The two leading merger systems--those of the United States and the European Union--treat the potential benefits and risks of mergers asymmetrically. Both systems require considerably greater proof of efficiencies than they do of potential harms if the efficiencies are to offset concerns over the accumulation or exercise of market power. The implicit asymmetry principle has important systemic effects for merger control. It not only stands in the way of some socially desirable mergers but also may indirectly facilitate the clearance of some socially undesirable mergers. Neither system explicitly justifies this asymmetry, and none of the plausible justifications are normatively supportable. The most likely positive explanations for the asymmetry stem from institutional frictions between the lawyer and economist classes in the antitrust agencies, self-preservationist biases by antitrust regulators, and misplaced ideological opposition to industrial concentration. In principle, the probability-adjusted net present value of merger risks should be treated symmetrically with the probability-adjusted net present value of merger efficiencies.
TABLE OF CONTENTS INTRODUCTION I. MERGER EFFICIENCIES' LEGAL MALAISE A. The Predictive Context of Merger Decisions B. U.S. Legal Principles C. EU Legal Principles II. SYSTEMIC EFFECTS OF FORMAL ASYMMETRY A. Incidence, Intensity, and Effect of Efficiencies Discourse in Administrative Negotiations B. The Liberalization of Merger Policy C. Effects on Distribution of Proposed and Challenged Mergers III. SOURCES OF HOSTILITY TO MERGER EFFICIENCIES A. Productive Efficiencies Do Not Always Benefit Consumers B. Efficiencies Claims Are Difficult to Prove C. Mergers Are Driven by Kingdom Building Rather Than Increasing Shareholder Value D. Counterattacking Optimism Bias E. Efficiencies Create Undue Dominance F. Status Quo Preference 1. Loss Aversion 2. Precautionary Principle 3. Deconcentration as a Political Value IV. REVALUING MERGER EFFICIENCIES A. Standards of Proof and Burdens of Proof B. Balancing and Problems of Commensurability C. Costs of Increased Complexity CONCLUSION INTRODUCTION
Merger law exhibits an unexplained and unexamined differentiation between probabilistic costs and benefits. (1) In the two leading merger systems--those of the United States and the European Union--merger law implicitly requires a greater degree of predictive proof of merger-generated efficiencies than it does of merger-generated social costs. As a matter of both verbal formulation in the governing legal norms and observed practice of antitrust enforcement agencies and courts, the government is accorded greater evidentiary leniency in proving anticompetitive effects than the merging parties are in proving offsetting efficiencies.
To illustrate, suppose that the best available economic evidence holds that a horizontal merger is 40 percent likely to create $100 in net present value consumer welfare losses and 40 percent likely to create $100 in net present value efficiencies that would be passed on to consumers. (2) Putting aside enforcement costs, the expected value of the merger to consumers is zero. Therefore, all else being equal, there is no reason to challenge the merger, particularly given the high costs of enforcement. Under prevailing norms and practices, however, the merger would likely be challenged. Superficially, at least, the articulated legal mechanism for this differentiation would be a disparity in the standards of proof for the government's affirmative case and the defendant's rebuttal case.
The systemic consequences of this asymmetry are significant, in a way that has not previously been appreciated. It might appear that the only consequence of a more stringent approach to claims of merger efficiencies is that some mergers that are close calls on the anticompetitive effects side of the ledger will be prohibited even though, on balance, they might actually benefit society. Since merger policy has been relatively lenient overall in the past three decades, false positives in a handful of close-call merger cases might seem to be a relatively trivial consequence of an unexplained evidentiary asymmetry.
This view incorrectly assumes that the only consequence of stringency on proof of efficiencies falls on the efficiencies side of the ledger. There are good reasons to think that this is not true--that courts and agencies selectively compensate for not giving much weight to merger efficiencies claims by demanding too much proof of anticompetitive effects from government antitrust enforcers. In an alternative legal regime where efficiencies and risks were equally weighted and parties therefore had a greater incentive to come forward with evidence of efficiencies, some mergers that today proceed unchallenged might be challenged since courts and enforcers could become more credulous of anticompetitive effects theories in cases without plausible efficiencies claims. Rebalancing the weighting of efficiencies and anticompetitive effects could have a significant effect on the overall mix and distribution of merger challenges.
