Monday, November 15, 2010
Posted by D. Daniel Sokol
Malcolm B. Coate (FTC) & Joseph J. Simons (Paul, Weiss) describe Continuity and Change in the 2010 Merger Guidelines.
ABSTRACT: For almost 30 years, the U.S. antitrust enforcement agencies have described a structured, step-by-step analytical methodology in their Merger Guidelines. Prior revisions to the Guidelines were designed, in significant part, to clarify actual practice at the agencies in light of historical experience, while keeping the underlying methodology intact. The 2010 Merger Guidelines are supportive of this tradition; the document clarifies actual practice in certain respects and retains much of the core presentation. However, the revision is also innovative, because it modifies the methodology to place greater emphasis on evidence of adverse competitive effects. Most of this "evidence" is completely consistent with past practice and uncontroversial. One type of "evidence" is not.
The 2010 Guidelines introduce margin evidence to support inferences on competitive behavior, market definition, and post-merger price effects. This type of evidence has not previously been systematically used by the agencies in their merger investigations. While we understand that the margin evidence and the models related to it might be proven applicable in particular fact situations, we are concerned that the Guidelines, as written, would apply these types of economic evidence to a broad set of mergers without basis. Doing so would run the risk of drastically increasing the number of mergers subject to challenge.
For most transactions reviewed by the Agencies, markets must still be defined, shares measured, unilateral or collusive effects evaluated, entry studied, and efficiencies analyzed, all within an interactive review process in which facts uncovered in any aspect of the investigation may require re-evaluation of an initial conclusion reached in other portions of the review. Within this standard structure, the revised Guidelines add numerous minor innovations. These include a more comprehensive overview for market definition, higher structural statistics, additional insights into unilateral and collusive effects, a more flexible entry section, and new openness to innovation-based efficiencies.
In this comment, we first discuss the Guidelines' increased emphasis on evidence related to a merger's adverse effect on competition. Then in section III, we address the analytical techniques introduced by the revision that relate to direct predictions of unilateral effects. We also explain how the new Guidelines can be used to modify the pre-existing structural approach in a way that makes it consistent with the new unilateral effects techniques. Next, in Section IV, we list some of the important improvements to the standard Guidelines methodology that has come to define modern merger analysis. Finally, in section V, we add some cautions related to the use of the theoretical innovations detailed in Section III. Section VI concludes by linking the Guidelines approach to the controlling legal authority developed from Philadelphia National Bank to General Dynamics to Baker Hughes.