Industrial Organization in Context: Updates and discussion topics, 2010.

April 2010 DOJ/FTC Proposed Horizontal Merger Guidelines

FTC material on proposed revisions.

The proposed revisions to the DOJ/FTC Horizontal Merger Guidelines complement the discussion of U.S. merger guidelines in Section 2.2.4.
Proposed revisions in the DOJ/FTC Horizontal Merger Guidelines emphasize that the central question in merger evaluation is the competitive effects of the merger, not mechanical calculation of market share and concentration levels. Unilateral and coordinated effects expected to flow from the merger will be analyzed, as will entry conditions. Concentration levels and changes in concentration levels that raise concerns are increased, and the attitude of the agencies toward efficiency claims continues to be a cautious one.  
Guidelines face the same tradeoff that affects the scope of the per se rule as opposed to the rule of reason: against the advantages of providing the business community with certainty what antitrust standards are must be set the danger that mechanical application of guidelines would result in prohibition of mergers that would improve market performance (type I errors) or approval of mergers that worsen market performance (type II errors). How do the proposed Guidelines stack up in terms of the clarity/flexibility tradeoff?

The proposed guidelines highlight that market definition is a means to an end, not an end in itself (p. 6):

The Agencies define relevant markets to help analyze the competitive effects of a horizontal merger. Market definition is not an end in itself: it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition. Market definition identifies an arena of competition and enables the identification of market participants and the measurement of market shares and market concentration. This exercise is useful to the extent it illuminates the merger's likely competitive effects. The Agencies' analysis need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.
Market definition focuses solely on demand substitution factors, i.e., on customers' ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service. The responsive actions of suppliers are also important in competitive analysis. They are considered in these Guidelines in the sections addressing the identification of market participants, the measurement of market shares, the analysis of competitive effects, and entry.
Both the levels of concentration (compare the first three bullets below with those at the top of p. 792 IOIC) and the changes in the Herfindahl index that raise concerns are increased, compared with previous Guidelines (p. 18):
Based on their experience, the Agencies generally classify markets into three types:

When using HHI measures, the Agencies employ the following general standards for the relevant markets they have defined:

These changes will bring the Guidelines into line with recent enforcement practice.

The Guidelines indicate unilateral effects that may raise concern (p. 19):
Several common types of unilateral effects are discussed ...
as well as coordinated effects (p. 23):
A merger may diminish competition by enabling or encouraging post-merger coordinated interaction among firms in the relevant market that harms customers. Coordinated interaction involves conduct by multiple firms that is profitable for each of them only as a result of the accommodating reactions of the others.
Entry conditions play a role in assessing the prospective effect of a merger (p. 26):
As part of their full assessment of competitive effects, the Agencies consider entry into the relevant market. The prospect of entry into the relevant market will alleviate concerns about adverse competitive effects only if such entry will deter or counteract any competitive effects of concern so the merger will not substantially harm customers. The Agencies consider the actual history of entry into the relevant market, and give substantial weight to this evidence. Lack of successful and effective entry in the face of non-transitory increases in the margins earned on products in the relevant market tends to suggest that successful entry is slow or difficult. A merger is not likely to enhance market power if entry into the market is so easy that the merged firm and its remaining rivals in the market, either unilaterally or collectively, could not profitably raise price or otherwise reduce competition compared to the level that would prevail in the absence of the merger.
The Guidelines maintain a cautious attitude toward efficiencies (p. 28, footnote omitted):
The Agencies credit only those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects. These are termed merger-specific efficiencies.
and (p. 29)

Efficiencies are difficult to verify and quantify, in part because much of the information relating to efficiencies is uniquely in the possession of the merging firms. Moreover, efficiencies projected reasonably and in good faith by the merging firms may not be realized. Therefore, it is incumbent upon the merging firms to substantiate efficiency claims so that the Agencies can verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved (and any costs of doing so), how each would enhance the merged firm's ability and incentive to compete, and why each would be merger-specific.