Efficiencies, Failing Firms, and Alternatives to Merger: A Policy Synthesis

• Author: Frederick R. Warren-Boulton,John E. Kwoka
• Published date: 01 June 1986
• Date: 01 June 1986
• DOI: http://doi.org/10.1177/0003603X8603100209
• Subject Matter: Article

The Antitrust Bulletin/Summer 1986

Efficiencies, failing firms,

and alternatives to merger:

apolicy synthesis

BY

JOHN

E. KWOKA, JR.,*

and FREDERICK R. WARREN-BOULTON**

I. Introduction

431

Antitrust policy in recent years has increasingly focused on the

potential for achieving economic efficiencies through merger.

This shift has coincided with, and may be partly due to, an

improved understanding of economies of scale, economies of

scope, and the market for corporate control.

It

also reflects the

recognition that much of the evidence on the correlates of higher

market concentration could be interpreted to indicate that

mergers result in significant economic efficiencies instead of, or

as well as, increased market power.I

Professor of Economics, George Washington University.

•• Deputy Assistant Attorney General, Antitrust Division, Depart-

ment

of

Justice.

AUTHORS' NOTE: The views expressed in this article do not necessarily

reflect those

of

the Department

of

Justice or

of

George Washington

University.

Gratitude

for

helpful comments is expressed to William

Burnett, Michael DeBow, Paul Godek, Gerald Hellerman, Jon Joyce,

Mark Leddy, Robert McGuckin, John

Sawyer,

and Gregory

Werden,

none

of

whom bear any responsibility for any errors.

1For a review of the literature since the appearance of Demsetz,

Industry Structure, Market Rivalry and Public Policy, 16 J.L. &

ECON.

1

(1973),

see Pautler, A Review

of

the Economic Basis

for

Broad-Based

Horizontal-Merger Policy, 28

ANTITRUST

BULL.

571-651 (1983).

©1986by Federal Legal Publications. Inc.

432 The antitrust bulletin

This greater emphasis on efficiencies was a major element in

the 1984 revision of the Department of Justice Merger Guide-

lines.' Whereas the

1982

Guidelines indicated that the Depart-

ment would explicitly consider efficiency claims only in

extraordinary cases, the revision moved efficiency claims from

the "defenses" section into the "other factors" section. Thus for

mergers that would otherwise violate the Merger Guidelines,

appropriately supported efficiency claims can now be continu-

ously balanced against competitive risks, rather than having to

meet some separate, absolute threshold.' As many who were

involved in that revision noted, however, proposing a policy that

takes due account of efficiencies is far easier than implementing

it.

Yet

the success or failure of efforts to carry out such a policy

will significantly affect the evolution of merger policy over the

next decade.

Much of the literature considering efficiencies in antitrust

policy has focused on the legislative intent versus economic

analysis, the choice between consumer welfare and total welfare

as the appropriate criterion, and, ultimately, on the practical

difficulty

of

determining the efficiency and price effects of

mergers.' In order to skirt those minefields, we focus here on

efficiency-related issues that must be decided before any such

trade-offs are made.

We begin by discussing the qualitative criteria for a reduction

in costs to qualify as an efficiency and then turn to the issue

of

evidence for the existence and magnitude of such efficiencies.

2U.S. Department

of

Justice Merger Guidelines (1984), reprinted

in 2

TRADE

REG.

RER

(CCH) " 4490-95 [hereinafter cited as Merger

Guidelines] .

3See Warren-Boulton, Merger Policy and Enforcement at the

Antitrust Division: The Economist's

View,

54

ANTITRUST

L.J.

109

(1985).

4The seminal piece on trade-offs is Williamson, Economies as an

Antitrust Defense, 58

AM.

ECON.

REV.

18 (1968).

For

arecent

and

extensive discussion

of

these issues, see Fisher &Lande, Efficiency

Considerations in Merger Enforcement, 71

CALIF.

L.

REV.

1580 (1983).