless web, and prohibits significant unjustified public, private and hybrid restraints.(6)
Sir Leon Brittan, EC Commissioner for External Affairs, Karel van Miert, EC Competition Commissioner, Claus Ehlermann, immediate past Director General of the EC Competition Directorate, Giuliano Amato, President of the Italian Antitrust Authority and former Prime Minister of Italy, and others have taken the lead, along with the OECD, in launching think-tank sessions about how to conceptualize the internationalization of competition problems and their resolution.(7) Such conceptualization does not mean that the United States must forego or bargain away its law or must submit to faceless untrusted decision-makers.(8) Nonetheless, U.S. officials have shown a reluctance to grapple with the problem, and in this sense have relinquished leadership and could forfeit the opportunity to participate in the shaping of an emerging world conception. It is not too late, and indeed some signs may indicate a new receptivity. With their comparative advantage in antitrust knowledge and analysis and their tradition in valuing open markets and robust competition and trade, the U.S. antitrust authorities are uniquely needed in the forefront of the on-going world conversations of how to bring competition law, with its global dimension, into the twenty-first century.
II. Antitrust, Competitiveness, and Efficiencies and Failing Firms in Perspective
Much has been said in the course of these hearings about how to make U.S. business more competitive and whether an efficiencies or failing firm defense can advance the effort to do so. The word "competitive" is often used in the following colloquial sense: having the qualities of a robust and effective competitor in world competition. This is the sense in which I use the word herein.
In my view no further cutbacks in the U.S. antitrust laws are needed or useful in facilitating competitiveness and indeed further cutbacks could have the opposite effect by weakening competition. I believe this perspective coincides with the essence of the U.S. antitrust laws, and I therefore wish to focus on the central core of the law before specifically addressing the proposal for new defenses.
The U.S. antitrust laws protect competition not efficiencies, although efficient markets and efficient competitors are expected products of the system. The focus of the law is properly on competition — the forces produced by rivalrous firms in reasonably open markets. Competition as market governor assures a fluid, productive economy; responsive, inventive businesses that adjust to change; a high degree of self-correction of market failures; best deals for consumers and intermediate buyers, and economic opportunity for market participants. Also the competition system is a fundamental prong of a vision of political economy compatible with and likely to stabilize democratic institutions, as we are reminded by the democracy/free enterprise revolutions in Central Europe.
The multifaceted benefits of competition policy should not be sold short. A narrow focus on static short-term consumer welfare as defined by neoclassical price theory does sell competition policy short. Were it not for this blindered focus it would not have been necessary to invent innovation markets to take account of the reality that ZF Friedrichshafen's acquisition of General Motor's Allison Division would have taken off the market the only competition in innovation in heavy duty bus and truck automatic transmissions; or indeed to take account of all other dynamic competition and innovation, none of which is adequately captured by price theory.
Of course it is important that U.S. business be competitive. If, however, we were to ask the open question, what changes are most likely to improve the competitiveness of U.S. business, the answers would probably be of the following order:
- Bring antidumping and other national trade laws into closer harmony with antitrust price predation law.
- Focus on the workers laid off by downsizing, including downsizing through mergers; enlist more talent, foresight and rigor in programs designed to retrain workers for jobs that are likely to be available.
- Concentrate on education from the lowest grades up, especially for children in inner cities and without family support.
An efficiencies defense would certainly not lead a list of measures to improve U.S. competitiveness. Indeed it might be a problem rather than a solution if it induces more layoffs than would otherwise be contemplated to help the merging firms prove cost savings. Much less would a failing firm defense be on the list. Acquisition of a failing firm (which is seldom anticompetitive) is more likely to delay the day of adjustment than to face the forces of adjustment.
Having set the context, I wish now to take a closer look at the treatment of efficiencies.
Efficiencies are highly relevant to merger analysis. They always have been so (though before the effective demise of Brown Shoe, perversely, they were held against a merger).
Mergers are sometimes driven by a firm's prospect for cost-savings and by the prospect of being more responsive to the needs of the market place and even of being able to pioneer new markets. They are sometimes driven by the desire to get rid of the competition, to enhance personal position and power, and to profit from financial reshuffling. Understanding (if one can) the driving force of a merger is important to a prediction of its effects. Efficiencies are relevant to this understanding. Moreover, if efficiencies are realized in a competitive market place, the forces of competition are likely to enhance market efficiency and consumer welfare.
