Quality-Enhancing Merger Efficiencies

• Author: Roger D. Blair & D. Daniel Sokol
• Position: Department of Economics, University of Florida and Department of Public Policy/Professor of Law, University of Florida Levin College of Law; Senior Research Fellow, George Washington University Law School Competition Law Center
• Pages: 1969-1996

Quality-Enhancing Merger Efficiencies Roger D. Blair  & D. Daniel Sokol  ABSTRACT: The appropriate role of merger efficiencies remains unresolved in United States antitrust law and policy. The Patient Protection and Affordable Care Act (“ACA”) has led to a significant shift in health care delivery. The ACA promises that increased integration and a shift from quantity of performance to increased competition will create a system in which quality of health care will go up and prices will go down. Increasingly, due to the economic trends that respond to the ACA, including considerable consolidation both horizontally and vertically, it is imperative that the antitrust agencies provide an economically sound and administrable legal approach to efficiency-enhancing mergers. In this regard, horizontal hospital mergers present particular challenges for antitrust. Most hospital merger cases focus on cost-based efficiencies, as does most of the academic empirical literature. Yet, government policy seems out of sync with quality-enhancing efficiencies analysis. This Essay first provides a discussion of the welfare effects on quality and its implications for antitrust analysis. Then, the Essay explores quality -enhancing efficiencies analysis in both the 2010 Horizontal Merger Guidelines and in antitrust case law. In doing so, the Essay identifies areas of both clarity and ambiguity regarding quality-enhancing efficiencies policy. Third, the Essay draws parallels to an efficiency analysis of quality under rule of reason analysis, in which the Essay offers examples of resale price maintenance and tying of franchising contracts. Thereafter, the Essay addresses how agencies and courts should treat quality-enhancing efficiencies in mergers. In doing so, the Essay draws upon the existing academic literature in empirical industrial organization economics and public health on measurements of what is hospital quality in a consolidating health care marketplace. In its concluding section, the Essay advocates a more robust use of quality measurements as a guiding principle of merger law and policy that (1) is flexible enough for case by case analysis; (2) will provide for ease of  Professor and Chair, Department of Economics, University of Florida.  Professor of Law, University of Florida and Senior Research Fellow, George Washington Law School Competition Law Center. We would like to thank workshop participants at Georgia State University and the University of Iowa as well as the wonderful editors of the Iowa Law Review . Sokol also would like to thank the University of Florida Levin College of Law for a summer research grant. 1970 IOWA LAW REVIEW [Vol. 100:1969 administrability; and (3) will make outcomes fall more in line with sound economic analysis than the current system. I. INTRODUCTION ........................................................................... 1970 II. WELFARE EFFECTS OF QUALITY ................................................... 1975 A. B ASIC A NALYSIS .................................................................... 1975 B. Q UALITY E FFICIENCIES U NDER THE M ERGER G UIDELINES AND C ASE L AW ..................................................................................... 1979 C. Q UALITY E NHANCING E FFICIENCIES U NDER A R ULE OF R EASON A NALYSIS .............................................................................. 1984 1. Resale Price Maintenance ........................................... 1985 2. Promotional Uses of RPM .......................................... 1986 3. Tying ............................................................................ 1989 III. HOW TO TREAT QUALITY-ENHANCING EFFICIENCIES IN MERGERS ..................................................................................... 1991 IV. CONCLUSION .............................................................................. 1995 I. INTRODUCTION The role of merger efficiencies remains unresolved in U.S. antitrust law and policy. 1 Within the world of merger efficiencies, the antitrust agencies and courts have spent less effort in analyzing and developing workable legal rules with regard to quality-enhancing efficiencies vis-à-vis cost-reducing efficiencies. As this Essay explains, agencies and courts offer greater weight to price than quality efficiencies. In some cases this does not affect the outcome of a case. Indeed, only a small number of litigated cases or matters before the agencies have been decided on efficiency grounds. 