Chapter 4. Horizontal Mergers: Proving Likely Anticompetitive Effects

• Pages: 107-140

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CHAPTER 4

HORIZONTAL MERGERS: PROVING

LIKELY ANTICOMPETITIVE EFFECTS

In order to determine whether a merger or acquisition may violate

the federal antitrust laws, i.e., to determine whether “the effect of such

acquisition may be substantially to lessen competition, or to tend to

create a monopoly,”1 the combination must be examined to ascertain its

likely competitive effects in the relevant product (or service) and

geographic markets. Horizontal mergers or acquisitions are those that

involve firms that compete in the same market prior to the merger, and

are generally analyzed for two types of potential anticompetitive effects:

the facilitation of coordinated interaction and unilateral effects.

A merger may diminish competition by enabling the firms in the

relevant market to engage in successful coordinated interaction that

harms consumers.2 A merger may also substantially lessen competition

by changing the pricing calculus facing the new integrated firm in a way

that favors a unilateral price increase for one or more of the products or

brands sold by the merged firm.3

Generally, the greater the homogeneity of the products offered by

sellers in the relevant market, the more likely a merger between

participants in that market will facilitate coordinated interaction among

the remaining competitors. Conversely, the greater the differentiation

1.15 U.S.C. § 18.

2.See UNITED STATES DEP’T OF JUSTICE & FEDERAL TRADE COMM’N,

HORIZONTAL MERGER GUIDELINES § 2.1 (1992) [hereinafter 1992

MERGER GUIDELINES], reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.

“Coordinated interaction is comprised of actions by a group of firms that

are profitable for each of them only as a result of the accommodating

reactions of the others.” Id.

3.See id. § 2.2. For example, if, prior to a merger between firms A and B,

firm A sets its price equal to its marginal revenue, any unilateral price

increase by firm A will result in a loss of profit, because the lost profit

resulting from the demand side substitution outweighs any increased

profitability on the remaining products sold. However, after the merger,

some of the lost profit resulting from the demand side substitution will be

internalized and recaptured by firm B which could, depending on B’s

profit margin, result in a sufficient benefit to justify an increase in the

price charged by firm A.

108 MERGERS AND ACQUISITIONS

among products in the relevant market, the less likely the merger will

facilitate tacit or express cooperation among market participants because

competing sellers must constantly assess the relative value of the

differing products.4 Although coordinated interaction in markets

involving differentiated products is more difficult to maintain and less

likely to occur, the more the differentiated products sold by the merging

firms are viewed as close substitutes for each other, relative to other

competing products, the greater the likelihood that the combined firm

will be able to engage in unilateral behavior affecting competition after

the merger.5

A. Market Share as a Measure of Anticompetitive Effects

1. U.S. Supreme Court Precedent

Once the product and geographic markets have been defined

properly, U.S. Supreme Court jurisprudence teaches that the government

may establish its prima facie case that a merger is unlawful by relying

upon market shares and market concentration in the postmerger market.6

Increases in market concentration above certain thresholds give rise to a

presumption that the combination will have anticompetitive effects and is

thus unlawful. This presumption may be overcome, however, by

demonstrating that market conditions make it unlikely that the presumed

anticompetitive effects in fact will occur.

In the period following enactment of the Celler-Kefauver

amendments in 1950,7 courts interpreted the legislative history of those

amendments as condemning most horizontal mergers. During the 1960s,

the U.S. Supreme Court issued a series of opinions that emphasized that

Section 7 was enacted to arrest incipient losses of competition. Mergers

4.See 1992 MERGER GUIDELINES, supra note 2, § 2.1 (“the extent of

information available to firms in the market, or the extent of

homogeneity, may be relevant to both the ability to reach terms of

coordination and to detect or punish deviations from those terms”).

5.See Carl Shapiro, Mergers with Differentiated Products, ANTITRUST ,

Spring 1996, at 23 (“When products are highly differentiated, concerns

about coordinated effects may be secondary to concerns about unilateral

effects”).

6.The courts use models that serve as indicia of market concentration, e.g.,

the Herfindahl-Hirschman Index or the earlier four-firm concentration

ratio. See generally Chapter 3.

7.Act of Dec. 29, 1950, Pub. L. No. 81-899, 64 Stat. 1225 (codified as

amended at 15 U.S.C. § 18).

Horizontal Mergers 109

that resulted in firms with relatively small market shares were found to

violate the law, particularly where there was evidence of a trend toward

increasing concentration in the relevant market.8

The U.S. Supreme Court’s first major horizontal merger decision

under the 1950 amendments to Section 7 was Brown Shoe Co. v. United

States.9 In Brown Shoe, the Court opined that market share was “one of

the most important factors to be considered when determining the

probable effects of the combination on effective competition in the

relevant market.”10 Noting the congressional desire to “arrest[] mergers

at a time when the trend to a lessening of competition . . . was still in its

incipiency,”11 the Court then condemned the merger of the Brown Shoe

Company and G.R. Kinney Company, even though the two companies

collectively accounted for only 5 percent of the relevant market.12

A year later, in United States v. Philadelphia National Bank ,13 the

U.S. Supreme Court announced a rule of presumptive illegality in the

context of heavily concentrated markets. In that case, the acquiring firm

held a 30 percent market share and, while the acquired firm’s market

share was only 3 percent, the combined firm and the market’s second

largest firm shared approximately 59 percent of the relevant market.14

The Court found that the merged firm’s market share and the increased

concentration resulting from the merger were sufficient to find the

merger presumptively illegal.15

The Philadelphia National Bank case spawned the “leading firm”

doctrine, in which acquisitions by firms with significant market shares

(15 percent or greater) of firms with trivial shares (often no greater than

1 percent) were condemned.16 Under the “leading firm” doctrine, once

8.See, e.g., United States v. Von’s Grocery Co., 384 U.S. 270 (1966)

(combined shares totaled 7.5%); United States v. Pabst Brewing Co., 384

U.S. 546 (1966) (combined shares totaled 4.49% nationwide, 11.32% in a

three-state area, and 23.95% in Wisconsin); United States v. Aluminum

Co. of Am., 377 U.S. 271 (1964); Brown Shoe Co. v. United States, 370

U.S. 294 (1962).

9.370 U.S. 294 (1962).

10.Id. at 343 (footnote omitted).

11.Id. at 317.

12.See id. at 343-44.

13.374 U.S. 321 (1963).

14.See id. at 331, 365.

15.See id. at 363-64.

16.See, e.g., Aluminum Co. of Am., 377 U.S. at 277-79 (acquisition by firm

with 27.8% of the market of firm with 1.3% condemned); FTC v.

PepsiCo, 477 F.2d 24, 25-27 (2d Cir. 1973) (merger where acquiring firm