For these reasons, apart from (other) possible allocative gains, efficiencies are properly recognized as an integral part of merger analysis. Moreover, since efficiencies are positive, both the agencies and the courts normally consider efficiencies as a plus factor guiding their judgment in the range of uncertainty when a merger's probable effects on competition are ambiguous.
The foregoing treatment is consistent with the law, which declares that anticompetitive mergers are illegal.
The question has been raised, however, as to whether there should be an efficiencies defense that would save anticompetitive mergers; and a proposal has been made for a conditional efficiencies defense: the merger, though anticompetitive, would be allowed, but if the projected efficiencies are not achieved within a specified time frame, the acquirer would be required to divest.
I am opposed to an efficiencies defense for anticompetitive mergers, and I am even more strongly opposed to a conditional efficiencies defense.
First, I note that provision of an efficiencies defense to an anticompetitive merger is a change in law. Though economists "show," as they have for many years, how efficiencies can theoretically offset dead weight loss, and many people argue that movement towards allocative efficiency should be the only interest of antitrust and virtually all other law, efficiency as opposed to competition is not the raison d'etre of antitrust law.
Second, I believe that the law is wise to focus on competition as it does. In addition to other reasons for competition, competition-based law is more likely to foster efficient, innovative and responsive firms than a law focused on the productive efficiency of a given firm that desires a specific competition-lessening merger. The U.S. interpretation of "competition-lessening" mergers has become more and more "liberal" in favor of merging firms. The threshold for lessening competition is very high, and a relatively small percentage of mergers even of important competitors cross that threshold today. The U.S. market is large and the scope of accessible foreign markets is constantly increasing. Firms can almost always achieve all available economies of scale and scope without making anticompetitive mergers. This is particularly so in the global market place, where competition by effective foreign firms has often destroyed the possibility of domestic firms' power.
Also, in my view, the benefits of productive efficiency prospects are often overstated, the probable productive efficiency losses are not counted, and the dynamic losses from the suppression of competition in the market are not only uncounted, they are unknowable. Cost-savings are often ephemeral and exaggerated. Moreover, cost-savings actually made do not frictionlessly flow to shareholders when no forces of competition cause them to be passed on to consumers. But more importantly, large costs attend large mergers, especially large mergers in noncompetitive markets. These include X-efficiency, costs of digestion, debt burden costs exaggerated by market changes, and the huge dislocation costs to laid off workers. The costs of large mergers could overwhelm paper cost-savings. Moreover, unknowable dynamic losses attend merger to significant market power. For example, Microsoft mounted an impressive case that huge efficiencies, including innovation breakthroughs, would have followed from its acquisition of Intuit, the leading money management applications system. Yet with the abandonment of the merger in the face of a Justice Department suit, we have seen large dynamic gains from Intuit's competition with Microsoft's Money. Congress has chosen competition over significant increases in market power by merger.
If I am not enamored of an efficiencies defense, I like a conditional efficiencies defense even less. A conditional efficiencies defense will bring us back to before the days of Hart-Scott-Rodino, when midnight mergers were consummated before they were investigated. When assets were scrambled it was almost impossible to unscramble them. When the government sought hold separate orders in order to prevent scrambling, defendants objected that they could not live with a hold separate order; it would effectively put all of the benefits of the merger on hold and would, they argued, irreparably injure the partners. These dilemmas produced the Hart-Scott-Rodino Act. A conditional efficiencies defense has all the pre-HSR flaws and more: (1) it would require agency surveillance, second guessing, and more bureaucracy. (2) It would enter a brave new world of legal/factual questions: If the efficiencies are not achieved within the time frame, is divestiture automatic? Can/should it be saved by offsets of more competition? circumstances beyond control? the problems of effective divestiture? (3) It would create incentives to make cost-cuts that may not otherwise make sense and may be disabling past the short term. (4) If it creates incentives to hold assets separate it may undermine the prospect for the most important efficiencies. Moreover, if even anticompetitive mergers are allowed, on condition of achieving efficiencies, why should not (a fortiori) presumed anticompetitive mergers be allowed on condition that no anticompetitive effects materialize?
