Comments of J. Gregory Sidak and David J. Teece before the Federal Trade Commission & U.S. Department of Justice on the Horizontal Merger Guidelines Review Project

Abstract

We submit these comments to the Federal Trade Commission and the U.S. Department of Justice in their review of the Horizontal Merger Guidelines. The Agencies ask, in Question 8: “Should the Guidelines be revised to explain more fully than in the current §1.521 how market shares and market concentration are measured and interpreted in dynamic markets, including markets experiencing significant technological change?” Our answer, which reflects our previous writings, is clearly “yes.” The Merger Guidelines should embody principles that reflect dynamic competition rather than static competition. In Part I of these comments, we discuss the differences between dynamic competition and static competition. Dynamic competition — fueled by new products, new paradigms, or new sources of supply that provide decisive cost advantages — is the most compelling form of competition. Merger enforcement should be sensitive to (1) preserving opportunities for such paradigm shifts, and (2) recognizing the potential for these paradigm shifts to render existing market power non-durable. Thus, high market shares of themselves should not be cause for concern in industries in which there has been a history of, or there is likely to be, paradigm-shifting competition. The ability of new firms or smaller incumbents to innovate and rapidly adopt new technologies enables them to disrupt the market and prevent firms with high historic shares from exercising market power. Further, a firm with a high market share in an industry characterized by dynamic competition may have that market share precisely because competition is working. Consequently, possession of that high market share by a merging party should not, without more, cause concern. Product differentiation complicates direct comparisons of products and may lead to incorrectly narrow market definitions and misleadingly high market shares. In Part II, we discuss three versions of economic rent: Ricardian (scarcity) rents, Schumpeterian (entrepreneurial) rents, and monopoly rents. The Merger Guidelines should recognize that some sources of high margins (the difference between price and marginal cost) are competitively benign, or may even suggest that competition is strong. To conclude in these circumstances that high margins (again, without more) are indicative of competitive concerns could discourage innovation and the welfare-enhancing benefits it brings to consumers.