Department of Justice and Federal Trade Commission Announce Revisions to Merger Guidelines

With special thanks to contributing author, J. Stephen Stockum, Ph.D., Principal, Economists Incorporated

On April 20, 2010, the U.S. Department of Justice's Antitrust Division and the Federal Trade Commission jointly promulgated completely revised Horizontal Merger Guidelines ("Guidelines"). The proposed Guidelines are open to public comment until May 20, 2010, after which revisions may be made. While these Guidelines do not have the force of law, they lay out the analytical framework the two agencies use to conduct their antitrust review of proposed mergers and acquisitions, and they frequently are relied upon by the courts.

One stated goal of the Guidelines is to reduce businesses' uncertainty in federal merger review. However, the new Guidelines are such an extensive revision that they appear likely to increase uncertainty. Moreover, as merger review under the current Guidelines has always been a highly fact-specific undertaking, not amenable to broad-based conclusions about what types of mergers will be challenged by the agencies (e.g., bright-line market share thresholds), this is even more so under the proposed Guidelines, as they emphasize the agencies' "flexibility" in applying their analytical methods.

The proposed new Guidelines, as with the current Guidelines, include the definition of relevant product and geographic markets in which the parties compete and the calculation of market shares and measures of market concentration within those markets. Then the proposed new Guidelines provide a framework to investigate whether anticompetitive effects appear likely to result, either through unilateral or coordinated behavior. The proposed new Guidelines also consider whether entry of new firms is likely to thwart any attempted exercise of market power and whether specific types of increased efficiency may counteract any increased ability to exercise market power. Also, a highly limited failing-firm defense is outlined.

Important elements of the proposed new Guidelines include:

1. Downplaying the role of market definition, i.e., focusing more on evidence of the potential for increased anticompetitive behavior independently of market definition. This change appears to be intended to enable the agencies to challenge mergers with relatively limited evidence.
2. Describing fact circumstances and analytical methods that will enable the agencies to define relevant markets narrowly, frequently much more narrowly than how businesspeople describe their "markets" in the ordinary course of business. The effect of narrow markets, of course, is to raise market shares and increase the likelihood that a proposed deal will be challenged.
3. Considering a broad array of types of anticompetitive behavior beyond just the potential for increased prices, including reduced product quality, reduced product variety, reduced service and diminished innovation. The new Guidelines also greatly increase the emphasis on price discrimination.
4. Raising the safe-harbor thresholds of market concentration based on the Herfindahl-Hirschman index. However, these higher thresholds do not reflect an easing of enforcement. Rather, they reflect recent de facto enforcement activity.
5. Describing in detail the types of evidence on which the agencies will rely, including evidence provided by customers and other third parties. The agencies will also rely on analyses of "analogous events," such as past mergers and past entry, expansion, and other competitive behavior both within the relevant markets and in related markets. The agencies' economists also frequently require large amounts of data from the parties to perform complex econometric analysis.
6. Describing defenses, including entry, efficiencies, and failing firms, to be relevant only under highly restricted conditions. For example, potential cost savings calculated for the purpose of businesses' assessing the profitability of a proposed merger will be dissected by the agencies to determine the extent to which each source of cost savings is deemed to be a cognizable gain in efficiency.

The overall effect of the proposed new Guidelines appears likely to be increased enforcement uncertainty and an increased need for fact-specific legal and economic analysis. Proposed mergers, now more than ever, will require careful examination by experienced lawyers and economists familiar with the agencies' merger review process.

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