Tuesday, November 16, 2010
WARNING: Improper Use of the New Horizontal Merger Guidelines Can Result in Overly Narrow Markets, Mistaken Inferences of Market Power, and Wrong-Headed Analyses
Posted by D. Daniel Sokol
Michael Doane (Competition Economics), Luke Froeb & Steven Tschantz (Vanderbilt University) provide a WARNING: Improper Use of the New Horizontal Merger Guidelines Can Result in Overly Narrow Markets, Mistaken Inferences of Market Power, and Wrong-Headed Analyses.
ABSTRACT: Every first-year law student has heard the story of the man who was mowing his lawn when he realized that his hedge also needed trimming. Since he didn't own a hedge trimmer, he lifted the lawnmower up, turned it on its side, and then accidentally cut off his fingers. He sued the manufacturer, claiming that the label should have warned him not to trim his hedge with a lawnmower.
With all of the tools in the new Guidelines-natural experiments, merger simulation, market delineation, and "Upward Pricing Pressure" ("UPP") to name a few-it is easy for an antitrust practitioner to feel a little like the protagonist of this urban legend. We are given a lot of tools, but no warning label on how or when to employ them.
Predictably, economists have jumped into this void by coming up with cases or examples of when the tools would give the wrong answer. Most of the criticism is directed against UPP, but the criticism could just as easily be directed against any of the tools mentioned in the guidelines. Some of this criticism is over-stated as there is little in the Guidelines to suggest that the agencies are going to misuse the tools in the way that the critics suppose.
But since the new Guidelines are a little short on guidance, and since they did not come with a warning label, we are going to try to clear up some confusion by providing one.
WARNING: Improper use of the New Horizontal Merger Guidelines can result in overly narrow markets, mistaken inferences of market power, and wrong-headed analyses.
But they can just as easily do the opposite. It depends on how you use them. Incidentally, the same was true of the old Merger Guidelines