Antitrust Division Research Articles

The New United States Horizontal Merger Guidelines: Devolution, Evolution, or Counterrevolution?

This article reviews the new Horizontal Merger Guidelines released on August 19, 2010, by the United States Department of Justice, through its Antitrust Division, and the Federal Trade Commission. The United States' New Horizontal Merger Guidelines converge towards and closely mimic their European counterparts. Indeed, the New Guidelines differ dramatically from their 1992 predecessors, and signal an American competition theory counterrevolution. First, they reveal a commitment towards more aggressive horizontal merger enforcement driven by a renewed emphasis on the incipiency standard. Second, they set out a less formulaic and rigid review methodology, which the Agencies hope will prove to be more litigation friendly, as they pursue enforcement cases in American courts. And third, they indicate heightened concerns about potential unilateral effects, including exclusionary conduct, and impacts on non-price competition such as quality, variety, and innovation. When the New Guidelines are systematically compared side by side to the EC's, the resemblances are striking. Indeed, the New Guidelines more closely resemble the EC's than they do their 1992 predecessors. It can be fairly concluded that the New Guidelines' drafters were heavily influenced by, and paid close attention to, the EC's guidelines. However, it is unclear whether the New Guidelines will survive a conservative administration, or how they will be accepted and interpreted by the American courts.

The Year in Review: Economics at the Antitrust Division, 2009–2010

This paper covers the activities of the Economic Analysis Group of the Antitrust Division, U.S. Department of Justice, during 2009–2010. It describes the economic analysis undertaken by EAG in several important investigations and other activities as an advocate for competition.

Harm to Competition Under the 2010 Horizontal Merger Guidelines

In August, 2010, the Antitrust Division and the Federal Trade Commission issued new Guidelines for assessing the competitive effects of horizontal mergers under the antitrust laws. These Guidelines were long awaited not merely because of the lengthy interval between them and previous Guidelines but also because enforcement policy had drifted far from the standards articulated in the previous Guidelines. The 2010 Guidelines are distinctive manly for two things. One is briefer and less detailed treatment of market delineation. The other is an expanded set of theories of harm that justify preventing mergers or reversing mergers that have already occurred.The 2010 Guidelines reflect a growing belief that in markets where product differentiation is minimal competition tends to be robust and the structural presumptions stated in previous Guidelines were too harsh. By contrast, where product differentiation is substantial the Guidelines’ approach tended to define markets too broadly, overlooking significantly anticompetitive possibilities. Under the 2010 Guidelines unilateral effects analysis, relevant markets can be very small, often limited to three or four firms, and excluding some obvious substitutes. Markets in merger analysis are not defined for their own sake, however, but rather to ascertain whether a particular alteration in market structure covered by the merger provisions will be likely to facilitate a price increase.The 2010 Guidelines address four substantive merger concerns: exclusion, restraints on innovation, unilateral effects, and coordinated effects. The Guidelines have a separate section on mergers limiting “innovation and product variety,” treated mainly in the category of unilateral effects.The 2010 Guidelines are more flexible than previous Guidelines and also more catholic about the types of harms that mergers might cause and the techniques that can be used to assess them. Older Guidelines were excessively wed to methodologies that were at the forefront of applied merger analysis when they were drafted, but that tended to make the Guidelines obsolete as new methodologies became available. Not only do methodologies change, however, they are also specific to the situation. Further, they tend to be well developed in the literature and accessible to experts consulted by those defending a merger as well as to the government economists who employ them. To be sure, there is a tradeoff between flexibility and guidance. Often we can have more of one only by giving up some of the other, and that tradeoff is clearly present in the 2010 Guidelines.This paper focuses mainly on novel features of the 2010 Guidelines, including a new treatment of restraints on innovation, a greatly expanded consideration of unilateral effects and the possibility of exclusionary practices, a trimmed down and restated theory of coordinated interaction, and a de-emphasis on traditional market definition as used in antitrust analysis in favor of more direct measurement alternatives.

Sector-Specific Competition Enforcement at the FCC

This comment explains how and why sector-specific enforcement by the Federal Communications Commission (FCC) complements generalist competition enforcement by the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC), to the benefit of competition in the communications industry. It illustrates ways in which a sector-specific agency such as the FCC can foster competition by comparing merger reviews by the FCC and DOJ in the wake of the 1996 Telecommunications Act.

