Abstract

The Federal Trade Commission and the U.S. Department of Justice published a draft update of their merger guidelines in July 2023. This paper reviews the Draft Merger Guidelines from a dynamic competition perspective. We base our findings and recommendations on recent economic literature dealing with innovation.

Abstract

The economic theory of the firm teaches that vertical (and complementary goods) mergers differ fundamentally from horizontal mergers. Given incomplete contracting at arm’s length, improved coordination post-merger tends to increase competition and improve market outcomes in the case of vertical merger but tends to lessen competition and degrade market outcomes in the case of horizontal merger. Countervailing effects can of course reverse these tendencies, but rational merger analysis should take the fundamental differences of merger types into account.

The economic analysis of Section II.5 of the Draft Merger Guidelines (DMGs) conveys a rational—though incomplete—antitrust treatment of vertical mergers based on sound economic analysis. The one glaring omission in Section II.5 is the absence of any discussion of the elimination of double marginalization (EDM)—a feature typically inherent to vertical mergers and thus a procompetitive effect rather than an exogenous efficiency requiring separate evidence and analysis. EDM arises from improved coordination between the merging parties, with the salutary effect of increasing competition in the relevant market. EDM can manifest as improvements in the merged firm’s product price or non-price features. We urge the Agencies to add a discussion of EDM to Section II.5 of the DMGs.

Section II.6 of the DMGs, however, stands in stark contradiction to the economic analysis in Section II.5. The market-share threshold for a presumption of harm in Section II.6 has no support in either economics or legal precedent, and the “plus factors” when the presumption threshold is not triggered offer no reliable indication of competitive harm. We urge the Agencies to entirely eliminate Guideline 6 and the material in Section II.6 from the DMGs.

Last Tuesday, the Department of Justice (DOJ) kicked off its first major monopolization trial since the Microsoft case of the late 1990s. The target this time is a Microsoft rival: Google. Google’s ubiquitous search engine competes with Microsoft’s Bing, which powers search engines Yahoo and DuckDuckGo.

Filed in the waning days of the Trump administration, the government’s lawsuit alleges that Google has cemented its monopoly power in general internet search and related search advertising by paying to be the default search engine on various “search access points.” Specifically, Google secures default status by agreeing to share search advertising revenue with web browsers like Mozilla’s Firefox, producers of Android phones and the carriers who service them, and iPhone maker Apple. In the government’s telling, these deals prevent Google’s search rivals from achieving the scale they need to become formidable competitors.

Read the full piece here.

Presidential administrations over the last 50 years have pursued widely varying policy goals, but they have agreed—at least, in principle—that policies should be efficient and improve social welfare. Now, the Biden administration is taking steps to unravel that bipartisan consensus. We focus on different policy areas (Dudley on regulation and Sullivan on antitrust) and are struck by the similarities among the radical changes being proposed.

Read the full piece here.

Innovations in payment systems are rapidly transforming the world economy. While Bitcoin, Ethereum, and other decentralized blockchain-based systems tend to garner much of the press (good and bad), centralized peer-to-peer (P2P) payment systems are far more common. (Note that I use the term P2P here in its original sense to mean all peer-to-peer transactions, which includes transactions between any combination of individuals, businesses, and other entities, such as governments and unincorporated associations.) 

Read the full piece here.

The Draft Merger Guidelines (DMGs)[1] released by the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) on July 19, 2023 feature many significant changes from earlier Merger Guidelines.[2] Of the 13 guidelines highlighted in the DMGs, two are particularly new and important for tech acquisitions. One is Guideline #4, which states that “mergers should not eliminate a potential entrant in a concentrated market” and the other is Guideline #9, stating that “when a merger is part of a series of multiple acquisitions, the agencies may examine the whole series” (emphases added).

While the DMGs provide hardly any details on #9, they do offer a list of evidence that the agencies would consider in support of #4. For example, the DMGs state that a firm’s “sufficient size and resources to enter,” expansion “into other markets in the past,” current participation “in adjacent or related markets,” being considered by industry participants as “a potential entrant,” as well as “subjective evidence that the company considered entering absent the merger” can all constitute evidence for the firm’s reasonable probability of entry. More importantly, a reasonable probability of entry is presumed to result in deconcentration or other significant benefits for competition, unless there is substantial direct evidence that the competitive effect would be de minimis. Simply put, a merger that is deemed to reduce a reasonable probability of entry is presumed to harm market competition.

Guideline #4 appears to hinge on the implicit assumption that, but for mergers and acquisitions (M&A), all entities with a reasonable probability of entry would likely enter the market, vigorously compete with each other, and significantly promote market competition in the absence of M&A. To avoid a linguistic debate on “reasonable,” “likely” and “significant,” it may be worthwhile to examine this assumption in a simple illustrative example.

[1] https://www.justice.gov/d9/2023-07/2023-draft-merger-guidelines_0.pdf.

[2] See a summary by Froeb et al., “Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines” available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=4537425 and another summary by Werden, “Two Bridges Too Far: First Take on the Draft Merger Guide- lines”, CPI Column, September 5, 2023, available at https://www.pymnts.com/cpi_posts/two-bridges- too-far-first-take-on-the-draft-merger-guidelines.

I can hardly believe it, but I’ve read that a famous old bit by Henny Youngman has been purged from Florida textbooks, apparently because it was deemed offensive to those who wrote, told, and laughed at the joke. I won’t tell it here, but you can look it up. And if you’re a reader of a certain age, you’ll know it as soon as I note that it’s at the heart of the U.S. Justice Department’s (DOJ) antitrust case against Google.

Read the full piece here.

Bertrand Russell is well known as a philosopher and mathematician. But few know that during his lifetime, he was cancelled—to use the contemporary term—by the New York judiciary and by mid-twentieth-century religious conservatives. Both those conservatives today who seek to ban books and regulate curricula and those progressives who wish to censor everyone who disagrees with them would do well to reflect on the Bertrand Russell case.

Read the full piece here.