Property Rights and the Presumptions of Merger Analysis

• Published date: 01 June 1994
• DOI: 10.1177/0003603X9403900203
• Author: William J. Lynk
• Date: 01 June 1994
• Subject Matter: Article

The Antitrust Bulletin/Summer 1994

Property rights and the

presumptions

of

merger

analysis

BY WILLIAM J. LYNK*

Both common sense and economic theory demonstrate that

the

competitive

behavior

and

financial

performance

of

nonprofit

hospitals-including

the incentive to raise prices

when

faced

with

less

competition-will

not

differ

materially from investor-owned hospitals.

363

Robert E. Bloch,

Antitrust Division, U.S. Department of Justice.

Antitrust

enforcement

investigations

of

proposed

mergers

are

focused

by one central question: Will the merger result in a price

increase

in the

affected

market? This, the

ultimate

question,

is

*Lexecon Inc., Chicago.

AUTHOR'S

NOTE: An earlier version

of

this article was

presented

at

aContemporary Policy Issues session at the 68th annual conference

of

the Western Economic Association International (June 23,

1993;

Lake

Tahoe, NV). I thank Thomas Campbell, Dennis Carlton,

Alan

Fisher,

Sam Peltzman, Margaret Sanderson, William Shear, Jeffrey Teske, and

Lawrence Wu for helpful comments on an earlier draft, none

of

whom

bears responsibility for any remaining errors or omissions.

©1994 by Federal Legal Publications, Inc.

364

The antitrust bulletin

generally assumed to be functionally identical to the penultimate

question: Will the merger create market powerf" And the reason

for assuming that the same reply answers both questions is simple.

In virtually all challenged mergers the parties to the transaction

are for-profit firms, and if the profit-maximization assumption

means anything,

it

means that any profit opportunity that can be

taken, will be taken.

The antitrust enforcement agencies are veterans at for-profit

merger analysis, but have had much less opportunity to analyze

the conduct of nonprofit firms." Perhaps as a result, the prevailing

presumption in government merger review seems to be that "for-

profit v. nonprofit" is a distinction without adifference; specifi-

cally, that a

nonprofit

merger

that

creates market

power

(the

penultimate question) is just as likely to result in a price increase

(the ultimate question) as an otherwise identical for-profit merger.

As I show in the analysis below, that presumption is baseless in

many, though not all, mergers of nonprofit hospitals. Analyses of

merger

policy

usually ask:

What

are the

circumstances

under

which a firm that wants to raise price, cannot? In contrast, I ask

the transpose

of

that question: What are the circumstances under

which a firm that can raise price, will not?

If

my analysis is cor-

rect, it implies that, by the agencies' failure to incorporate prop-

erly

the

pertinent

property

rights

issues

into

their

analytical

process, they have probably discouraged hospital mergers that in

fact were unlikely to result in increased prices to consumers.

Market power is the ability of the merged firm, with a now-higher

market share, to profitably make a price hike stick, either unilaterally or

with the cooperation of other firms in the now-more-concentrated market.

See William M. Landes &Richard A. Posner, Market Power in Antitrust

Cases, 94

HARv.

L.

REV.

937 (1981).

Most of that limited experience has been in the hospital industry;

see U.S. v. Rockford Memorial Corp., 898 F.2d 1278 (7th Cir. 1990);

U.S. v. Carilion Health System and Roanoke Valley Hospital, 892 F.2d

1042 (4th Cir. 1989); FTC v. University Health, 938 F.2d 1206 (11th Cir.

1991); and In re Adventist Health System/West and Ukiah Adventist

Hospital, F.T.C. Dkt. 9234 (1994).