The Evolution and Vitality of Merger Presumptions: A Decision-Theoretic Approach
| Author | Steven C. Salop |
| Position | Professor of Economics and Law, Georgetown University Law Center; Senior Consultant, Charles River Associates |
| Pages | 269-306 |
THE EVOLUTION AND
VITALITY OF MERGER PRESUMPTIONS:
A DECISION-THEORETIC APPROACH
S
TEVEN
C. S
ALOP
*
[A] merger which produces a firm controlling an undue percentage share of
the relevant market, and results in a significant increase in the concentration
of firms in that market is so inherently likely to lessen competition substan-
tially that it must be enjoined in the absence of evidence clearly showing
that the merger is not likely to have such anticompetitive effects.
Philadelphia National Bank
1
I have come to celebrate Philadelphia National Bank (PNB), not to bury it.
2
As an analytic matter, PNB involved the application of decision theory to
antitrust. It formulated what we would now call a “quick look” type of deci-
sion process of using a preliminary screen to create a rebuttable presumption
that certain mergers are anticompetitive. In PNB, that presumption was ap-
plied to proposed mergers uniting firms with high combined market shares in
highly concentrated markets. This presumption, and its associated high burden
of production placed on rebuttal evidence, was based on an economic view
widely accepted at the time regarding the likely anticompetitive impact of
such mergers. The economic presumption has become weaker over time, and
that has led to the rebuttable presumption also becoming weaker. However,
* Professor of Economics and Law, Georgetown University Law Center; Senior Consultant,
Charles River Associates. An earlier version of this article was presented at the Conference on
the Fiftieth Anniversary of United States v. Philadelphia National Bank, held at New York Uni-
versity School of Law (Nov. 15, 2013). I have benefited greatly from the treatment of these
issues in Andrew I. Gavil, Burden of Proof in U.S. Antitrust Law,in 1 ABA S
ECTION OF
A
NTI-
TRUST
L
AW
, I
SSUES IN
C
OMPETITION
L
AW AND
P
OLICY
125 (W. Dale Collins ed., 2008), and
helpful conversations and comments from Jonathan Baker, Dennis Carlton, Malcolm Coate, An-
drew Gavil, Douglas Ginsburg, Thomas Krattenmaker, John Kwoka, Serge Moresi, Paul Roth-
stein, Carl Shapiro, Sean Sullivan, Mariano Tappata, Lawrence White, Robert Willig, and Joshua
Wright.
1
United States v. Phila. Nat’l Bank, 374 U.S. 321, 363 (1963).
2
Banking deregulation, mergers, and the financial meltdown led to the disappearance of Phil-
adelphia National Bank. Philadelphia National Bank became CoreStates, which then was pur-
chased by First Union in 1998, which purchased and took the name of Wachovia in 2001, which
in turn was rescued by Wells Fargo in the 2008 financial meltdown.
269
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NTITRUST
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AW
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OURNAL
[Vol. 80
the basic “quick look” structure remains central in the law. The antitrust agen-
cies also have adopted enforcement presumptions that reflect the economic
evidence and the way in which the courts have applied the PNB rebuttable
presumption. Looking forward, as economic analysis has advanced, alterna-
tive measures have been developed that can supplement or even eventually
replace concentration as a basis for anticompetitive legal and enforcement
presumptions. Thus, merger law can continue to evolve, while retaining the
vitality of PNB’s basic decision-theoretic approach.
Justice Brennan’s opinion in PNB built on the legislative history of Sec-
tion 7 of the Clayton Act and Brown Shoe
3
to create a quick look rule of
reason process for merger analysis.
4
If the merger leads to a combined firm
with a sufficiently large market share in a sufficiently concentrated market,
then the merger is presumed anticompetitive as a matter of law. The merging
parties can rebut this anticompetitive evidentiary presumption with evidence
“clearly showing” that the merger is unlikely to cause competitive harm.
5
In
the PNB case, the Supreme Court rejected certain specific rebuttals involving
the vigor of remaining competition, efficiencies, and social benefits to the
Philadelphia economy.
6
The Court also limited the efficiencies rebuttal as a
matter of law solely to merger-specific competitive benefits within the rele-
vant market.
