Almost fifty years ago, in 1968, the economist Oliver Williamson
first proposed that cost savings generated by a merger could offset the
transaction’s anticompetitive effects.1 Since then, the courts and the
enforcement agencies have grown more receptive to efficiency claims
presented by merging firms. The efficiencies section of the
2010 Horizontal Merger Guidelines,2 published jointly by the Antitrust
Division of the U.S. Department of Justice (DOJ or the Division) and the
Federal Trade Commission (FTC or the Commission), recent speeches
by senior officials, as well as recent lower court decisions, indicate that
efficiencies have already had a critical impact on how courts and
agencies analyze the competitive effects of mergers. Nonetheless,
although it is clear that the agencies and the courts agree that efficiencies
should be considered in merger analysis, there remains a fundamental
debate concerning what efficiencies should be credited and the degree to
which they should affect the antitrust analysis.3
A. Efficiencies Defined
Generally, “economic efficiency” describes an event that increases
the total value of all economically measurable assets in society.4 In the
context of a merger, efficiencies grow out of the ability of the combining
1. See Oliver E. Williamson, Economies as an Antitrust Defense: The
Welfare Tradeoffs, 58 AMER. ECON. REV. 18 (1968).
GUIDELINES (2010) [hereinafter MERGER GUIDELINES] § 10, available at
3. See Ilene K. Gotts & Calvin S. Goldman, The Role of E fficiencies in
M & A Global Antitrust Review: Still in Flux?, in 2002 FOR DHAM
POLICY 201 (Barry E. Hawk ed., 2003).
4. See, e.g., Joseph F. Brodley, The Economic Goals of Antitrust: Efficiency,
Consumer Welfare, and Technological Progress, 62 N.Y.U. L. REV.
1020, 1025 (1987).
230 Mergers and Acquisitions
firms to use assets more efficiently through integration,5 particularl y in
ways that cannot be achieved without the merger.
The four types of efficiencies most commonly recognized in merger
analysis are: (1) productive efficiency; (2) allocative efficiency;
(3) transactional efficiency; and (4) dynamic or innovative efficiency.6
Productive efficiencies are achieved when the merged firms are able to
reduce long-run average costs through a more cost-effective combination
of resources, such as economies of scale, economies of scope, superior
integration of production facilities, plant specialization, or lower
transportation costs.7 Allocative efficiencies refers to circumstances in
which competition in the marketplace creates incentives for firms to
increase output up to the point at which the marginal costs of each unit of
output equals the value of the unit to consumers. Transactional
efficiencies refer to circumstances in which competition stimulates firms
to seek out the least expensive means of carrying out transactions.
Finally, dynamic or innovative efficiencies derive from competition as
well, such as merging firms lowering costs by eliminating duplicative
research and development operations or by combining to expand the
benefits of a superior technology.8
These four efficiencies may generate two different types of cost
savings: (1) marginal-cost reductions, which are generally equated to
reductions in variable costs; and (2) fixed-cost reductions. Marginal-cost
reductions are accorded significant credit under the Merger Guidelines,
because they increase the merged firm’s incentives to lower price or
reduce the firm’s incentive to elevate price. Fixed-cost reductions
generally are treated less favorably, because reductions in fixed costs are
less likely to result directly in lower prices to consumers and frequently
5. MERGER GUIDELINES, supra note 2.
6. See, e.g., William J. Kolasky & Andrew R. Dick, The Merger Guidelines
and the Integration of Efficiencies into Antitrust Review of Horizontal
Mergers, 71 ANTITRUST L. J. 207 (2003); see also Joseph F. Brodley,
Symposium: Perspectives on Effectiveness and Failing Firms in Merger
Analysis: Proof of Efficiencies in Mergers and Joint Ventures,
64 ANTITRUST L.J. 575 (1996).
7. See MERGER GUIDELINES, supra note 2, § 10. The cost savings associated
with productive efficiencies are generally considered to be more
susceptible to quantification than other types of efficiencies because cost
savings may be estimated reliably from available informatio n.
8. See Joseph Kattan, Comment: Efficiencies and Merger Analysis,
62 ANTITRUST L.J. 513, 522-23 (1994).
Efficiencies 231
may be obtained without a merger.9 The DOJ and FTC st ate in the
Merger Guidelines Commentary,10 however, that they will consider
“merger-specific, cognizable reductions in fixed costs, even if they
cannot be expected to result in direct, short-term, procompetitive price
effects because consumers may benefit from them over the longer term
even if not immediately.”11 Beyond variable-cost and fixed-cost savings,
other types of savings are not considered by the agencies in evaluating a
merger’s competitive effects.12
Reflecting the position taken by the agencies in the Merger
Guidelines Commentary, antitrust commentators also recognize that there
are circumstances in which fixed-cost savings can provide short-term,
direct, price-related consumer benefits, similar to variable-cost
reductions. For example, direct, price-related consumer benefits from
fixed-cost savings are more likely where fixed-cost savings directly
affect the pricing decisions of the merging parties and result in savings
that are similar to variable-cost reductions.13 In this regard, studies of
9. See, e.g., Dennis W. Carlto n, Revising the Horizontal Merger Guidelines,
6 J. COMPETITION L. & ECON. 619 (2010).
GUIDELINES COMMENTARY], available at http://www.ftc.gov/sites/
default/files/attachments/merger-review/commenta ryonthehorizontal
mergerguidelines march2006.pdf.
11. Id. at 58.
12. See Kattan, su pra note 8, at 14; Thomas B. Leary, Comm’r, Fed. Trade
Comm’n, Efficiencies and Antitrust: A Story of Ongoing Evolutio n,
Remarks at ABA Section of Antitrust La w 2002 Fall Forum, Washington,
D.C. (Nov. 8, 2002) [hereinafter Leary Remarks], available at
http://www.ftc.gov/public-statements/2002/1 1/efficiencies-and-antitrust-
story-ongoing-evoluti on (“whether they are called innovation or
managerial economies . . . we do not overtl y take them into acco unt when
deciding merger cases”).
13. William J. Kolasky, The Role of Economics in Merger Enforcement:
Efficiencies and Market Definition Under Conditions of Price
Discrimination, Presented at Charles River Associates Conference,
Current Topics in Merger & Antitrust Enforcement, Washington, DC,
Dec.11, 2002, at 10 (“[F]ixed cost savings matter . . . . First, which costs
are variable depends in part on how long our time horizon is. With a
longer horizon, cos ts that might other wise appear fixed may indeed
impact marginal pricing decisions. . . . Second, under conditions of price
discrimination, prices to most customers are not set at marginal costs, but

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