Monday, May 20, 2024

Potential Competition and the 2023 Merger Guidelines

Potential Competition and the 2023 Merger Guidelines

Richard Gilbert

University of California, Berkeley

A. Douglas Melamed

Stanford Law School


Potential competition can benefit consumers by providing an important source of future competition and by provoking efforts by incumbents to keep prices low or engage in other beneficial conduct in order to deter new entry. Courts have characterized the first benefit as the result of actual potential competition and the second as the result of a response to perceived potential competition. The 2023 Merger Guidelines issued by the U.S. Department of Justice and Federal Trade Commission include a section that describes how the agencies will evaluate mergers that eliminate potential competition. None of the earlier Merger Guidelines since 1984 had addressed the particular issues raised by potential competition. This paper reviews empirical evidence regarding the effects of potential competitors on market performance and describes conditions under which incumbents might, or might not, have incentives to acquire potential competitors. One conclusion is that the distinction between actual and perceived potential competition is not very helpful because potential competition typically has both effects. Another is that the incentive to acquire potential competitors does not depend on the probability of actual competition from the acquired firm. A corollary is that courts have erred by treating actual and perceived potential competition as distinct phenomena and by placing too much emphasis on the probability of new competition and not enough emphasis on the potential benefits from new competition.

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