Relevant Market and Concentration

• Pages: 79-145

CHAPTER IV

RELEVANT MARKET AND CONCENTRATION

Section 7 of the Clayton Act (Section 7)1 prohibits acquisitions that

may result in a substantial lessening of competition “in any line of

commerce or in any activity affecting commerce in any section of the

country.”2 This statutory language arguably requires the delineation of a

relevant product market (line of commerce) and relevant geographic

market (section of the country) within which to assess the competitive

effects of a business combination, and merger analysis traditionally has

begun with market definition.3

Traditionally, the determination of the appropriate relevant market or

markets within which to analyze a transaction, along with corresponding

measures of concentration within those markets, has provided the

backdrop against which to assess competitive effects. Market definition

“allows [enforcers] to identify market participants and measure market

shares and market concentration,”4 while market concentration “i s often

one useful indicator of likely competitive effects of a merger.”5 Indeed,

1. 15 U.S.C. §18.

2. Id. (emphasis added).

3. See Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962) (“the

‘area of effective competition’ must be determined by reference to a

product market (the ‘line of commerce’) and a geographic market (the

‘section of the country’).”). See also, e.g., United States v. E.I. du Pont de

Nemours & Co., 353 U.S. 586, 593 (1957) (“[s]ubstantiality can be

determined only in terms of the market affected”); United States v.

Marine Bancorp., 418 U.S. 602, 618 (1974); FTC v. Arch Coal, Inc.,

329F. Supp. 2d 109, 119 (D.D.C.) (“The defi nition of the relevant market

is necessary to identify that area of trade within which a defendant

allegedly has acquired or will acquire an ille gal monopolistic or

oligopolistic position.”), granting appellants’ motions for voluntary

dismissal of appeal, 2004 WL 2066879, at *1 (D.C. Cir. 2004); see also

Chapter III.A.1.

4. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER

GUIDELINES (2010) [HEREINAFTER MERGER GUIDELINES] § 4, available at

http://www.justice.gov/atr/public/guidelines/hmg-2010.html.

5. Id. § 5.3.

79

80 Mergers and Acquisitions

the courts and federal antitrust enforcement agencies long have adhered

to a rebuttable presumption that mergers resulting in a significant

increase in concentration in one or more highly-concentrated relevant

markets are anticompetitive.6 This presumption rests on the basic

premise that eliminating a significant independent competitor in a

highly-concentrated market may reduce competition by facilitating

coordinated interaction among the remaining firms or by allowing the

merged firm to obtain or enhance unilateral pricing power.7

6. See id. § 2.1.3 (“Mergers that cause a significant increase in concentration

and result in highly concentrated markets are presumed to be likely to

enhance market power, but this presumption can be rebutted by

persuasive evidence showing that the mer ger is unlikely to enha nce

market power.”). See also United States v. Philadelphia National Bank,

374 U.S. 321, 365 (1963) (a single firm controlling at least 30 percent of

the relevant market was sufficient to raise an inference that the effect of

the contemplated merger may be substantially to lessen competitio n);

United States v. Baker Hughes Inc., 908 F.2d 981, 982 (D.C. Cir. 1990)

(demonstrating that a merger would produc e a firm controlling an und ue

share of the relevant market a nd would result in a sign ificant increase in

the concentration of firms in the market establis hes a presumption that the

transaction will substantially lessen competition); FTC v. OSF Healt hcare

Sys., 852 F. Supp. 2d 1069, 1074 (N.D. Ill. 2012) (“[t]herefore, ‘[i]f the

government makes t his [prima facie] sho wing, a presumption o f illegality

arises’”) (citation omitted); United States v. H&R Block, Inc., 833 F.

Supp. 2d 36, 71 (D.D.C. 2011) (presumption created where merged firm

would have undue percentage share of relevant market and market would

be highly concentrated as a result of merger) (citations omitted). But see

United States v. Oracle Corp., 331F. Supp. 2d 1098, 1123 (N.D. Cal.

2004) (“A presumption of anticompetitive effects from a combined share

of 35 percent in a differentiated products market is unwarranted.”). Once

the government has established this p resumption, the bur den shifts to the

defendants to rebut the presumption by “‘show[ing] that the market-share

statistics give an inaccurate account of the merger’s probable effects on

competition in the relevant market.’” H&R Block, 833 F. Supp. 2d at 49-

50 (quoting FTC v. H.J. Heinz, Co., 246 F.3d 708, 715 (D.C. Cir. 2001)).

7. See United States v. Oracle Corp., 331 F. Supp. 2d at 1110 (“A

significant trend toward concentration create[d] a p resumption that the

transaction violates section 7.”); Arch Coal, 329 F. Supp. 2d at 116

(“Market concentration affects the likelihood that one firm, or a small

group of firms could successfully exercise market power.”); Heinz,

246 F.3d at 715-716 (concentration exceeding certain levels raises a

likelihood of “interdependent anticompetitive conduct”).

Relevant Market and Concentration 81

Notably, however, presumptions based on market concentration

provide only a starting point for merger analysis. Additional evidence

regarding a merger’s likely competitive effects is usually required to

determine its legality. Moreover, the increasing sophistication and

adoption of applied economics in recent years has resulted in some de-

emphasis on market definition and market concentration as critical steps

in merger analysis.8 Indeed, the antitrust agencies’ most recent Merger

Guidelines, issued in 2010, state that: “[t]he Agencies’ analysis need not

start with market definition. Some of the analytical tools used by the

Agencies to assess competitive effects do not rely on market definition,

although evaluation of competitive alternatives available to customers is

always necessary at some point in the analysis.”9 The Merger Guidelines

further state that: “[t]he measurement of market shares and market

concentration is not an end in itself, but is useful to the extent it

illuminates the merger’s likely competitive effects.”10

These statements are generally consistent with the Supreme Court’s

observation that “[s]ince the purpose of the inquiries into market

definition and market power [in antitrust cases] is to determine whether

an arrangement has the potential for genuine adverse effects on

competition, ‘proof of actual detrimental effects, such as a reduction in

output,’ can obviate the need for an inquiry into market power, which is

but a ‘surrogate for detrimental effects.’”11 They also reflect the

8. See, e.g., FTC Closing Statement, Office Depot/OfficeMax, No. 1310104,

at 2 (Nov. 1, 2013) (explaining reasons for closing investigation into

proposed merger without defining the relevant market or referencing

market concentration and observing that “[a]ll of the econometrics, none

of which assumed or depended on any particular definition of a relevant

product or geographic market, indicate that the merger is unlikely to lead

to anticompetitive price increases.”).

9. MERGER GUIDELINES, supra note 4, § 4.

10. Id.

11. FTC v. Indiana Fed’n of Dentists, 476 U.S.447, 460-61 (1986) (using

direct proof to show market power in a Sherman Act § 1 unreasonable

restraint of trade action) (quoting 7 PHIL LIP E. AREEDA, ANTITRUST LAW

¶ 1511, at 429 (1st ed. 1986)). Three courts of appeals have concurred

that “[m]arket share is just a way of estimating market power, which is

the ultimate consideration. When there are better ways to estimate market

power, the court s hould use them.” All en-Myland, Inc. v. IBM Corp.,

33F.3d 194, 209 (3d Cir. 1994); United States v. Baker Hughes Inc.,

908F.2d 981, 992 (D.C. Cir. 1990); Ball Mem’l Hosp. v. Mutual Hosp.

Ins., 784 F.2d 1325, 1336 (7th Cir. 1986).