Ten years ago this month, the FTC and DOJ issued the Commentary on the Horizontal Merger Guidelines. The report was a follow-up to a set of joint workshops at which antitrust lawyers and economists compared notes on how the agencies were implementing the analysis contained in the then-prevailing 1992 Horizontal Merger Guidelines (HMGs). The consensus that emerged from those hearings was that the 1992 framework was still yielding the right results and providing predictability for parties considering a merger, but that in certain areas, agency practice had evolved in ways that might not be obvious if all one had to go on was a compilation of complaints and press releases for announced cases.
Instead of rewriting the Guidelines, the agencies decided to publish a Merger Commentary. The Merger Commentary covers all aspects of merger analysis—market definition, concentration, competitive effects, entry analysis, and efficiencies, using as examples FTC and DOJ merger cases between 1992 and 2005. The Commentary included not only cases the Agencies brought, but also mergers that were not challenged after investigation.
Of course, soon after the Merger Commentary was published, the push to issue a formal update of the HMGs took hold, and by 2010, the agencies released a revised set of guidelines. But much of the groundwork for the changes that were contained in the 2010 HMGs can be found in the Merger Commentary.
Here are some examples of how the Merger Commentary laid the foundation for elemental changes adopted in the 2010 HMGs.
According to the Merger Commentary, “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.” This bold position reflected the agencies’ practice at the time, but was in marked contrast to the five-step analysis contained in the 1992 HMGs that started with market definition. The 2010 HMGs wholly adopt the integrated approach:
These Guidelines should be read with an awareness that merger analysis does not consist of uniform application of a single methodology. Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.
As a corollary, the Merger Commentary reflected the Agencies’ move away from formalistic reliance on market share statistics, especially in light of data from the period that revealed that the FTC rarely challenged mergers that weren’t above proscribed levels (>1800 HHI). According to the Commentary: “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.” Sound familiar? In 2010, the Agencies adjusted the HHI thresholds upward.
Unilateral Effects and Growing Use of Economic Tools
One of the innovations contained in the 1992 HMGs was the concept of unilateral effects. By 2006, the Agencies had experience with applying that framework in a number of different industries. The Merger Commentary describes many different scenarios for unilateral effects analysis: mergers-to-monopoly; homogenous products in which there might be capacity and output effects; and differentiated products in which there might be auctions or bargaining. Fast-forward to the 2010 HMGs, which contain a more fulsome discussion of how and why the Agencies might measure diversion ratios or rely on merger simulation models as yet one more piece of evidence bearing on the merger’s likely unilateral competitive effects.
The overall trend, from 1992 to today, is that the Agencies continue to incorporate new econometric tools when appropriate, especially in the area of unilateral effects. For example, the 1992 HMGs outlined the basic framework for analyzing mergers involving differentiated products, which laid the groundwork for the discussion of Bertrand and Cournot models in the Merger Commentary, which undergirds the use of diversion ratios and upward pricing pressure today in cases like Dollar Tree/Family Dollar.
Efficiencies analysis with examples
Even with updated text added in 1997, the efficiencies analysis contained in the HMGs has always been a source of uncertainty among antitrust practitioners. Some point to the lack of a litigated case in which a court has found that merger-specific cognizable efficiencies are sufficient to conclude that the merger is unlikely to be anticompetitive.
But as I discussed in a speech last fall, focusing solely on litigated cases to understand efficiencies analysis presents a skewed sample set, given the very high levels of concentration involved in most litigated cases. Better to look at the Merger Commentary, which contains several examples of cases in which the Agencies assessed whether proffered efficiencies were verifiable, cognizable, and merger-specific—including cases in which the agency determined not to challenge the merger. The Merger Commentary confirms that the Agencies can and do credit well-documented efficiencies.
For providing depth and context in describing U.S. merger analysis, Happy 10th Anniversary, Merger Commentary.