7
Over the past 50 years, the courts have elucidated and expanded the rebuttal
factors and adjusted the burden of production to rebut the evidentiary pre-
sumption placed on the merging firms. Today, the rebuttal factors include
ease of entry and other supply responses (e.g., repositioning), lack of pre-
merger competition, continued intense post-merger market competition, and
merger-specific efficiencies. The Department of Justice introduced “quasi-
safe harbor” (i.e., not-anticompetitive) enforcement presumptions into the
1982 Merger Guidelines, presumptions that the agencies have updated over
time.
8
The “clear showing” rebuttal standard of proof has been eased by the
3
Brown Shoe Co. v. United States, 370 U.S. 294 (1962).
4
The PNB opinion apparently was drafted by Judge Richard Posner while he was clerking
for Justice Brennan. Posner reported that his approach was inspired by the Derek Bok article
cited in the opinion, which he had cite-checked as a journal editor while attending law school.
Philadelphia National Bank at 50: An Interview with Judge Richard Posner,supra this issue, 80
A
NTITRUST
L.J. 205, 205–06 (2015).
5
Philadelphia National Bank, 374 U.S. at 363.
6
Id. at 369–71.
7
Id. at 370 (requiring defendants to prove that they could not expand “by opening new of-
fices rather than acquiring existing ones”).
8
U.S. Dep’t of Justice, 1982 Merger Guidelines § 3.A.1 [hereinafter 1982 Merger Guide-
lines], available at www.justice.gov/atr/hmerger/11248.pdf; U.S. Dep’t of Justice & Fed. Trade
Comm’n, Horizontal Merger Guidelines § 5.3 (2010) [hereinafter 2010 Merger Guidelines],
available at ftc.gov/os/2010/08/100819hmg.pdf.
2015]
E
VOLUTION AND
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ITALITY OF
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ERGER
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RESUMPTIONS
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courts, and the defendants’ burden of production now involves a sliding
scale.
9
However, the basic analytic framework remains applicable.
This article reviews the formulation and evolution of the PNB rebuttable
presumption through the lens of economic decision theory, including the role
played by advances in economic analysis. The article also sketches out the
prospects for further evolution and suggest a number of non-market share
structural factors that might form the basis of rebuttable evidentiary presump-
tions. The article also examines the potential for conflicting evidence and how
such conflicts might be resolved.
I. THE EVOLUTION OF THE PNB REBUTTABLE PRESUMPTION
Trenton Potteries
10
and Socony-Vacuum
11
formulated the seminal standard
of per se illegality for price fixing. As explained by Professor Thomas Krat-
tenmaker, those per se standards of illegality rejected certain defenses,
12
in-
cluding the reasonableness of the price that was fixed, lack of market power,
and any alleged benefits from the elimination of ruinous competition.
13
In
decision-theory terms, the per se rule represents a non-rebuttable (i.e., conclu-
sive) presumption of anticompetitive effects for price fixing. The Supreme
Court’s 1958 opinion in Northern Pacific presents this classic statement:
[T]here are certain agreements or practices which because of their pernicious
effect on competition and lack of any redeeming virtue are conclusively pre-
sumed to be unreasonable and therefore illegal without elaborate inquiry as
to the precise harm they have caused or the business excuse for their use.
This principle of per se unreasonableness not only makes the type of re-
straints which are proscribed by the Sherman Act more certain to the benefit
of everyone concerned, but it also avoids the necessity for an incredibly
complicated and prolonged economic investigation into the entire history of
the industry involved, as well as related industries, in an effort to determine
at large whether a particular restraint has been unreasonable—an inquiry so
often wholly fruitless when undertaken.
14
This standard avoids the delays and other costs of a rule of reason analysis,
the potential for errors that such analysis may entail, and the potential for
under-deterrence caused by such errors. However, the truncated analysis cre-
ates its own potential for false positives.
9
981, 991 (D.C. Cir. 1990) (“The more compelling the prima facie case, the more evidence the
defendant must present to rebut it successfully.”).
10
United States v.Trenton Potteries Co., 273 U.S. 392 (1927).
11
United States v. Socony-Vacuum Oil Co., Inc., 310 U.S. 150 (1940).
12
Thomas G.Krattenmaker, Per Se Violations in Antitrust Law: Confusing Offenses with De-
fenses, 77 G
EO
. L.J. 165, 178 (1988).
13
Id. 173–74.
14
N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958) (emphasis added).
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