The Role of Ideas in Antitrust Policy toward Vertical Mergers: Evidence from the FTC Cement-Ready Mixed Concrete Cases

• Author: Ronald N. Johnson,Allen M. Parkman
• Published date: 01 December 1987
• Date: 01 December 1987
• DOI: http://doi.org/10.1177/0003603X8703200401
• Subject Matter: Domestic Antitrust

The Antitrust Bulletin/Winter 1987

The role

of

ideas in antitrust policy

toward vertical mergers:

evidence from the FTC

cement-ready mixed concrete cases

BY RONALD N. JOHNSON* and ALLEN M. PARKMAN**

841

Throughout the

1950s

and '60s, the antitrust authorities typically

took a hostile presumptive approach to vertical mergers.' More

recently, however, they have initiated areappraisal of the effects

of

vertical mergers on competition. Clear evidence

of

this reap-

praisal is contained in the Department

of

Justice's 1982 and 1984

Merger Guidelines.' These guidelines de-emphasize concerns

about vertical mergers by covering them in a section devoted to

•Professor

of

Economics, Montana State University, Bozeman,

Montana.

•• Professor of Management, University of New Mexico, Albuquer-

que, New Mexico.

IThat attitude was reflected in a general hostility toward all merg-

ers. Dissenting from a 1966 opinion invalidating a horizontal merger,

Justice Stewart wrote,

"The

sole consistency that I can find is that in lit-

igation under [section] 7, the Government always wins." United States

v. Von's Grocery Co., 384 U.S. 270,

301

(Stewart,

J.,

dissenting).

21982Merger Guidelines, 47 Fed. Reg. 28,493 (1982);1984 Merger

Guidelines, 49 Fed. Reg. 26,824 (1984).The 1968 Merger Guidelines had

©1988by Federal Legal Publications, Inc.

842 The antitrust bulletin

horizontal effects

of

nonhorizontal mergers. The Reagan Admin-

istration's proposed Merger Modernization Act of 1986 would go

even further by amending section 7

of

the Clayton Act.' The

stated purpose

of

the act is to make a clearer distinction between

mergers that would enhance efficiency in contrast to those that

would have the probability of significantly increasing prices to

consumers. The proposed act contains three amendments to the

Clayton Act: (1) to require that there be a "significant probabil-

ity" that a merger will be harmful before it is prohibited, (2) to

focus attention on

"market

power" as the anticompetitive harm

about which the Clayton Act is concerned, and (3) to set forth

specific factors that the court should consider as relevant. 4

While this reappraisal has been well received in some quarters,

it certainly has not been unanimously endorsed. The effects

of

vertical mergers on competition continue to be a controversial

topic in both law and economics. SSince all productive activities

are integrated to some extent, many commentators have argued

that vertical mergers will only occur when it is anticipated that

they will increase the efficiency

of

the combined firm." Others

have argued that the mergers are motivated by a desire

of

the

separate criteria for horizontal and vertical mergers. For vertical

mergers, a 10 percent share of the market for the upstream firm and 6

percent share for the downstream firm were established as the danger

points. 1968 Merger Guidelines, 2

TRADE

REG.

REP.

(CCH) , 4510

(1968).

3Department of Justice Press Release (Feb. 19, 1986).

4[d.

5For a recent discussion of these concerns, see E. Fox &J.

HALVERSON,

ANTITRUST

POLICY

IN

TRANSITION:

THE

CONVERGENCE

OF

LAW

AND

ECONOMICS

(1984).

6 In R.

BORK,

THE

ANTITRUST

PARADOX

245 (1978), the author con-

cludes,

"The

analysis set out in this chapter suggests that, in the

Vertical mergers :843

merging firms

to

increase their

market

power

by

creating

barriers

to

entry

through

foreclosure.'

Much

of

the

debate

has

been

of

a

theoretical

nature.

How-

ever,

the

agencies responsible for

the

implementation

of

the

antitrust

laws

have

faced apractical

problem

with

their

enforce-

ment

of

the

Clayton

Act's

restrictions

on

vertical mergers.

After

a

merger

has

been

culminated,

the

merged

company

often

becomes

so

intertwined

that

an

appropriate

remedy

may

be

difficult

to

construct.

8

The

difficulty

of

applying

an

appropriate

remedy

has

caused

the

enforcement

agencies to

evaluate

mergers in

their

"incipiency,"

rather

than

waiting to see

which

of

the

opposing

arguments

is valid." As a result, evaluations

have

been

made

with

limited empirical evidence

of

the

effects

of

the

proposed

mergers.

Since

the

effect

of

amerger

isto

be

judged

in its incipiency,

theories

about

the

probable

outcome

carry

substantial

weight.

Moreover,

as

Robert

Bork

notes,

".

. .

ideology

remains,

and

its

inner

logic drives

the

antitrust

enterprise-lawyers,

economists,

judges,

and

legislators-inexorably

toward

the

conclusions

im-

absence of a most unlikely proved predatory power and purpose, anti-

trust should never object to the verticality of any merger; much less

should it adopt the stance of virtual per se illegality reflected in Brown

Shoe and other cases."

7While this argument has generally not been popular among econ-

omists, the antitrust authorities and the courts have relied on the market

foreclosure doctrine as applied to vertical mergers in dealing with verti-

cal mergers. For a detailed discussion, see R.

BLAIR

&D.

KASERMAN,

LAW

AND

ECONOMICS

OF

VERTICAL

INTEGRATION

AND

CONTROL

147 (1983).

8The problems associated with fashioning adequate remedies are

documented in Elzinga, The Antimerger Law: Pyrrhic Victoriesr, 12

J.L.E. 43 (1969). The Elzinga study has recently been updated in Ro-

gowsky, The Economic Effectiveness

of

Section 7Relief, 31

ANTITRUST

BULLETIN

187 (1986).

9The need for early action was based on Congress' hope of catch-

ing the process of monopolization

"in

its incipiency," while not making

mergers per se illegal. A.

NEALE,

THE

ANTITRUST

LAWS

OF

THE

U.S.A. 180

(1970).