Coordinated and Unilateral Anticompetitive Effects

• Pages: 147-185

CHAPTER V

COORDINATED AND UNILATERAL

ANTICOMPETITIVE EFFECTS

The 2010 revision of the Antitrust Division of the Department of

Justice (DOJ or the Division) and Federal Trade Commission’s (FTC or

the Commission) Merger Guidelines1confirmed that the analysis of

competitive effects is the key to merger review. It will not be relegated to

a later stage of the process, after, for example, determining market

definition. As the Merger Guidelines note, the agencies are often able to

draw preliminary conclusions about a transaction’s competitive effects

without identifying a specific relevant market.

In assessing under Section 7 of the Clayton Act (Section 7)2 whether

a merger between competitors “may substantially[] lessen

competition,”3the agencies consider two primary theories of harm:

•Unilateral effects. As a result of the merger, the common owner

of previously competing products is able to increase the price of

one or the other product—without accounting for any reaction

from competitors—because it now internalizes the recapture of

sales that previously would have been lost to the other merging

party as a result of the price increase.4

1. SeeU.S.DEP’T OF JUSTICE &FED.TRADE COMM’N,HORIZONTAL

MERGER GUIDELINES(2010) [hereinafter MERGER GUIDELINES] §6.1,

available athttp://www.justice.gov/atr/public/guidelines/hmg-2010.html

(“Diagnosing unilateral price effects based on the value of diverted sales

need not rely on market definition or the calculation of market shares and

concentration. The Agencies rely much more on the value of diverted

sales than on the level of the HHI for diagnosing unilateral price effects

in markets with differentiated products.”).

2. 15 U.S.C. §18.

3. Id.

4. See MERGER GUIDELINES, supranote 1, §6. For example, if, prior to a

merger between firms A and B, firm A sets its price so that its marginal

revenue equals its marginal cost, 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

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148Mergers and Acquisitions

•Coordinated effects. As a result of the merger, firms in the

industry are better able to coordinate their behavior with the

effect of raising prices, even without express communication.5

Of course, each of these theories of harm is itself a simplification.

Mergers typically lead not only to a change in the merging parties’

unilateral incentives, but also to a change in competitors’ incentives.

Dividing theories of harm along these lines often makes sense,

however, because of how these effects play out in the large majority of

mergers. Generally, the more homogeneous the products offered by

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

companies in that market will facilitate coordinated interaction among

the remaining competitors. The more differentiated the products in the

relevant market, the more difficult it is for competitors to coordinate

because it is typically more difficult to reach terms of coordination and to

detect or punish deviations from those terms.6Thus, in a merger of firms

producing differentiated products, unilateral effects typically dominatein

remaining products sold. However, after the merger, some of the lost

profit resulting from thedemand side substitution will be internalized and

recaptured by firm B which could, depending on firm B’s profit margin,

result in a sufficient benefit to justify an increase in the price charged by

firm A. “By eliminati ng competition between the merging firms, a merger

gives the merged firm incentives different from those of the merging

firms.” U.S.DEP’T OF JUSTICE &FED.TRADE COMM’N,COMMENTARY ON

THE HORIZONTAL MERGER GUIDELINES25 (2006) [hereinafter MERGER

GUIDELINES COMMENTARY],available athttp://www.ftc.gov/sites/

default/files/attachments/merger-review/commenta ryonthehorizontal

mergerguidelinesmarch2006.pdf.

5. See MERGER GUIDELINES,supra note 1, §7 “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.” Id. “A merger

could reduce competition substantially through coordinated interaction

and run afoul of section 7 of the Clayton Act without an agreement or

conspiracy within the meaning of the Sherman Act.” MERGER

GUIDELINES COMMENTARY, supranote 4, at 18. Coordinated effects

analysis considers past coordination and factors indicating susceptibility

to coordination such as product homogeneity and transparency of prices.

6. See MERGER GUIDELINES, supranote 1, §7.2 (explaining that prices are

more likely to be transparent and that a merging firm is more likely to

anticipate punishment by its rivals for deviation when the products in the

relevant market are relatively homogeneous).

Coordinated and Unilateral Anticompetitive Effects149

the transaction analysis.7Between these two ends of the spectrum, the

division between these theories of harm can be less clear, and for many

mergers, both coordinated and unilateral effects may play an important

role in the analysis.8

A.Unilateral Anticompetitive Effects

Over the history of the Merger Guidelines, unilateral effects have

taken on an increasingly significant role, from their first true description

in the 1992 Merger Guidelines9to the agencies’ growing enforcement

based on unilateral effects through the late 1990s.10The 2010 revision of

the Merger Guidelinesdoubles the length of the section describing

unilateral effects analysis, largely to reflect the maturing of the economic

tools used to examine unilateral effects.11The 2010 revision of the

Merger Guidelinesidentifies several economic tools, including diversion

ratios, upward pricing pressure (UPP) analysis, and merger simulation

models.12

7. SeeCarl 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.”).

8. MERGER GUIDELINES, supranote 1, §1.

9. U.S.DEP’T OF JUSTICE &FED.TRADE COMM’N,HORIZONTAL MERGER

GUIDELINES(1992) (with Apr. 8, 1997 revisions to § 4 on efficiencies

[hereinafter 1992MERGER GUIDELINES), available athttp://www.justice.

gov/atr/hmerger/11250.htm.

10. SeeMERGER GUIDELINES,supranote 1, §6; MERGER GUIDELINES

COMMENTARY, supranote 4, at 25; Timothy J. Muris, Chairman, Fed.

Trade Comm’n, Antitrust Enforcement at the Federal Trade Commission:

In a Word—Continuity, Remarks before the ABA Antitrust Section

(Aug.7, 2001), available athttp://www.ftc.gov/public-statements/2001/

08/antitrust-enforcement-federal-trade-commission-word-conti nuity

(“[A]lthough we have always had what could be called ‘unilateral effects’

theories, they have evolved, and they have been more widely applied

since the 1992 revision of the Guidelines.”).

11. MERGER GUIDELINES,supranote 1, §6.

12. Id.