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What Economists Should Know About the New Merger Guidelines
There's always room for more economics. Lots more.
When I’m not working on economics education or doing economics research, I spend my time trying to apply insights from economics to policy questions. I’ve issued warnings in the past when it was a policy newsletter. I will do so again here. This is not pure price theory. You’ve been warned.
The following is a heavily updated version of a piece I wrote for Truth on the Market, updated for the economists around.
Fifteen months after the close of the comment period, we finally have the release of the draft merger guidelines by the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). While there is a lot to digest in the 51 page document, the broad picture is clear: the goal of this document is to stop more mergers.
Originally issued in 1968, the purpose of the merger guidelines is to inform companies what type of mergers will likely be challenged in court. To reduce uncertainty and aid coordination, it is helpful for people to know beforehand whether something is legal or not—just as a speed-limit sign tells drivers the rules of the road. The merger guidelines play a similar role. The merger guidelines describe the current state of the law and how evolving economic learning applies to it.
Instead of bringing clarity and aiding economic decision-making, I’m worried that the new draft guidelines create confusion by blurring the line between what the law is and what the agencies want the law to be. The agencies’ record in court, in particular the FTC’s 0 for 4 record, proves those are not the same thing. Will they need to be completely redone under the next administration?
Lowered Concentration Thresholds, Because?
The simplest change to understand is that the new merger guidelines would lower the Herfindahl-Hirschman Index (HHI) thresholds, thereby classifying a larger number of markets as concentrated or highly-concentrated.
First, it’s sad to see concentration so central to the document, as Guideline #1. A mere 50 years of economics tell us to be very skeptical of the importance of concentration as a measure of competition. But I understand. They exist and have existed in previous iterations.
In addition to lowering HHI thresholds, the guidelines add another measure of concentration: if the merged firm’s market share is over 30%, that “presents an impermissible threat of undue concentration, regardless of the overall level of market concentration.”
So, why lower the thresholds and add another? I’m skeptical there is much good reason, too, unless the goal is simply to block more mergers overall. That’s not just my crazy reading of the literature. In comments submitted during the initial round of public comments, John Asker, Kostis Hatzitaskos, Bob Majure, Ana McDowall, Nathan Miller, and Aviv Nevo (now at FTC) argued:
Our view is that this would not be the most productive route for the agencies to pursue to successfully prevent harmful mergers, and could backfire by putting even further emphasis on market definition and structural presumptions.
If the agencies were to substantially change the presumption thresholds, they would also need to persuade courts that the new thresholds were at the right level. Is the evidence there to do so? The existing body of research on this question is, today, thin and mostly based on individual case studies in a handful of industries. Our reading of the literature is that it is not clear and persuasive enough, at this point in time, to support a substantially different threshold that will be applied across the board to all industries and market conditions. (emphasis added)
But we can debate the thresholds. More importantly than the specific HHI threshold, the new guidelines flip their role in antitrust analysis. Recognizing that concentration measures don’t prove anything anticompetitive, the 2010 merger guidelines explained that HHI thresholds “provide one way to identify some mergers unlikely to raise competitive concerns.”
In contrast, the new proposed guidelines flip this framing and burden of proof. Now, it is not that low HHI means the merger is unlikely to raise competitive concerns. Rather, under the new guidelines, an HHI over the threshold creates “structural presumption” against the merger. Underscoring the significance of this change, the permissible consumer welfare defenses in the face of a structural presumption basically don’t exist.
The guidelines make clear in Section IV that they can assess when the merger is anticompetitive under a single guideline (such as having a high HHI). But even if HHI is low, they have 12 more guidelines they can use.
The ultimate takeaway here is that the new concentration threshold guidance presents firms with a gauntlet to run if they want to make a deal. No doubt, combining the change in the burden with lower levels of acceptable concentration creates a recipe for many more blocked mergers. Notice I didn’t say anticompetitive mergers. Rather, this will just stop more mergers of every kind without regard for economic argument or recent law.
Efficiencies are Real
One common defense of horizontal mergers is that even if they eliminate a competitor, there can be enough gains to productive efficiency to offset that. Combined, it is possible that customers are ultimately better off from lower prices. This is a key part of the consumer welfare standard. We should ultimately judge actions based on whether consumers are made better off.
