Philadelphia National Bank: Bad Economics, Bad Law, Good Riddance

• Author: Douglas H. Ginsburg and Joshua D. Wright
• Position: Respectively, Senior Circuit Judge, United States Court of Appeals for the District of Columbia Circuit, and Professor of Law, George Mason University; and Commissioner, Federal Trade Commission, and Professor of Law (on leave), George Mason University
• Pages: 377-395

PHILADELPHIA NATIONAL BANK: BAD ECONOMICS,

BAD LAW, GOOD RIDDANCE

D

OUGLAS

H. G

INSBURG

J

OSHUA

D. W

RIGHT

*

In a series of five merger cases starting with Brown Shoe (1962),

1

running

through Philadelphia National Bank (1963) (PNB),

2

Continental Can (1964),

3

Von’s Grocery (1966),

4

and ending with General Dynamics (1974),

5

the Su-

preme Court turned the then-reigning paradigm in industrial organization eco-

nomics into the law of the land. In Brown Shoe, the Court adopted the market

share of the would-be merged firm as the best indicator of “the probable ef-

fects of the combination on effective competition in the relevant market.”

6

At

the same time, by pointing out that the company had “presented no mitigating

factors,”

7

the Court signaled its openness to facts that would diminish the

significance of market shares in the particular market(s) affected by the

merger.

Just one year later, in PNB, the Court considered a merger that would have

created a bank with 30 percent of the relevant market—commercial banking

in metropolitan Philadelphia—and would have raised the two-firm concentra-

* Respectively, Senior Circuit Judge, United States Court of Appeals for the District of Co-

lumbia Circuit, and Professor of Law, George Mason University; and Commissioner, Federal

Trade Commission, and Professor of Law (on leave), George Mason University. The views

expressed do not necessarily reflect those of the Commission or of any other Commissioner. The

authors thank Samantha Morelli for research assistance and Steven Salop for valuable comments

on an earlier draft.

1

Brown Shoe Co. v. United States, 370 U.S. 294 (1962).

2

United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963).

3

United States v. Cont’l Can Co., 378 U.S. 441 (1964).

4

United States v. Von’s Grocery Co., 384 U.S. 270 (1966).

5

United States v. Gen. Dynamics Corp., 415 U.S. 486 (1974).

6

Brown Shoe Co., 370 U.S. at 343. The Court said market share was “one of the most

important factors to be considered” in this predictive exercise, id., but identified as “[o]ther

factors” only “the history of tendency toward concentration in the industry,” id. at 344–45—

which, unlike market shares, would not be a feature of every case—and the absence of mitigating

factors, id. at 346.

7

Id. at 346.

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tion ratio from 44 percent to 59 percent.

8

In reversing the judgment of the

district court, which had ruled in favor of the merger, the Court made the

following fateful statement: “Without attempting to specify the smallest mar-

ket share which would still be considered to threaten undue concentration, we

are clear that 30% presents that threat.”

9

By the standards then prevailing in the economics of industrial organiza-

tion, the Court was undoubtedly on solid ground, as it made clear in a footnote

appended to the sentence quoted above. Referring to the leading analysts of

the day, the Court noted:

Kaysen and Turner . . . suggest that 20% should be the line of prima facie

unlawfulness; Stigler suggests that any acquisition by a firm controlling 20%

of the market after the merger is presumptively unlawful; Markham men-

tions 25%. Bok’s principal test is increase in market concentration, and he

suggests a figure of 7% or 8%. . . . We intimate no view on the validity of

such tests for we have no need to consider percentages smaller than those in

the case at bar . . . .

10

One year after deciding PNB, the Court held unlawful the acquisition by

Continental Can, the second largest producer of metal containers with a 33

percent share of the market, of Hazel-Atlas Glass Co., the third largest pro-

ducer of glass containers with a 9.6 percent share.

11

The decision is best

known for the Court’s grouping of metal and glass containers in the same

relevant market and its focus upon “inter-industry” competition. Of more in-

terest here, however, is the Court’s extension of the recently created PNB

presumption. The merged company’s 25 percent of the combined glass and

metal bottle market, the Court noted, “approaches that held presumptively bad

in United States v. Philadelphia National Bank,” and as the Court had said in

that case, “Where concentration is already great, the importance of preventing

even slight increases in concentration and so preserving the possibility of

eventual deconcentration is correspondingly great.”

12

Curiously, however, the Court held unlawful the merger in its next case,

Von’s Grocery, without so much as mentioning either the 30 percent standard

set in PNB or the possibility of prohibiting a lesser merger that nonetheless

8

Philadelphia National Bank, 374 U.S. at 364–65.

9

Id. at 364. The Court went on to say “th[e] increase of more than 33% in concentration

must be regarded as significant,” id. at 365, but that aspect of the case has not been treated as

significant in the lower courts applying the PNB precedent.

10

Id. at 364 n.41 (citing C

ARL

K

AYSEN

& D

ONALD

F. T

URNER

, A

NTITRUST

P

OLICY

133

(1959); George J. Stigler, Mergers and Preventive Antitrust Policy, 104 U. P

A

. L. R

EV

. 176, 182

(1955); Jesse W. Markham, Merger Policy Under the New Section 7: A Six Year Appraisal, 43

V

A

. L. R

EV

489, 521–22 (1957); Derek C. Bok, Section 7 of the Clayton Act and the Merging of

Law and Economics, 74 H

ARV

. L. R

EV

. 226, 308–16, 328 (1960)).

11

United States v. Cont’l Can Co., 378 U.S. 443–45, 460 (1964).

12

Id. at 461–62 (quoting Philadelphia National Bank, 374 U.S. at 365 n.42).