Turning Back the Clock: Structural Presumptions in Merger Analyses and Revised Merger Guidelines
Introduction
Since 1950, when Congress closed a loophole in Section 7 of the Clayton Act, the federal antitrust agencies have investigated actively, and prosecuted diligently, mergers the government believed could be anti-competitive. In 1976, the Clayton Act was amended to require notification of many mergers to the agencies before consummation, allowing the government to sue to stop these mergers before they occur. Throughout the decades, merger review has become an elaborate, expensive process consuming vast resources; involving the merging parties, their attorneys, various experts, and those in the government; and rarely ending in judicial proceedings. The large majority of mergers the government opposed were either abandoned or settled with agreements requiring asset divestitures before consummation.
Prospective merger screening at the federal antitrust agencies has evolved, using advances in theoretical and empirical economics, to deemphasize structural tests in favor of an effects-based analysis. The agencies’ merger guidelines have changed with this evolution in economic knowledge and agency practice. The goal of guideline changes has been to increase the predictability and accuracy of the agencies’ merger screening, thereby decreasing the social costs of merger enforcement.
Strident critics of modern antitrust law, including merger policy, hold each key competition job in the administration of Pres. Joseph R. Biden Jr., including heads of both the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice. President Biden recently decried modern antitrust law and policy as a 40-year “experiment failed.”To correct these “mistakes,” the antitrust agencies plan to replace the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines (already withdrawn by the FTC) with a new enforcement approach.
Periodic revisions to the merger guidelines ensure that they reflect current agency practice, recent legal developments, and sound antitrust policy. Given the current administration’s desire to alter significantly how the agencies analyze mergers, changes to the guidelines are necessary to ensure that they accurately describe the new agency practice. It is less clear, however, whether the planned changes to antitrust enforcement and guidelines will reflect current law or sound antitrust policy. Although the precise nature, including the operational details, of the new guidelines is unknown at this writing, the agencies not only have made their disdain for the guidelines of the past 40 years known, but also have expressed their affinity for the pre-1980 merger law that modern guidelines have repudiated. Both their request for comment on the guidelines, one year ago, and a recent speech from FTC Chair Lina Khan show this affinity. The request relied almost entirely on pre-1980 law; Chair Khan’s speech was even more explicit.
In September 2022 at Fordham Law School, FTC Chair Khan discussed her work on revising the merger guidelines and stressed “fidelity to the law” as a guiding principle. She claims that, starting in the 1980s, the antitrust agencies “began straying” by sidestepping “controlling precedent and the statutory text, including the 1950 amendments” through “administrative fiat.” The law to which Chair Khan refers relied on strict structural presumptions to proscribe mergers. As shown here, merger law then did much more, reflecting a populist animus against mergers. The result was an era when the only consistency in the cases, as Justice Potter Stewart famously remarked, was that “the Government always wins.” The case law was incoherent, illogical, and, most important, anti-consumer, condemning bigness for its own sake, even when the mergers were not especially large or in concentrated markets.
In her speech, Chair Khan also notes that a post–World War II FTC study showing growing industrial concentration was “cited extensively by Congress as evidence of the danger to the American economy in unchecked corporate expansions through mergers” and was a “major driver in the passage of the 1950 amendment.” David Cicilline, then Chairman of the House Judiciary Committee’s Antitrust, Commercial, and Administrative Law Subcommittee and a leading critic of recent antitrust enforcement, also cites the same historical evidence. Yet, the FTC study showing growing concentration as a result of merger activity was methodologically flawed and wrong on the facts. Scholars convincingly demonstrated the flaws in the study and its conclusions, and shortly thereafter the authors of this FTC study on concentration even conceded it was wrong. Concentration was in fact not growing, from mergers or otherwise, and may actually have been decreasing. The problems with this study were known shortly before Congress passed the 1950 amendments. The courts obviously were wrong to rely on this discredited study in the 1960s, and one is more puzzled still that the current administration finds it useful to approvingly cite a flawed and discredited study today.
Critics of antitrust enforcement since 1980 also cite newer studies that show increasing industry concentration and claim that this increase is associated with increases in aggregate markups and decreased competition. This evidence has the same flaws as the discredited evidence used to support the structural approach to merger control from the 1960s that the Biden administration admires. Industrial organization economists have repeatedly shown that reliable inferences about the competitive dynamics in antitrust markets cannot be derived from measures of concentration or correlations between concentration and aggregate markups. These advances in theoretical and empirical economics undermined the economic core of the structural approach and eventually caused the agencies under both political parties to abandon that approach to merger control. Surely, new evidence with the same flaws cannot support a return to structural antitrust.
To provide background on the issues and show the fallacy in returning to reliance on strong and simple structural presumptions, section II begins with a brief description of the economic evolution of the effects-based approach contained in the 2010 U.S. Horizontal Merger Guidelines and 2020 U.S. Vertical Merger Guidelines. Section III then examines the flawed economic evidence cited to support returning to strong structural presumptions. Section IV next analyzes why the statutory text of the 1950 amendment and the post-1950 merger law do not support turning the clock back to structural presumptions. Section v concludes.