Reasonable economists can debate how likely those efficiencies are from mergers. As Asker et al say, “In that context (horizontal mergers), some appropriate skepticism of efficiency claims is understandable.”
But they clearly are possible. For one recent paper on power plants, Mert Demirer and Omer Karaduman “find that high-productivity firms buy under-performing assets from low-productivity firms and make the acquired asset almost as productive as their existing assets after acquisition.” How applicable is that to another merger? I don’t know. But we have a long list of papers showing us that you can’t simply Jedi-mind-trick away the possibility.
If we ignore efficiencies as the reason for some mergers, of course, we come to the conclusion that all mergers are anticompetitive.
In theory, the guidelines allow these defenses. They have a whole section on it. At the same time, the guidelines say, “efficiencies are not cognizable if they will accelerate a trend toward concentration.”
The problem? Efficiencies will almost always increase concentration—especially if those efficiencies come from economies of scale! If a merger creates efficiencies, the merged firm can lower costs, cut prices, and attract more customers. That’s exactly what efficiency does! The economic evidence is quite strong that efficiency increases concentration.
The other option, so as to not attract customers and increase concentration, would be not pass on cost-savings to consumers. Is that what the FTC wants? Surely not, but that would be the effect if attracting customers is viewed as anticompetitive.
Vertical Mergers are Different
For me, the most troubling change is in the handling of vertical mergers. No one would claim vertical mergers (where non-competitors merge) cannot be anticompetitive, but law and the economics literature has long held they are different from horizontal mergers. Again, returning to Asker et al’s comments:
Applying the same sort of skepticism about efficiencies in a vertical merger as in a horizontal merger can amount to assuming away a portion of the economics that is at the heart of the vertical investigation.
One clear example of this dual nature of vertical theories is the model of linear pricing, which generates a raising rivals’ cost incentive and also generates a potential procompetitive incentive in the form of elimination of doublemarginalization (“EDM”). Not every merger will present facts that fit this particular model. But, if that model is the basis of an investigation, its full range of implications should be considered.
The guidelines don’t do away with the distinction between the two, but they try to chip away at the difference, including by introducing a new structural presumption against vertical mergers.
The guidelines introduce the idea of a “foreclosure share.” That is, if the merged firm “could foreclose rival’s access,” then the guidelines assume they will. There is no need to show an incentive to foreclose. Again, no anticompetitive outcomes need to be predicted, no future harm to consumers needs to be shown.
Moreover, if the foreclosure share (aka market share, since no incentive to foreclose must be shown) is more than 50%, “that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition.” Color me skeptical that there is a solid economic argument that is the case.
To see why this is extreme, imagine an input seller with 50% of the market acquiring a downstream firm with 1% of the downstream market. By the agency’s definition, this would substantially lessen competition since 50% is the “share of the related market that is controlled by the merged firm.” In what economic sense does this merger change who controls what inputs? They claim there is possible rebuttal evidence, but none mentioned in Section IV of the guidelines would actually apply. Instead, again, they cite to Brown Shoe Co. v. United States (1962) as conclusory evidence.
As Dan Crane points out, the guideline conception of vertical mergers is at odds with the law. For a recent example, take the Microsoft-Activision merger. The guidelines would certainly flag it to be blocked (we know how that went for them) since Microsoft could pull Call of Duty from the Sony Playstation consoles. But the courts concluded that Microsoft would not have an incentive to pull Call of Duty, since Sony has the biggest market share.
This begs the question: how can the FTC/DOJ claim the guidelines reflect the law when they admonish clearly legal, and recently affirmed, conduct?
Labor Markets aren’t Product Markets
Much has been made of the fact that the new guidelines are the first to place an emphasis on labor. Guideline 11 states that “When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers.”
Policymakers and the commentariat are clearly excited about the inclusion of language about labor markets. For their part, FTC Commissioner Alvaro Bedoya and California Attorney General Rob Bonta highlighted the importance of explicitly including labor in the guidelines.