If the agencies believe that a merger, though anticompetitive, is justified by efficiencies unique to the particular case, I would prefer that the agencies not challenge the merger at all than that they enter a conditional decree.
IV. Failing Firms
Just as most firms achieve all available significant efficiencies within the confines of permitted (not anticompetitive) mergers, acquisitions of failing firms are unlikely to be anticompetitive. We have a failing firm defense as a matter of Supreme Court case law (Citizen Publishing), devised in the interests of stockholders and communities (e.g., jobs). The case law may seem of questionable wisdom to those who believe that the job of antitrust is antitrust. Shareholders by definition take risks of losing an investment; and jobs policy is not best handled by antitrust exemptions. Allowing mergers can result in job losses as surely as can disallowing mergers, and it would be no less incongruous to suggest that layoffs should disqualify mergers under the antitrust law. The Citizen Publishing defense is an anomaly.
Nonetheless the requirements of the defense are rigorous and the defense has not appeared to be harmful. The real policy question raised at this point is whether the defense should be expanded.
I do not support expansion. I note that the two industries most often cited in connection with a claimed need for more flexibility — hospitals and defense — are local or buy- national (with big buyer) markets; they do not raise global competitiveness problems. Each may be sui generis and solutions tailored to these industries are not obviously the best general solution for markets involving global competition.
Jobs problems should be dealt with by jobs policy — which is greatly needed for the country and for competitiveness;(9) competition policy should be dealt with by antitrust.
Competitiveness has become a buzz-word. Policy to promote competitiveness has become a buzz-word phrase adopted by some to suggest industrial policy measures that are anti-anti- trust.
We have seen many and far-reaching cut-backs in antitrust in the last fifteen years. Some of the changes have been salutary; e.g., taking realistic account of the effects of world competition and the possible existence of broader than national markets. Some has been excessive; e.g., the presumption that what is good for big firms is good for the country.
In 1963 Gregory Kolko wrote The Triumph of Conservatism. The triumph of conservatism was the final drafting and passage of the Clayton Act, which, Kolko said, would allow the established business interests to manipulate the law, use it in their own interests, and yet cite to a rule-of-law regime.
U.S. antitrust law has already been pared back to its core. It is modern and it is responsive to the realities of world competition. We cannot afford to let cries of "competitiveness" produce another triumph of conservativism.
(1)1/See, e.g., Radio Telefis Eirann v. Commission (Magill), 1995 ECR I- (April 6, 1995); Hoffmann-La Roche v. Commission (Vitamins), ECR 461.
(2)2/See, e.g., Mannesmann/Vallourec/Ilva, Commission Decision 31 Jan. 1994 O.J. L 102/15.
(3)3/See Ingo Schmidt, The Suitability of the EC Merger Control System: An Analysis of Five Years of Application, Discussion paper, Institute für Volkswirtschaftslehre (520), University of Hohenheim 1995. Cf. Kurt Stockmann, Anti-Merger Control - A German Perspective, 9 Connecticut J. of Int'l L. 565 (1994).
(4)4/See Robert Reich, The Work of Nations, Preparing Ourselves for 21st Century Capitalism (1991).
(5)5/I refer to a sense that we can do what we wish and catch what we wish by our own law, and that cooperation with regard to law or dispute settlement that transcends borders is likely to corrupt our "pure" legal principles.
See 1995 Agency Guidelines on International Operations, Examples D and E; Ambassador Hills, Super/Special 301 Provisions of the 1988 Trade Act, 7 CCH Trade Reg. Rep. ¶ 50,020.
(6)6/See E. Fox, Vision of Europe: Lessons for the World (introduction to symposium issue), 18 Fordham Int'l L.J. 379 (1994).
(7)7/See, e.g., Report of EC Experts, Competition Policy in the New Trade Order: Strengthening International Cooperation & Rules, published by Europe Documents (27 July 1995).
(8)8/See E. Fox, Competition Law and the Agenda for the WTO: Forging the Links of Competition and Trade, 4 Pacific Rim Law & Policy Journal 1 (1995).
(9)9/See Benjamin Schwarz, American Inequality: Its History and Scary Future, N.Y. Times, Dec. 19, 1995, A25.