Comparative Deterrence from Private Enforcement and Criminal Enforcement of the U.S. Antitrust Laws

I. INTRODUCTION The purpose of this article is to determine which type of antitrust enforcement deters more anticompetitive behavior: the U.S. Department of Justice (DOJ) Antitrust Division's criminal anticartel enforcement program or enforcement of U.S. antitrust laws. The answer to this question - and answers to related questions concerning deterrence and compensation issues - could have important implications for the United States, pertaining both to appropriate antitrust remedies and to the course of litigation of antitrust cases. Those answers also could influence other nations considering either adopting or changing criminal penalties for competition law violations, or allowing rights of action by the victims of competition law violations. Anti-cartel enforcement by the DOJ long has been the gold standard of antitrust enforcement worldwide. If a country were to have only one type of antitrust violation, surely it would be against horizontal cartels, and surely this law would be enforced by that country's government officials. Even critics who believe that monopolization and vertical restraints never or rarely should be challenged almost always believe in strong anti-cartel enforcement.1 People in the antitrust world disagree about many things, but it is extremely difficult to find responsible critics who do not applaud the U.S. government's anti-cartel program.2 We strongly agree with this almost-unanimous consensus and second to no one in our appreciation of the DOJ's anti-cartel activity. In terms of taxpayer dollars well spent, the program surely is one of the most outstanding in all of government. By contrast, antitrust enforcement under U.S. antitrust laws gets little respect and much criticism. Indeed, it is difficult to find many people other than members of the plaintiffs' bar willing to say much good about enforcement. For example, even moderates like FTC Commissioner J. Thomas Rosch believe that treble damage class action cases are almost as scandalous as the price-fixing cartels that generally at issue .... The plaintiffs' lawyers . . . stand to win almost regardless of the merits of the case.3 Due to these widespread beliefs, former FTC Chairman William E. Kovacic recently summarized the conventional wisdom about enforcement succinctly: private rights of actions U.S. style poison.4 Given these criticisms, it may come as a surprise - even a shock - that a quantitative analysis of the facts demonstrates that antitrust enforcement probably deters more anticompetitive conduct than the DOJ's anti-cartel program.5 This deterrence effect is, of course, in addition to its virtually unique compensation function.6 If this article's conclusion about the importance of enforcement for deterrence is true, antitrust enforcement also should receive much of the praise given to DOJ anti-cartel efforts. Further, enforcement should be encouraged in the United States rather than hampered through new legislation7 or through restrictive judicial interpretation of existing law.8 And the United States' version of antitrust enforcement should be something for other countries to consider.9 Part II of this Article analyzes the deterrence effects of DOJ anticartel efforts by studying DOJ cases filed from 1990 to 2007. Part III compares these results to the cumulative deterrence effects of a sample of forty large cases that ended during this same period. (We do not compare the DOJ with the deterrence effects of every case filed during this period, however, because we were unable to obtain this information). Before coming to any policy conclusions based on this comparison, we address some criticisms of enforcement. Few commentators dispute that most DOJ anti-cartel prosecutions involved anticompetitive conduct or that most DOJ cartel cases should have been brought. …

Restoring Accountability and Oversight in the Antitrust Settlement Process

The enforcement of the antitrust laws is supposed to be a traditional task of the courts in the United States. However, the line between lawful and unlawful restraints of competition is not easily drawn. The courts struggle to assess the competitive effects of restraints, in particular outside the area of per-se unlawful restraints. Still, we are inclined to comfort ourselves by the seemingly acceptable outcomes of enforcement, achieved with the support of expert bodies like the Antitrust Division of the Department of Justice (DOJ) and later the Federal Trade Commission (FTC). Nevertheless, the authorities' resources to litigate cases in full are limited. A full litigation, with extensive discovery, with hearing of witnesses, and possibly with receipt of briefs of amicus curiae, may reveal tons of information, but the necessary knowledge for a sound, lasting decision (root knowledge) may still not be acquired. Even if it would be theoretically possible to acquire root knowledge, a rational actor will not try to acquire it if his efforts are subject to information and search costs. Bounded rational agents, i.e. also courts and authorities, generally experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information. Enforcement results, therefore, vary, rendering Type I (false positives) and type II (false negative) errors. Given the circumstances, consent decrees – although probably more vulnerable to errors due to limited analysis – proved helpful to obtain fast relief and reduce the costs of enforcement; amicable settlements enjoy great success in antitrust enforcement. The obvious advantages of the consent decree over traditional antitrust enforcement by litigation come along with serious inherent flaws. Quite often, the settlement process is accused to be vulnerable to undue political influence and possibly corruption. The Tunney Act addressed these concerns by opening up the results of the settlement process to interested third parties and by requiring the government to reveal its justifications for settling the case. However, the Tunney Act fails to guarantee an informed decision of the court on the public interest of the proposed consent decree, and, consequently, fails also to deter participants from drafting inadequate settlements. This paper is focused on the disregard of public interest by the use of consent decrees by the government. After describing the instrument of consent decree in the United States, the European Community and Switzerland (1.), I want to address inherent flaws of the settlement process (2.) and proposals to mitigate these flaws (3.). Due to the lack of a conflict of interest, the integrity of settlements in private antitrust cases are hardly compromised, and will not be discussed, except as an instrument mitigating a possible perversion of public interest. Further, I will neglect the enforcement activity of the States' Attorneys General.