My sense is that while it’s fine for the guidelines to be explicit that labor markets are markets in the antitrust sense and that mergers that create monopsony power can be anticompetitive, I’m less sure this represents some big change. In fact, I titled my piece on the latest labor antitrust case between Penguin–Random House and Simon & Schuster “business as usual.” Some things under the sun may be new, but this isn’t one of them.
In the weeds of the labor element, one immediately evident problem is that the draft guidelines attempt to create a false symmetry between product markets and labor markets. Doing so fails to appreciate how labor markets are different from product markets both in theory and in practice.
On the one hand, in theory, no matter how much people say it, monopsony is not the mirror image of monopoly. For instance, suppose the guidelines accepted efficiency as a justification for mergers (they don’t, but suppose they do). A merger that increases efficiencies may result in fewer workers being hired. That’s not an anticompetitive effect.
Again, Asker et al write
Note that even mergers that led to a decrease in employment could be procompetitive. Indeed, realized efficiencies may allow the merged firm to lower prices and increase production with lower levels of labor.
From a practical antitrust perspective, where you need to define relevant markets, it’s worth remembering that labor markets are simply different from products markets. While “MRIs in the DC area” may make sense as a market and antitrust has developed tools to analyze it, “bank tellers in the DC area” is not a market in any meaningful sense. For one, most bank tellers can leave for completely different jobs outside of banking while MRIs will, always and forever, be MRIs. Yet, the standard tools (such as merger simulations) don’t handle a world with so many potential employers. The DOJ must have forgotten that Prof. Kevin Murphy made this point at their 2019 workshop on Competition in Labor Markets:
[I]n many product markets, particularly the ones we tend to study in antitrust, we often see relatively few alternatives on the buyer side, that you look at if I stop buying from firm A, the vast majority of customers go to either B, C or D, for example, in a market where there’s four primary sellers of the product. We’re sort of used to dealing with kind of small numbers, oligopoly-type models in those markets.
Many labor markets, not all labor markets, don’t look anything like that. If you look at where people go when they leave a firm or where people come from when they go to the firm, often very diffuse. People go many, many different places.
If you look at employer data and you ask where do people go when they leave, of-ten you’ll find no more than 5 percent of them go to any one firm, that they go all over the place. And some go in the same industry. Some go in other industries. Some change occupations. Some don’t.
The Penguin–Random House and Simon & Schuster case was the exception. In that case, there were only a few firms in the market for the writers’ labor, so standard tools applied. We should not give up on applying antitrust to labor markets, but we need to recognize the differences.
To the extent that the guidelines recognize the differences, it is to point out the additional ways that labor markets are anticompetitive. The guidelines assert “labor markets are often relatively narrow.” Often? By what metric? I’d appreciate some evidence or a fair argument. The best papers find falling labor market concentration at the local level, which is how the agencies believe we should define the geographic labor market.
Beyond tenuous concerns about concentration, as the agencies point out, workers must search for jobs. Sure, but firms must search for workers. As they point out, workers must invest in learning skills. Sure, but firms must invest in training skills. There is a holdup problem on both sides that changes how the labor market functions. It is artificial to assume it always pushes against workers.
As the guidelines undergo further review and potential revisions (including from courts), it is essential to ensure a balanced approach that emphasizes the long-standing principle of consumer welfare, promotes competition, and allows for procompetitive mergers that drive innovation and economic growth. Striking the right balance between enforcement and fostering a dynamic marketplace remains crucial to realizing the goals of effective antitrust policy.
As my colleague Gus Hurwitz pointed out, it’s important to remember that the guidelines are not binding. Yes, the courts cite them, but the courts also cite academic research. They will continue to cite the guidelines only to the extent that they are seen as legitimate by the courts and consistent with antitrust law.
Interested in More?
Gus Hurwitz has a great thread for economists on the legal issues with the new guidelines
If you want more on the overall role of the merger guidelines, I encourage you to check out our team an ICLE’s initial comments last summer.
Satya Marar has a piece on the importance of efficiencies. I will write more on this at some point.
Alden Abbott, former General Counsel of the FTC, has a piece going through the thirteen guidelines one by one.