Efficiencies

• Pages: 229-267

CHAPTER VII

EFFICIENCIES

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).

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

GUIDELINES (2010) [hereinafter MERGER GUIDELINES] § 10, available at

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

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

CORPORATE LAW INSTITUTE: INTERNATIONAL ANTITRUST LAW AND

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).

229

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).

10. U.S. DEP’T OF JUSTICE & FED. TRADE COM M’N, COMMENTARY ON THE

HORIZONTAL MERGER GUIDELINES (2006) [hereinafter MERGER

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