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.1Since 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.4In the
context of a merger, efficiencies grow out of the ability of the combining
1. SeeOliver E. Williamson, Economies as an Antitrust Defense: The
Welfare Tradeoffs, 58AMER.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. SeeIlene K. Gotts & Calvin S. Goldman, The Role of Efficiencies in
M & A Global Antitrust Review: Still in Flux?, in2002 FOR DHAM
CORPORATE LAW INSTITUTE:INTERNATIONAL ANTITRUST LAW AND
POLICY201 (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
230Mergers and Acquisitions
firms to use assets more efficiently through integration,5particularly 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 firmsare 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.7Allocative 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 equatedto
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,supranote 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 alsoJoseph 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, supranote2, §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. SeeJoseph Kattan, Comment:Efficiencies and Merger Analysis,
62 ANTITRUST L.J.513, 522-23 (1994).
Efficiencies231
may be obtained without a merger.9The DOJ and FTC state in the
Merger Guidelines Commentary,10however, 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.”11Beyond 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.13In this regard, studies of
9. See, e.g., Dennis W. Carlton, Revising the Horizontal Merger Guidelines,
6 J.COMPETITION L.&ECON. 619 (2010).
10. U.S.DEP’T OF JUSTICE &FED.TRADE COMM’N,COMMENTARY ON THE
HORIZONTAL MERGER GUIDELINES(2006) [hereinafter MERGER
GUIDELINES COMMENTARY], available athttp://www.ftc.gov/sites/
default/files/attachments/merger-review/commenta ryonthehorizontal
mergerguidelinesmarch2006.pdf.
11. Id.at 58.
12. SeeKattan, supranote 8, at 14; Thomas B. Leary, Comm’r, Fed. Trade
Comm’n, Efficiencies and Antitrust: A Story of Ongoing Evolution,
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/2002/11/efficiencies-and-antitrust-
story-ongoing-evolution(“whether they are called innovation or
managerial economies . . . we do not overtly take them into account 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, costs that might otherwise 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
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
