NEW PAPER ON SSRN:
The wealth-creating engine of capitalism is the movement of assets to higher-valued uses.
Our biggest and most valuable assets, and those with the greatest wealth-creating potential are
corporations. Antitrust law and practice work to facilitate this movement, while deterring the
types of mergers which substantially lessen competition.
Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for doing so. By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, which encourages good mergers and deters bad ones.
As long as the methodology can distinguish the good from the bad mergers, this process works pretty well.
Beginning in 1982 (Reagan/Baxter) the methodology relied heavily on economics. At that time, the simple "big is bad" structural models focused on changes in market concentration. But by the early 1990's, Agency economists had begun using more realistic game theoretic models to both characterize observed pre-merger competition (calibration) and to predict the loss in competition following merger (simulation).
By providing a transparent mapping from evidence to prediction, the models showed which evidence mattered, why it mattered, and how much it mattered (
Werden et al., 2004). Economic models gave credibility to antitrust conclusions because they were falsifiable. All one party had to do was show that the inputs were wrong, e.g., "demand is much more elastic than you think" (
Werden and Froeb, 1994), or that the model was wrong, e.g., "if we ignore advertising, you will understate the loss in competition among super-premium ice cream manufacturers" (
Tenn et al., 2010).
The most common models used by Agency economists, and the consultants that appear before them, are online at
CompetitionToolBox.com.
Attorneys are critical to this process, as they have to pitch the economists' work to the Agencies in a way that is credible, but also favors their client. When these goals conflict, attorneys earn their hourly fees. Also, by pushing back against economists, attorneys make the presentations better so that by the time they get to the Agencies, arguments are clear and persuasive.
But the 2023 Draft Merger Guidelines seem to be trying to go back to the days before economics played such a large role. Not only do the Draft Guidelines put economic analysis in the appendices, they don't say how it should guide the legal analysis. Untethered from economics, the Agency heads are now freer to claim that what they do is consistent with the Guidelines. In other words, the Draft Guidelines don't provide as much Guidance.
What worries us most is their potential effect on innovation. In the late 1950s, Nobel Laureate
Robert Solow attributed about seven-eighths of the growth in U.S. GDP to technical progress, and stressed the importance of policies to encourage growth— “Adding a couple of tenths of a
percentage point to the growth rate is an achievement that eventually dwarfs in welfare
significance any of the standard goals of economic policy,” which includes antitrust.
For example, the Draft Guidelines take particular aim at acquisitions made by US Tech Firms. However, this kind of enforcement can discourage innovation by reducing the rewards from
innovating. In particular, acquisitions of tech firms often create the incentives that induce firms to
innovate in the first place:
- acquisitions of technology companies are critical in creating the incentives to innovate—for
technology ventures, exits via acquisitions are about five times more likely than IPOs. These
exits create an ex-ante incentive to innovate.
- In addition, investors evaluate regulatory risks as
part of their due diligence when considering an investment; excessive regulatory risks, like those
posed by uncertain antitrust enforcement, can deter investors from investing, particularly in the
early and growth stages of ventures.
BOTTOM LINE: Without a coherent merger analysis that embraces both benefits and costs and a way to weigh one against the other, the Draft Guidelines will likely deter
mergers, regardless of whether they are anticompetitive.
=======ARTICLE========
Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines
7 Pages Posted: 14 Aug 2023
Vanderbilt University - Owen Graduate School of Management
USC Gould School of Law; USC Marshall School of Business
Illinois Institute of Technology - Stuart School of Business, IIT
Date Written: August 10, 2023
Abstract
Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their anticompetitive costs. By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, increase public understanding and confidence, and promote international cooperation.
But the 2023 Draft Merger Guidelines do not. They go to great lengths to articulate the potential anticompetitive costs of mergers but with no way to gauge “substantiality.” Most significantly, they ignore potential benefits, which eliminates the need for balancing. In other words, the Draft Guidelines provide very little guidance about current practice which adds risk, which deters mergers, which seems to be the point. We offer specific recommendations for Horizontal, Vertical, and Tech Mergers that do a better job differentiating procompetitive mergers from anticompetitive ones.
Keywords: Antitrust, Merger Enforcement, Horizontal Mergers, Vertical Mergers, Technology Mergers
JEL Classification: L40, K21
Suggested Citation:
Froeb, Luke M. and Sokol, D. Daniel and Wagman, Liad, Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines (August 10, 2023). Southern California Law Review, Forthcoming, Available at SSRN:
https://ssrn.com/abstract=4537425
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