Horizontal Mergers, Market Structure, and Burdens of Proof.

Author:Hovenkamp, Herbert
Position:Symposium: Unlocking Antitrust Enforcement


Since the Supreme Court's landmark merger decision in United States v. Philadelphia National Bank, (1) challengers have mounted prima facie cases against horizontal mergers that rest on the level and increase in market concentration caused by the merger. For example, in the Heinz baby food case, the D.C. Circuit enjoined a merger of two manufacturers who each had more than 15% of the market and were the second- and third- largest competitors in the industry. (2) The merger would have doubled the size of the second largest firm and created a market dominated by just two firms, one with a 65% market share and the other with more than 30%. Those facts about both the increase in concentration that the merger produced and the resulting overall concentration were sufficient for prima facie illegality. When such a prima facie case has been made, the merging parties can then rebut this structural presumption by showing that the market shares do not accurately predict competitive effects. Generally, they do this by making one of three showings: first, that the proposed market is poorly defined or that market shares exaggerate the merger's anticompetitive potential; (3) second, that entry into the market will discipline any price increase; (4) or third, that the merger produces offsetting efficiencies sufficient to keep prices at premerger levels or otherwise counteract any anticompetitive effects. (5)

This Philadelphia National Bank burden-shifting approach has been critical for effective horizontal merger enforcement by the Department of Justice (DOJ) and the Federal Trade Commission (FTC). While the technical analysis of markets and the size of the relevant numbers have shifted somewhat over time, the basic structural presumption and burden-shifting framework remain alive and well. (6) We strongly support the application of the structural presumption in merger cases and suggest in this Feature how to broaden the set of situations in which the presumption operates.

Our approach is highly pragmatic: given that horizontal merger enforcement is typically a predictive exercise that is conducted after mergers are proposed but before they are consummated, what facts can the government realistically establish in court? We argue that considerable uncertainty is the norm, as to both the likely competitive effects of the merger and the specific manner in which those effects will manifest in the market. We thus embrace the structural presumption for very practical reasons, notwithstanding certain valid criticisms regarding market definition. Ultimately, we argue that market shares are often highly informative, despite the fact that one can measure market shares only after the messy process of defining the relevant market. In addition, the structural presumption is rebuttable.

Two important economic ideas underlie the structural presumption. First, the loss of a significant competitor in a concentrated market will likely enhance market power. Second, significant entry barriers often exist in concentrated markets. The Chicago School and other critics have challenged both of these economic ideas over the past half century. (7) These fundamental principles remain valid as bases for the burden-shifting approach of the structural presumption. Both ideas find strong support in how companies themselves formulate and execute competitive strategy--and indeed in how they evaluate proposed mergers and select merger partners. In contrast, the Chicago School's views that small firms are just as effective competitors as large firms and that entry will typically and promptly occur in response to prices modestly above competitive levels find much less empirical support. Importantly, if those conditions do apply in particular markets, the structural presumption can be rebutted with industry-specific evidence.

Our response to those who criticize the structural presumption because of its reliance on market definition is threefold. First, we suggest that the courts, whenever practical, should assess whether the market shares that underlie the government's structural presumption are sensitive to the precise boundaries of the relevant market. If not, then many of the criticisms based on market definition melt away, and the structural presumption deserves greater weight. If the market shares are sensitive to market definition, then the court should ask which set of market shares more accurately reflects the likely competitive effects of the proposed merger for the overlap products. Direct evidence of the likely competitive effects, such as the extent of direct competition between the merging parties, will be important for this purpose. However, the fact that the market shares vary with the boundaries of the market does not make those shares uninformative or require the abandonment of market definition altogether.

Second, the government should be entitled to the structural presumption if the merger causes the requisite increase in concentration in any properly defined relevant market. Even if the defense can identify an alternative relevant market (whether broader or narrower) in which the level or increase in concentration is insufficient to trigger the structural presumption, that showing does not negate or rebut the presumption. This observation is especially important because the accepted method of defining relevant markets in horizontal merger cases, namely the hypothetical monopoly test (HMT), generally leads to relatively narrow markets. (8) Under the HMT, a group of products is tested as a "candidate market" to determine whether it qualifies as a relevant antitrust market. Any candidate market for which the court concludes that a perfectly functioning cartel would lead to a significant price increase qualifies as a relevant market. The objection that the merger leads to only a modest increase in concentration in some broader market is not responsive, so long as the market identified by the challenger satisfies the HMT. As we note below, this is particularly pertinent in unilateral effects analysis. (9)

Third, we argue that in some cases the government should be able to prevail without invoking the structural presumption, at least as commonly stated, based on a more direct showing of the likely competitive effects of the proposed merger. As a result, market definition need not always be a gating factor for the government. This is especially true in cases where it is unclear which relevant market would be the most informative regarding the merger's likely competitive effects. Allowing this route for the government would harmonize horizontal merger law with other areas of antitrust law, where the courts have shown an increasing willingness to look at direct evidence of the likely effect of challenged conduct, relying less on indirect evidence based on a firm's market share. (10) We also consider briefly whether the existing statutory language permits an approach that avoids market definition altogether. (11)

We also discuss how the courts should evaluate evidence of market structure alongside more direct evidence of likely competitive effects. In cases in which the government alleges effects arising solely due to the loss of direct competition between the two merging firms, so-called "unilateral effects," alternative metrics such as diversion ratios or upward pricing pressure can complement and supplement the more traditional measures of market shares and the Herfindahl-Hirschman Index (HHI) without necessarily displacing them. (12) In cases in which the government alleges coordinated effects, the role of market definition and concentration measures such as the HHI is much more fundamental.

Part I explains that considerable economic evidence supports the proposition that a merger combining two firms with substantial market shares in a concentrated market is likely to reduce competition and harm customers. This evidence has strengthened over the past ten to twenty years, as economies of scale have become more significant in many industries. This shift, primarily driven by technological change, further strengthens the economic basis for the structural presumption, because firms with small market shares and new entrants are less likely to be as effectively competitive as firms that have proven their capabilities by achieving a substantial market share. Part II argues that the structural presumption is deeply established in the case law and has been a central element of the Horizontal Merger Guidelines for a full fifty years. Part II further explains how the DOJ and the FTC can use the structural presumption more aggressively under existing case law. We also respond to those who would weaken or eliminate the structural presumption. Part III discusses how the structural presumption can most effectively be applied in cases where loss of direct competition between the merging firms, i.e., with unilateral effects, is the primary concern. (13)

Part IV relates the structural presumption to the fundamental goal of antitrust law and policy. The structural presumption and the associated burden-shifting framework, as they have developed over the past fifty years, rely on the assumption that the goal of merger policy is to promote "consumer welfare" by protecting consumers against high prices or reduced output, product variety, product quality, or innovation. Our analysis in Parts I, II, and III assumes that the goal of merger enforcement policy is to promote consumer welfare. As we use this term, applying the "consumer welfare" standard means that a merger is judged to be anticompetitive if it disrupts the competitive process and harms trading parties on the other side of the market. (14) If the goal were something else, such as deterring industrial concentration to control corporate political power or protecting small firms from larger competitors, then the structural presumption would be viewed differently or might not apply at...

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