Markets in Merger Analysis

Abstract

Antitrust merger policy suffers from a disconnect between its articulated concerns and the methodologies it employs. The Supreme Court has largely abandoned the field of horizontal merger analysis, leaving us with ancient decisions that have never been overruled but whose fundamental approach has been ignored or discredited. As a result the case law reflects the structuralism of a bygone era, focusing on industrial concentration and market shares, largely to the exclusion of other measures of competitive harm, including price increases. Only within the last generation has econometrics developed useful techniques for estimating the price impact of specific mergers in differentiated markets – so called “unilateral effects” analysis. In Brown Shoe the Supreme Court equated the newly amended merger law’s phrases “line of commerce” and “section of the country” with relevant product and geographic markets. When it drafted those phrases, however, Congress almost certainly did not have technical definitions of relevant markets in mind. “Line of commerce” was commonly used to describe a particular “line” of business, such as clothing or groceries. A “line” could include complements as well as substitutes. The phrase “section of the country” was intended to create jurisdictional limits. Mainly, Congress wanted to make sure that the Clayton Act’s reach would be limited to mergers whose impact was felt in the United States rather than abroad. While Brown Shoe required definition of a relevant market, its rationale was fundamentally at odds with the rationale for market definition in horizontal merger cases today. The Court was not thinking of a relevant market as a grouping of sales capable of being monopolized or cartelized. The perceived injury in Brown Shoe was not that the merger threatened higher prices from increased concentration in the shoe market – thus benefitting rivals but harming customers. Rather, the concern was that post-merger Brown Shoe would acquire a competitive advantage over its competitors. Indeed, Brown Shoe was a “unilateral effects” case in the sense that its concern was not with market wide collusion, but rather with the likelihood that the post-merger firm would be able to undersell other firms within the same market. Viewed in historical perspective, Brown Shoe should serve to give antitrust policy makers far greater latitude to develop merger assessment methodologies that are not wed to traditional market definition concepts. Not only do they serve us poorly today, they are not what the Supreme Court had in mind in the first place. This paper will appear in a symposium on market definition and market power in the Antitrust Bulletin, Fall, 2012.