Prophylactic Merger Policy

Abstract

An important purpose of the antitrust merger law is to arrest certain anticompetitive practices or outcomes in their “incipiency.” Many Clayton Act decisions involving both mergers and other practices had recognized the idea as early as the 1920s. In Brown Shoe the Supreme Court doubled down on the idea, attributing to Congress a concern about a “rising tide of economic concentration” that must be halted “at its outset and before it gathered momentum.” The Supreme Court did not explain why an incipiency test was needed to address this particular problem. Once structural thresholds for identifying problematic mergers are identified there is no need to condemn mergers that fall below that threshold. In the future merger law could always be brought to bear if the relevant numbers became larger. But this does not mean that incipiency tests are unimportant. They properly have a different use than the one that the Supreme Court identified. A better use of incipiency tests is to prevent certain bad outcomes early when antitrust rules make it difficult or impossible to prevent them later. Today most mergers are challenged before they occur, based on models that rest on an assumption of profit maximization to predict post-merger performance. As a result, the feared post-merger conduct has not occurred either and the evidence pertains to predicted rather than actual effects. This makes it important to place some limits on merger law’s prophylactic reach. First, the language of §7 requires causation -- a showing that the merger is what is likely to facilitate that feared anticompetitive conduct. Second, we must be satisfied that this conduct, if it should occur, will be both anticompetitive and difficult to reach through direct application of the antitrust laws. Third, the merger must raise a significant risk that the conduct will occur. Finally, as with all merger cases, there must not be offsetting gains that serve to justify the merger notwithstanding these threats to competition. This paper then applies these considerations to mergers threatening coordinated interaction, merges to monopoly or facilitating anticompetitive unilateral effects, vertical mergers, exclusionary IP acquisitions, and acquisitions of very small but highly innovative firms. The paper discusses some high profile transactions, including the AT&T/Time Warner acquisition, currently on appeal. In such situations the challenger applies widely accepted economic tools to estimate anticompetitive effects by considering how the merger would change the post-merger firm’s profit-maximizing behavior. The AT&T/Time Warner opinion was wrong to credit the testimony of the firms’ employees that they would not maximize profits subsequent to the transaction. That conclusion, if accepted and broadly applied, would undermine most of the basis for merger analysis today. Finally, the paper examines the recent Intellectual Ventures decision, now subject to appeal, which involves an allegedly anticompetitive acquisition of patents.