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MERGERS
Clayton 7 as amended by the Celler-Kefauver Act:
“No corporation engaged in commerce shall acquire… the whole or
any part of the stock or other share capital and no corporation
subject to the jurisdiction of the Federal Trade Commission
shall acquire the whole or any part of the assets of another corporation
engaged also in commerce, where in any line of commerce
in any section of the country, the effect of such acquisition
may be substantially to lessen competition,
or to tend to create a monopoly.
NOTE:
-”in any line of commerce” refers to the market for a product
(prosecution can use ANY market)
-”in any section of the country” refers to the geographic extent of the
market
-”substantially” implies that a rule of reason should be used
-”may be to” and “tend” suggest that a lessening of competition need
not have occurred but that a reasonable probability must exist that
competition will be lessened in the future.
Types of Mergers
1. Horizontal Mergers: mergers between competitors
2. Vertical Mergers: mergers between buyers and sellers of the
same good
3. Conglomerate Mergers
a. Market extension: merging with a firm producing the same
product in a different (geographic) market
b. Product extension: merging with a firm producing a product
in the same product line within the same market
c. Pure Conglomerate merger: merging with a firm producing
an entirely different, unrelated product
Economically Valuable Effects of Mergers
Economies of Scale
Economies of Scope
Pecuniary efficiencies (eg. quantity discounts)
Diversification (elimination of risk)
Stimulating Management to be more efficient
(with the threat of takeover)
Eliminating dynamic inefficiencies (eg. vertical mergers
eliminate cycles)
Salvaging failing firms with more efficient managements or
greater economic viability
Efficiencies: Dept. of Justice Viewpoint
Efficiencies generated through merger can enhance the merged
firm's ability and incentive to compete, which may result in lower
prices, improved quality, enhanced service, or new products. For
example, merger-generated efficiencies may enhance competition
by permitting two ineffective (e.g., high cost) competitors to
become one effective (e.g., lower cost) competitor. In a coordinated
interaction context (see Section 2.1), marginal cost reductions may
make coordination less likely or effective by enhancing the
incentive of a maverick to lower price or by creating a new
maverick firm. In a unilateral effects context (see Section 2.2),
marginal cost reductions may reduce the merged firm's incentive to
elevate price. Efficiencies also may result in benefits in the form of
new or improved products, and efficiencies may result in benefits
even when price is not immediately and directly affected.
http://www.usdoj.gov/atr/public/guidelines/hmg.htm#11
Weighing Efficiencies Against Competitive
Effects: Dept. of Justice Viewpoint
…the Agency considers whether cognizable efficiencies
likely would be sufficient to reverse the merger's potential
to harm consumers in the relevant market, e.g., by
preventing price increases in that market. … The greater the
potential adverse competitive effect of a merger--as
indicated by the increase in the HHI and post-merger HHI
…, the analysis of potential adverse competitive effects…,
and the timeliness, likelihood, and sufficiency of entry …-the greater must be cognizable efficiencies in order for the
Agency to conclude that the merger will not have an
anticompetitive effect in the relevant market.
Procedure for Bringing an Antitrust Case
1. Defining the product market and any appropriate submarket
2. Defining the geographic extent of the market
3. Showing the probability of lessening competition
4. Determining whether a failing firm, de minimis or other defense
might apply
Horizontal Mergers
Legal: A quantitative basis is used to determine the probability of
lessening competition:
“trend to monopoly” can be shown by changes in
Herfindahl index (HHI) in an industry
HHI is used to determine whether a merger has
anticompetitive potential
Philadelphia National Bank was a key case where
application of above criteria resulted in a nearly per se
proscription of horizontal mergers
Economies of scale is not a defense
Economic: Horizontal mergers lessen the number of firms, increase
market power, and may make conspiracy easier.
DOJ General Standards for Horizontal Mergers
"In evaluating horizontal mergers, the Agency will consider both the
post-merger market concentration and the increase in concentration resulting from
the merger.
a) Post-Merger HHI Below 1000. "unconcentrated"
•"require no further analysis."
b) Post-Merger HHI Between 1000 and 1800. "moderately concentrated."
•" Mergers producing an increase in the HHI of more than 100 points
in moderately concentrated markets post-merger potentially raise significant
competitive concerns". ..
c) Post-Merger HHI Above 1800. "highly concentrated."
•"Mergers producing an increase in the HHI of more than 50 points in highly
concentrated markets
• post-merger potentially raise significant competitive concerns…."
•"Where the post-merger HHI exceeds 1800, it will be presumed that mergers
producing an increase in the HHI of more than 100 points are likely to create or
enhance market power or facilitate its exercise."
•"The presumption may be overcome by a showing that factors …make it
unlikely that the merger will create or enhance market power or facilitate its
exercise, in light of market concentration and market shares“
http://www.usdoj.gov/atr/public/guidelines/hmg.htm#11
Vertical Mergers
Legal:
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Cases can be brought if there exists:
a trend to vertical integration,
substantial foreclosure of a market, or
increasing barriers to entry after the merger
Brown Shoe is the first and they key case for proscribing
such mergers.
Economic: Vertical mergers are likely to increase minimum efficient
Scale and other barriers to entry. It thins markets (forecloses markets).
It may also trigger a merger wave in an industry
Example: oil companies, media companies, drug companies
Conglomerate Mergers
Legal:
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Cases may be brought against mergers
by large (top 200) firms,
by dominant firms
where there are clear reciprocity effects, and
where there is elimination of a potential entrant.
Economic: Conglomerate mergers
o
may open up reciprocity possibilities between firms,
o
may cause forbearance from competition between
conglomerates (Consolidated Food),
o
may allow a firm to cross subsidize its operations to
protect it from competition,
o
reap advantages of size (eg. advertising discounts),
o
entrench the firm, and
o
may eliminate a potential entrant into an industry