2 Among cases in which efficiencies matter, a merger in which there are no cost efficiencies also may be a situation in which there are no quality efficiencies. Nevertheless, 1. See generally Roger D. Blair & Jessica S. Haynes, The Efficiencies Defense in the 2010 Horizontal Merger Guidelines , 39 REV. INDUS. ORG. 57, 57–68 (2011); Hillary Greene & D. Daniel Sokol, Judicial Treatment of the Antitrust Treatise , 100 IOWA L. REV. 2039 (2015); Howard Shelanski, Efficiency Claims and Antitrust Enforcement , in 1 THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS 451 (Roger D. Blair & D. Daniel Sokol eds., 2015); D. Daniel Sokol & James A. Fishkin, Response: Antitrust Merger Efficiencies in the Shadow of the Law , 64 VAND. L. REV. EN BANC 45, 46 (2011) (“discussing the actual practice of merger efficiencies and the underlying scholarly work in the area”). 2. For litigated cases, see infra note 29. For agency matters, see generally MALCOLM B. COATE & ANDREW J. HEIMERT, FED. TRADE COMM’N, ECONOMIC ISSUES: MERGER EFFICIENCIES AT THE FEDERAL TRADE COMMISSION 1997–2007 (2009), available at https://www.ftc.gov/sites/ default/files/documents/reports/merger-efficiencies-federal-trade-commission-1997%E2%80 %932007/0902mergerefficiencies.pdf. 2015] QUALITY-ENHANCING MERGER EFFICIENCIES 1971 sometimes there may be situations in which the quality-enhancing efficiencies may be substantial, even while the cost-reducing efficiencies may not be. Such mergers should be allowed to proceed. By providing greater weight to cost efficiencies at the expense of quality enhancing efficiencies, antitrust policy creates market distortions. Ignoring changes in quality or underemphasizing such changes “in a merger analysis can lead to a bias in estimated welfare effects” of mergers and to mistaken outcomes. 3 By creating a false distinction between price and quality efficiencies, antitrust merger policy is out of step with antitrust policy in the area of conduct. The fundamental question, for example, regarding occupational licenses, such as in California Dental , is the price-versus-quality question and the desire for quality assurance. 4 The same can be said in Leegin about Resale Price Maintenance (“RPM”) both in the free rider and non-free-rider contexts. 5 This Essay seeks to provide some guidance on how to create an administrable system for measuring quality-enhancing efficiencies. Upon first glance, costs seem easier to measure than quality factors. Unlike price, where lower price is the single dimension (assuming one product), quality may have multiple dimensions. However, such reasoning is deceptively easy and misguided. Even in a pricing context, cost is not always easy to determine. A multi-product discount can mean that price may be higher for one product but the entire bundle would be cheaper. 6 Limiting oneself only to price, there are multiple ways to determine the appropriate cost-based tests in the context of single-firm conduct. 7 In this sense, the overriding concern of administrability regarding quality measurement seems out of place as price/cost tests may be equally difficult for courts to figure out as quality measurement. Quality issues remain critical to antitrust merger analysis. The purpose of section 7 of the Clayton Act is to prevent mergers that create monopolies or 3. See, e.g. , Ying Fan, Ownership Consolidation and Product Characteristics: A Study of the US Daily Newspaper Market , 103 AM. ECON. REV. 1598, 1598 (2013). 4. Cal. Dental Ass’n v. Fed. Trade Comm’n, 526 U.S. 756, 762, 771–78 (1999). 5. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 890–92 (2007). 6. This is not the issue that is the focus of our Essay. We note however that a number of litigated cases have addressed this issue. See, e.g. , ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 272–81 (3d Cir. 2012); Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 903–11 (9th Cir. 2008); Church & Dwight Co., Inc. v. Mayer Labs., Inc., No. C-10-4429 EMC, 2011 WL 1225912, at *8–11 (N.D. Cal. Apr. 1, 2011). 7. See, e.g. , A. Douglas Melamed, Exclusive Dealing Agreements and Other Exclusionary Conduct—Are There Unifying Principles? , 73 ANTITRUST L.J. 375, 387–89 (2006); Kevin M. Murphy et al., Competitive Discounts and Antitrust Policy , in 2 THE OXFORD HANDBOOK OF INTERNATIONAL ANTITRUST ECONOMICS 89, 92–93 (Roger D. Blair & D. Daniel Sokol eds., 2015); Gregory J. Werden, Identifying Exclusionary Conduct Under Section 2: The “No Economic Sense” Test , 73 ANTITRUST L.J. 413, 418–20 (2006). 1972 IOWA LAW REVIEW [Vol. 100:1969 oligopolies. 8 The 2010 Horizontal Merger Guidelines (“2010 Merger Guidelines”) express this concern specific to quality-enhancing efficiencies, noting that “purported efficiency claims based on lower prices can be undermined if they rest on reductions in product quality or variety that customers value.” 9 That is, quality degradation, if it results in lower cost, is not to be supported under efficiencies analysis. When both costs and quality efficiencies increase, however, the 2010 Merger Guidelines are silent. They contemplate only situations in which “[e]fficiencies also may lead to new or improved products, even if they do not immediately and directly affect price.” 10 Increased quality may also impact mergers where there is no price decrease or where prices go up post-merger. Understanding quality efficiencies is especially important today, after the increased merger activity...