The Commission today announces that it will not challenge the proposed merger of The Boeing Company and McDonnell Douglas Corporation. I agree that no action is warranted against the combination of assets in the defense and space lines of business, which constitutes the greater portion of the proposed transaction, although I do not join the discussion of the other commissioners(1) on this point.
I also agree with my colleagues that no action is warranted concerning the twenty-year exclusive arrangements for commercial aircraft that Boeing recently reached with three major U.S. airlines. The arrangements account for an estimated 11% of the market, well below any level that should be of concern under the laws enforced by the Commission. Given the state of the law and the fact that the exclusive arrangements apparently are unrelated to the proposed transaction, what is curious is that my colleagues choose to mention them at all.
Another aspect of the proposed transaction is the combination of two of the three remaining manufacturers of commercial aircraft in the world. Boeing is the largest commercial aircraft firm in the world; McDonnell Douglas, through Douglas Aircraft Company ("Douglas"), is number three in the industry. This horizontal combination of two of the three firms in the market appears to present a rather straightforward case for a challenge by the Commission. Absent action by the Commission, the merger will eliminate one of three firms in a highly concentrated market in which entry is difficult and unlikely.
My colleagues conclude that most airlines will not buy planes from Douglas, a factual conclusion with a surprising reach for a simple announcement of failure to prosecute and a conclusion and implication of competitive insignificance with which I disagree after having reviewed the available information. It is true that Douglas has a small share of the commercial aircraft market, but that does not mean that it exercises no competitive constraint.(2) The evidence shows that Douglas has added an element of competition at the stage at which commercial aircraft producers bid for the business of airlines, and it has continued to win some business.
My colleagues rely in their statement on the so-called General Dynamics(3) defense, that is, that market shares based on past performance may overstate a firm's future competitive significance. In General Dynamics, the government's statistical case based on historical production of coal was deemed an inadequate predictor of anticompetitive effects in light of the acquired firm's inability to obtain additional coal reserves. The company could not compete for future sales, because its coal reserves already were committed and it could not acquire additional reserves. No such definitive impediment is present here. Douglas may need more customers for its products, but having won fewer customers than it might want does not make Douglas unable to compete for future sales.(4) One problem with accepting a "flailing firm" or "exiting assets" claim is that it creates an incentive for strategic action to avoid competitive overlaps and government challenge under Section 7 of the Clayton Act.(5) This is a dangerous precedent when we move from the realm of finite reserves of natural resources to the more indeterminate realm of managerial discretion, because of the susceptibility of the defense to self-serving statements, manipulation and strategic behavior.(6)
After reviewing the available information, I conclude that the combination in the commercial aircraft market creates a classic case for challenge in accordance with the merger guidelines, and I find reason to believe that it would violate Section 7 of the Clayton Act. What is less clear on the existing information is the availability of an adequate remedy. On that issue, it seems to me that reasonable people can disagree but, on balance, I would pursue the matter further.
1. See Statement of Chairman Robert Pitofsky and Commissioners Janet D. Steiger, Roscoe B. Starek, III, and Christine A. Varney in The Boeing Company, File No. 971-0051 (July 1, 1997).
2. In 1996, Douglas obtained orders amounting to "4 percent of the total narrow-body and wide-body orders received in the commercial aircraft industry," and its backlog of commercial aircraft orders was $7 billion at the end of 1996, down from $7.2 billion at the end of 1995. 1996 McDonnell Douglas Corporation Annual Report 30 & 34 (Jan. 1977). Although the six months since the December 1996 announcement of the merger with Boeing may not be representative (because one would expect customers to be chary of placing orders for future delivery given the uncertainty about the business), Douglas has continued to seek aircraft business. See, e.g., "Customer Interest Is Renewed as First MD-95 Takes Shape, Flight International, June 18, 1997; "Jet Leasing Takes Off in Taiwan; McDonnell To Hold 20% Stake in Venture," Int'l Herald Tribune, June 20, 1997.
3. United States v. General Dynamics Corp., 415 U.S. 486 (1974)
4. The stringent requirements of the failing firm defense apply to test whether a firm's imminent failure would, absent the proposed transaction, cause the firm to exit the relevant market. See 1992 Horizontal Merger Guidelines 5. As I understand it, the parties to the transaction do not claim that the failing firm defense applies to this proposed transaction.
5. 15 U.S.C. 18 (barring acquisitions the effect of which "may be substantially to lessen competition, or to tend to create a monopoly").
6. See Azcuenaga, "New Directions in Antitrust Enforcement," remarks before NERA 12th Annual Antitrust & Trade Regulation Seminar 11-15 (July 4, 1991).