Wednesday, August 14, 2013

DOJ Opposition to AA-US Merger Mostly About Coordinated Effects

While I laid out the DOJ's rationale for opposing the proposed AA-US merger in mostly layman's terms in yesterday's post, I thought it appropriate to come back and explain the legal theory underpinning the DOJ's argument. The place to look to better understand the basis for this move is section 7 of the 2010 Horizontal Merger Guidelines, under the heading "coordinated effects." According to the Guidelines:

A merger may diminish competition by enabling or encouraging post-merger coordinated interaction among firms in the relevant market that harms customers. Coordinated interaction involves conduct by multiple firms that is profitable for each of them only as a result of the accommodating reactions of the others. (Horizontal Merger Guidelines 7)

The bulk of the DOJ complaint is dedicated to a discussion of coordinated interaction between U.S. legacy airlines. The possibilities for increased post-merger coordination are laid out in section V subsection C of the complaint, which represents approximately 15 pages of the 34-page complaint and is the heart of the complaint's analysis of potential anti-competitive effects. The arguments about industry-wide capacity discipline leading to higher fares, increased baggage fees and abandoned hubs are all addressed as potential coordinated effects. It is the DOJ's contention that each of these actions would be unprofitable if undertaken by an airline individually, but that all of the major carriers will profit if they adopt these measures simultaneously. The DOJ's concern for the future of US Airways' Advantage Fares program is also related to this coordinated effects analysis, something I'll examine further in a future post. It may seem that the DOJ has assigned itself the daunting task of proving each of those consequences are likelier to take place post-merger, and as a result of coordinated as opposed to distinct business strategies, but the Guidelines are fairly lax with regard to the need to justify coordinated effects arguments:

There are, however, numerous forms of coordination, and the risk that a merger will induce adverse coordinated effects may not be susceptible to quantification or detailed proof. Therefore, the Agencies evaluate the risk of coordinated effects using measures of market concentration (see Section 5) in conjunction with an assessment of whether a market is vulnerable to coordinated conduct....Pursuant to the Clayton Act’s incipiency standard, the Agencies may challenge mergers that in their judgment pose a real danger of harm through coordinated effects, even without specific evidence showing precisely how the coordination likely would take place. (Horizontal Merger Guidelines 7.1)

This permissive evidentiary standard will likely prove important if the DOJ lawsuit proceeds to trial and is successful in blocking the merger (note that the Guidelines aren't binding on courts, although courts often rely on them). The DOJ appears on sound footing in describing the airline industry as structurally vulnerable to coordination, describing it as dominated by a few large players, consisting of small transactions with transparent pricing. The DOJ also provides evidence (especially from US Airways) of previous examples of coordination, and attempted coordination as well as business planning around the anticipated reactions of competitors.

Demonstrating that a market is vulnerable to coordination is only one of three criteria the Guidelines consider necessary for making a coordinated effects case, DOJ also needs to show that the merger would significantly increase concentration and lead to a moderately or highly concentrated market. The DOJ attempts to do this through its annex of city-pairs that will experience a significant increase in concentration as well as its reference to consolidation in the U.S. airline industry overall. The DOJ must also have "a credible basis on which to conclude that the merger may enhance that vulnerability." Again, note the low threshold required under that phrasing. As I quoted yesterday, the DOJ believes removing one more major airline, regardless of the routes involved, is enough to make coordination easier and thus the merger worth blocking.

This is not to say that a court will be persuaded by the DOJ's coordinated effects argument, or that it won't demand greater empirical justification for the DOJ's claims than the Horizontal Merger Guidelines require. But for anyone who is surprised by the lack of rigorous city-pair analysis in the DOJ's suit, the arguments the DOJ makes are in keeping with an emphasis on structural factors and coordinated effects arguments in prior cases brought by the DOJ under the Obama administration.

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