Statement

Concerning the FTC's Merger Enforcement Actions in the Oil IndustryÊ

Date:
By: 
Mozelle W. Thompson, Former Commissioner

Last week, Chairman Muris issued a statement in his capacity as an individual member of the Commission to criticize a recent GAO report on petroleum industry mergers. While I agree with the Chairman's conclusion that the Commission has been vigilant in enforcing the antitrust laws in the oil industry, I do not agree with the Chairman's statement that certain merger data "demonstrate that the standards the Commission has applied to oil industry mergers are significantly more stringent than those applied to other industries." I further disagree with the suggestion that the Commission has taken excessive enforcement actions in challenging petroleum mergers.

In suggesting that the Commission has applied a different standard to petroleum mergers, the Chairman hypothesizes that because some of these mergers are large and take considerable time for the Commission to investigate, the merging parties "surrender" during the Commission review process and consent to divestitures that the Chairman claims might be "over-inclusive." This statement implies that the Commission asked for remedies it was not entitled to obtain for the benefit of American consumers. I strongly disagree. In the proposed oil mergers I have reviewed, the Commission was appropriately concerned about potential anticompetitive harm, and I had reason to believe that such harm would occur absent Commission action.

I suspect that time and cost, relative to transaction size, are practical considerations for every merging party regardless of the industry involved. In my view, merging companies that appear before the Commission assess whether they are likely to satisfy the Commission's merger review without having to defend a Commission lawsuit or enter into a settlement. Such analysis presumably affects the merging parties' strategies before the Commission and/or a court - whether to argue the merits, negotiate a settlement, or defend a lawsuit - should the Commission continue to have concerns about the merger. These considerations are made by all parties proposing a merger transaction and are not unique to oil industry mergers. Moreover, these considerations necessarily vary according to the particular facts presented by the proposed transaction and the parties involved, rather than by the particular industry being reviewed. There is simply no evidence showing that companies in the oil industry approach the Hart-Scott-Rodino merger review process differently than companies in other industries. Regardless of the strategies employed by oil merger proponents, as a Commissioner, I focus my review on the risk that these transactions pose to consumers and whether the Commission should seek appropriate relief.

In addition to the fact that practical considerations arise for mergers within any industry, the Commission's February 2004 data(1) cited in the Chairman's statement actually shows that the Commission has not established an inappropriately harsh standard for petroleum mergers. Indeed, although the data does show that "[u]nlike other industries, in mergers involving petroleum products, the Commission has obtained relief in moderately concentrated [relevant antitrust markets],"(2) the data also demonstrates that this approach is perfectly appropriate in light of established antitrust principles and the relevant factors present in most petroleum markets.

Oil industry mergers are generally horizontal transactions. As such, they risk harming competition and consumers by creating a single firm with market power ("unilateral market power"), or by permitting multiple market participants to lessen competition through coordinated interaction.(3) Various market conditions in the oil industry increase the likelihood that a merger will result in reduced competition through coordinated interaction,(4) and a fair number of the oil industry's relevant antitrust markets may be more likely to suffer a lessening of competition as a consequence of coordinated interaction.(5)

The data set forth in the table describing the Commission's oil industry enforcement actions, which the Chairman attached to his statement, actually bears out this conclusion.(6) The data shows that while the Commission alleged coordination as the sole theory of competitive harm for 22 market groupings, it alleged unilateral market power as the sole theory for only 11 market groupings.(7) This high ratio of coordinated interaction cases for the petroleum industry reflects the specific nature of this industry.

For all of these reasons, I disagree with the Chairman's statement to the extent it implies that the Commission placed unreasonable or inappropriate conditions on oil industry mergers. I believe that the Commission in reviewing proposed oil mergers was rightfully concerned about their potential harms. I have also been concerned about related practices that could lead to gasoline price manipulation.(8)

The Commission has recently spent substantial time and energy preparing two reports concerning the oil and gasoline industry.(9)These reports shed some light upon industry structure, how antitrust law shapes the petroleum markets, and the factors affecting gasoline pricing. They may also be very helpful in informing Federal and State policy makers. Accordingly, I call upon the Chairman to expedite their release.

Endnotes:

1. Federal Trade Commission, Horizontal Merger Investigation Data, Fiscal Years 1996-2003 (Feb. 2, 2004), vailable at/os/2004/02/040202horizmergereffects.pdf .

2. Market Forces, Anticompetitive activity and Gasoline Prices - FTC Initiatives to Protect Competitive Markets, Prepared Statement of the Federal Trade Commission Before the United States Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights (April 7, 2004) ("Judiciary Statement"), available at /os/2004/04/gaspricestest.pdf.

3. Horizontal Merger Guidelines, § 2, available at /bc/docs/horizmer.htm.

4. These include: product homogeneity, the characteristics of typical transactions, existing business practices, the characteristics of buyers, and the availability of key information concerning market conditions, transactions, and individual competitors. Horizontal Merger Guidelines, § 2.12. The relevant market conditions in the oil industry's antitrust markets may significantly differ from those market conditions in other industries that the Commission has investigated and taken enforcement actions, such as computer hardware and software, acute care hospitals, pharmaceuticals, defense, and media and entertainment.

5. It is well-established that "coordinated interaction" does not require market concentration levels to be as high as those present in markets in which mergers may generate unilateral market power. This fact is true because market share is spread across multiple, coordinating firms instead of being controlled by just one dominant firm with a large percentage of market sales. A firm that acquires unilateral market power in a computer software market may, for example, have a market share of 80%, which would result in a market concentration level above at least 6400 out of a possible 10,000 Herfindahl-Hirschman Index ("HHI") points. On the other hand, a market of five equal competitors that coordinate in a gasoline marketing market would only have a concentration of 2000 HHI points. See Horizontal Merger Guidelines, § 1.5 ("The HHI is calculated by summing the squares of the individual market shares of all the participants." [footnote omitted]). Yet, the potential consumer harm that can be caused by coordinated interaction can be just as great.

6. See FTC Enforcement Actions in the Petroleum Industry 1981-2002, available at /opa/2004/05/040527petrolactions81to02.pdf(attached to the Chairman's May 27, 2004 Press Release).

7. For 38 market groupings, the table shows that the Commission alleged both unilateral and coordinated interaction theories of harm. Thus, a remarkable 60 out of 71 market groupings included an allegation of coordinated interaction. In his press release, the Chairman fails to acknowledge this extremely high ratio of coordinated interaction allegations in oil industry mergers.

8. Concurring Statement of Commissioner Mozelle W. Thompson, In the Matter of Western States Gasoline Pricing Investigation, File No. 981-0187 (May 7, 2001), available at /os/2001/05/wsgpithompson.htm.

9. Judiciary Statement at 2; FTC to Hold Second Public Conference on The U.S. Oil and Gasoline Industry in May 2002, FTC Press Release (Dec. 21, 2001), available at /opa/2001/12/gasconf.htm.