Monday, January 10, 2011
Posted by D. Daniel Sokol
ABSTRACT: This article evaluates the predictive power of merger analysis. It looks first at the process courts use to resolve merger challenges and finds that in the area of product market definition, merger analysis is reasonably strong. The courts employ a theoretically precise test, examine multiple categories of evidence, devote a great deal of attention to the issue, and generally reach a defensible outcome. Market definition remains complex and subjective, however, and could be improved – or even avoided altogether – through such economic techniques as merger simulation. In contrast, judicial analysis of the likelihood of entry is distinctly weaker. Instead of working their way through the theoretically appropriate test – would new entry be profitable? – courts commonly resort to the simpler question: is the relevant market protected by entry barriers? But most judges do not assess the height of the barriers they find, or address the profitability of entry directly, and thus do not resolve the likelihood issue in an economically sound way.
The article also appraises the predictive power of merger analysis in a second way – by examining the results of “marginal” mergers, mergers that would have been blocked if the government and courts had been somewhat more aggressive. Measured in this way, merger analysis does not seem to be seriously off target: the merger retrospectives find that very few transactions led to either sharp price increases or major price reductions. At the same time, however, the studies indicate that a large proportion of marginal mergers resulted in small but significant price increases. This striking pattern does not support a broad scale increase in merger enforcement, given the limitations of the retrospectives, but it does suggest that in appropriate cases, enforcement agencies and courts should be more willing to block mergers. Finally, the article recommends that the enforcement agencies conduct more retrospectives, not only to improve the predictive power of merger analysis generally, but to resolve the behavioralist challenge to the profitability model of entry.