Saturday, May 4, 2013
Posted by D. Daniel Sokol
Joseph J. Simons, Paul, Weiss, Rifkind, Wharton & Garrison LLP and Malcolm B. Coate, U.S. Federal Trade Commission (FTC) offer US v. H&R Block: An Illustration of the DOJ's New, but Controversial Approach to Market Definition.
ABSTRACT: Sometimes what appears to be a little, almost imperceptible change can have a huge impact on a policy regime. The recently revised DOJ/FTC Horizontal Merger Guidelines contain such a change, as the document recognizes the importance of Critical Loss Analysis in defining a market, but introduces an unsupported theoretical construct to control the analysis. This approach imposes a structure based on the economist’s Lerner index, and then applies a specific style of diversion analysis to compute the actual loss to a hypothetical price increase. We show that this methodology almost guarantees narrow markets, a change that would support a very significant increase in the level of merger enforcement. However, we also show how this aggressive policy result depends on specific assumptions that are generally not justified. Change these assumptions and the traditional implications of a critical loss analysis are restored. The recent Department of Justice (DOJ) challenge of H&R Block’s proposed acquisition of the TaxACT brand is used to illustrate the problem. Unjustified theoretical assumptions allowed the DOJ’s expert economist to testify to a narrow market that virtually guaranteed that the merger would be found anticompetitive. Had he been required to rely on testimony and other evidence of the likely actual loss in volume, the outcome of the merger challenge may have been different.