Be A Shame If Anything Happened to Your Merger ... "Regulatory leveraging can be a useful tool or it can be an abuse of power.

Author:Kovacic, William E.
Position:REGULATORY REFORM
 
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Leveraging--a firm's tying together two or more of its products in order to boost sales--can be risky business. Firms that use substantial market power in one product to distort competition for a second product are attractive targets for claims of illegal tying and/or monopolization.

But what if the actor leveraging its market power is a government agency? Leveraging allows regulators to use their gatekeeping authority to secure concessions that they might not be able to achieve otherwise--and to do so quickly and cheaply. Should we applaud regulators for using a strategy that we would condemn when private parties do the same thing?

What kind of gatekeeping power makes regulatory leveraging possible? The most obvious example is the authority to grant or withhold approvals over something the regulated entity needs to function, such as a license to operate in a given market (e.g., the right to operate a radio station, cable system, or ferry) or the right to sell a particular product (e.g., a branded drug). A less obvious example is regulatory approval of a proposed merger. A common element in all of these settings is that if the regulator can attach conditions to the exercise of its gatekeeping authority, it can leverage outcomes that it might not be able to impose directly or could only accomplish at a much higher cost.

A concrete example may help in understanding the basic dynamics. Assume an agency uses its regulatory authority over mergers to extract concessions from the regulated entity on privacy and data security requirements. Does that raise any red flags? Does your reaction differ if the agency is using its authority over mergers to secure concessions that it could not obtain, or could realize only with great difficulty, if it focused solely on data security? What if the agency is using its authority over mergers to obtain concessions on data security that would be unconstitutional if it sought to impose them directly? Does it make a difference if the agency has no regulatory authority over data security? What if the agency does not have regulatory authority over data security, but a different agency that does have that authority has asked the competition agency to seek the concessions at issue? What if the agency is using its leverage to extract campaign contributions for favored constituencies or support for the priorities of agency leadership or their congressional masters?

REGULATORY LEVERAGING IN FIVE EASY PIECES

Is regulatory leveraging a normal, legitimate, and perhaps inevitable feature of agency design? Or is it hostage-taking that forces regulated entities to pay a sizeable ransom to be left in peace? We present five brief case studies that give a sense of the circumstances in which regulators can engage in leveraging.

Leveraging across two antitrust domains/ A regulator can leverage its power across distinct areas within a single policy domain. In 2012, the Federal Trade Commission resolved two matters involving the international engineering and electronics firm Robert Bosch GmbH. The first involved Bosch's proposed acquisition of SPX Service Solutions, which would have given Bosch a "virtual monopoly in the market for air-conditioning recycling, recovery, and recharge devices." That issue was resolved with Bosch's agreement to divest its automotive air-conditioner repair equipment business and make some licensing commitments.

The same FTC press release that announced the agency's approval of the Bosch-SPX merger also announced that the FTC and Bosch had resolved a separate dispute over whether SPX had harmed competition by reneging "on a commitment to license key, standard-essential patents on fair, reasonable, and non-discriminatory (FRAND) terms." Bosch agreed to abandon SPX's claims for injunctive relief in those other cases, thereby resolving an ancillary matter that preceded the proposed merger.

It is not clear from the FTC's press release how these two entirely distinct issues came to be settled simultaneously. Their appearance in the same press release certainly inclines us to believe that they were resolved as a package deal.

Is it possible that Bosch could have gotten the merger approved without conceding the dispute over SPX's alleged abuse of FRAND terms? Of course. But Bosch had a huge incentive to give in on the SPX matter in order to obtain speedy approval of the proposed merger. FTC personnel knew that and could push hard for an immediate and outright concession. Even if FTC personnel never raised the subject, Bosch...

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