Captive Opacity: The Increasing Uncertainty Surrounding Regulatory Treatment of Captive Capacity

• Pages: 56-62
• Date: 01 April 2025
• Published date: 01 April 2025
• Author: Jeffrey Oliver,Rachel Rasp,Sarah Zhang

ARTICLES

56 · ANTITRUST

reconcile recent caselaw developments. This would bring

much-needed transparency and consistency to government

enforcement, aid courts that confront captive capacity issues

in litigated merger cases, and improve private parties’ ability

to comply with the antitrust laws.4

Increased Ambiguity in the Merger Guidelines

Since 1982, the Agencies’ Merger Guidelines have become

increasingly ambiguous as to how the Agencies are likely to

treat captive capacity in their analysis of market definition

and market shares.5

1982/84 Horizontal Merger Guidelines. Each version of

the Guidelines has provided a method for identifying market

participants as part of the market definition analysis. Under

the 1982/84 Guidelines (“1984 Guidelines” for simplicity),

identifying market participants began with a “focus primarily

on firms that currently produce and sell the relevant prod-

uct.”6 In addition, other producers may be included if “their

inclusion would more accurately reflect probable supply

responses.”7 Specific examples of other producers in the 1984

Guidelines include production substitution, durable prod-

ucts, and internal consumption or captive capacity.

The 1984 Guidelines specifically stated that the DOJ

considered captive production and consumption of the rel-

evant product by vertically integrated firms as part of the

overall market supply and demand.8 The Agencies would

include a producer of a captive good in their market defini-

tion analysis if that producer would be likely to respond to a

“small but significant and non-transitory” increase in price9

in one of two ways—by (1) diverting the relevant product

from internal consumption to selling it in the merchant

market, or (2)increasing production of both the internally

consumed good and the downstream products in which the

internally consumed good is incorporated.10 According to

the 1984 Guidelines, either response would likely frustrate

collusion by firms currently selling the relevant product or

an effort by the current sellers of the relevant product to

exercise market power, and as such, these producers should

be included in the market.11

The 1984 Guidelines also contained specific instruction as

to the amount of sales or capacity that should be included in the

market for captive producers. The Agencies would only include

the portion of captive production that would be diverted to

the merchant market in response to a price increase.12 In other

words, even if a vertically integrated firm would respond to

a price increase by diverting captive production to the open

market, the market definition would not necessarily include

the firm’s total captive capacity—only that portion that would

likely be diverted. The 1984 Guidelines did not describe a

methodology to predict the amount of likely diversion.

1992 and 1997 Horizontal Merger Guidelines. The

1992 and 1997 versions of the Guidelines13 began an ongoing

trend of offering less discrete, specific, and clear guidance for

the treatment of captive capacity (as compared to the 1984

Guidelines).

Captive Opacity:

The Increasing

Uncertainty

Surrounding

Regulatory Treatment

of Captive Capacity

BY JEFFREY OLIVER, RACHEL RASP, AND SARAH ZHANG

WHEN A MERGER IMPLICATES THE

production and sale of inputs used to

make finished products, the question of

how to analyze “captive capacity” often

arises. “Captive capacity” is defined here

as production capacity for an input made by a vertically

integrated firm that is currently devoted to meeting the

firm’s internal needs to produce finished products or ser-

vices.1 Such deals often present the question of whether

captive capacity should be counted for purposes of defining

the relevant antitrust market, measuring market concentra-

tion, and analyzing competitive effects of the merger.2 In

circumstances where captive capacity accounts for a signif-

icant share of the overall production capacity for the input,

the competitive effects analysis can hinge on whether or not

captive capacity is deemed to be “in the market.”3

The Antitrust Division of the Department of Justice

(“DOJ”) and the Federal Trade Commission (“FTC”)

(together, the “Agencies”) have taken differing positions on

this issue in litigated merger cases, and courts have reached dif-

fering conclusions in these cases. The Agencies’ merger guide-

lines also have become increasingly vague with respect to the

proper treatment of captive capacity, all of which leaves private

parties with little clear and predictable guidance in their efforts

to assess deal risk and comply with the antitrust laws.

The Agencies should restore the guidance on this issue

in the 1984 version of the merger guidelines, described

below, and expand upon that guidance to incorporate and

Jeffrey Oliver is a partner, and Rachel Rasp and Sarah Zhang are senior

associates, in the Antitrust & Competition practice at Baker Botts in

Washington DC.

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