This Article interrogates the differential treatment of costs and benefits and argues that it is unjustified and counterproductive. A potential merger efficiency should be given weight equal to an equally likely anticompetitive risk of the same magnitude. To put it more formally, the probability-adjusted net present value of merger risks should be treated symmetrically with the probability-adjusted net present value of merger efficiencies. This proposition may seem intuitively obvious given ordinary cost-benefit analysis principles, but there are a number of reasons why symmetrical weighting might not hold in the merger context. Merger efficiencies might be disfavored because they tend to be captured by producers rather than consumers, while the consumers bear the full weight of anticompetitive effects. Similarly, short-run efficiencies may be disfavored because they can create long-run market dominance that creates further inefficiencies as the merging firms eventually exercise market power. Efficiencies claims may also be treated with skepticism because, unlike anticompetitive effects theories, efficiencies theories are inherently speculative. Finally, such claims may be suspect because of a general view that large corporate mergers are more often the product of kingdom building by imperialistic CEOs than efforts to generate shareholder value, or that managers proposing mergers suffer, as a class, from optimism bias.
Merger efficiencies may also be running up against the expression of political or ideological values in merger policy. Efficiency doctrine and practice may express residual manifestations of the precautionary principle, a requirement that proponents of economic changes eliminate the possibility of social welfare losses before those changes are approved. Or the veiled antipathy to merger efficiencies may be a holding place for ideological resistance to large aggregations of economic power, even when those aggregations advance short-run consumer interests.
This Article interrogates and rejects each of these possible justifications for cost-benefit asymmetry. It argues in favor of a formal principle of symmetrical treatment of expected costs and benefits from future mergers. However, treating costs and benefits symmetrically does not necessarily entail a comprehensive overhaul in the way that merger efficiencies are considered or the weight they are given in merger review. Courts and agencies sometimes discount certain efficiency claims for justifiable reasons. Some efficiency claims are inherently speculative or unlikely to advance consumer welfare. Rather, adoption of the symmetry principle would add rigor and transparency to merger review and reveal circumstances where well-founded efficiency defenses may be subordinated to confused analysis or weakly articulated policy objections.
Part I of this Article sets the stage by describing the prospective context of merger review decisions, which require agencies and sometimes courts to make predictive assessments of the consequences of mergers that have not yet occurred. It then describes the asymmetrical treatment between merger costs and benefits as a positive matter in the law and practice of United States and European antitrust agencies and courts. Although these two leading and often competing merger control jurisdictions differ in many ways on the substance and institutional framework of merger review, they share a common and unexplained devaluation of merger efficiencies as compared to their treatment of predicted anticompetitive merger costs.
Part II analyzes the systemic consequences of the understood norm of agency and court discounting of merger efficiency arguments. While this phenomenon has generally been viewed just to stand in the way of some mergers potentially beneficial to society, the asymmetry principle may in fact result in an overall suboptimal mix of approved and disapproved mergers, since the principle tends to create a suboptimal amount of information that would be useful in predicting and evaluating both efficiencies and anticompetitive effects.
Parts III and IV consider the current regime and offer a new merger review framework. Part III identifies a number of possible grounds for asymmetrical treatment and rejects each one as normatively insufficient to justify a principle of asymmetry. Part IV proposes a path forward for more fluid integration of efficiency concerns in merger review. It considers the role that burdens of proof should play on efficiencies questions. It also acknowledges that a principle of symmetrical treatment cannot be applied in a numerically rigid way but rather should serve as a mnemonic device to stimulate a rebalancing in some key drivers of merger policy. Finally, it considers the additional complexity costs that a symmetry principle might entail.