The Economics of Railroad 'Captive Shipper' Legislation

Recent rate increases by U.S. freight railroads have refocused attention on regulation, deregulation, and regulatory reforms in the railroad industry. Legislation introduced into Congress would render a variety of railroad behavior newly subject to the jurisdiction of the antitrust statutes, with potential enforcement by the Antitrust Division and the FTC and through lawsuits brought by state attorneys general or private parties. This paper considers the economic issues raised by legislation and the likely impacts on competition and welfare.

Horizontal Merger Guidelines: The Omitted Dimension of Buyer Power Comments Submitted to the FTC and DOJ

The Antitrust Division of the Department of Justice and the Federal Trade Commission have commenced a process of reviewing the Merger Guidelines that were last subject of a comprehensive revision in 1993. The agencies are holding a series of workshops and have solicited comments on a number of questions that they have formulated. The questions and the workshops, however, fail to take account of a major development in the assessment of mergers: their impact on the buying side of the market. Empirical data show that buying side effects can be quite substantial; yet the Guidelines devote only two sentences to discussing the analysis of this topic. These comments present a review of the central issues that ought to be included in comprehensive merger guidelines concerning buyer power: appropriate definition of the buying side product and geographic dimensions of the relevant markets, the likely competitive effects including the potential for such effects in various levels of market concentration, and the resulting thresholds above which more serious evaluation of mergers creating increased buyer power ought to be investigated. The basic point of these comments is that the revised Merger Guidelines should directly and clearly address the issue of buyer power resulting from mergers and provide appropriate standards for the evaluation of such effects.

MICROSOFT AND THE LIMITS OF ANTITRUST

Frank Easterbrook's 1984 article, The Limits of Antitrust, did not focus on public antitrust enforcement. Nevertheless, it expressed the kind of antitrust thinking that led the Antitrust Division of the U.S. Department of Justice, around the same time, to shift its resources to cartel prosecutions and away from big monopolization cases. The Microsoft case, filed in 1998, broke this pattern. I argue that the Division made this exception, and ultimately achieved a partial victory in the courts, because the relatively new economic theory of network effects seemed to make the filters Easterbrook proposed in 1984 less applicable in high technology markets like the ones in which Microsoft competed. In this article, I return to Easterbrook's filters and consider whether they offer a different perspective on the Division's decision to sue and the courts' eventual resolution of the case.

Federal Antitrust Enforcement Priorities Under the Obama Administration

The election of President Obama has been widely expected to presage a return to more aggressive enforcement of the United States antitrust laws as compared to the administration of George W. Bush. During the Bush years, although the Antitrust Division of the US Department of Justice (DOJ) vigorously enforced Section 1 of the Sherman Act in obtaining record criminal fines and jail sentences against participants in unlawful domestic and international cartels, this level of enforcement was not matched by the efforts of the US regulators under Section 2 of the Sherman Act to prevent and punish allegedly anticompetitive, single-firm conduct. Indeed, from 2000–2008, the DOJ did not initiate any new Section 2 cases, while the Federal Trade Commission (FTC) commenced only two such cases. During the 2008 presidential campaign, then-Senator Barrack Obama described this as perhaps ‘the weakest record of antitrust enforcement of any administration in the last half century’, and promised that, as President, he would ‘direct [his] administration to reinvigorate antitrust enforcement.’ Consistent with President Obama’s campaign promises, commentary from the news media and the antitrust bar has almost uniformly predicted reinvigorated enforcement of Section 2, stepped-up review of mergers for anticompetitive effects, and a new focus on competitive issues within high technology industries. Eight months into the Obama administration, we can now begin to evaluate whether the predictions of more aggressive enforcement were accurate. Although it is still too early to say definitively how the new administration will approach the enforcement of the antitrust laws, there does appear to be some support, particularly in the mergers area, for the view that more Key points † Pronouncements by the experienced new leadership at the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission suggest a more aggressive approach to enforcing U.S. antitrust laws, especially against single-firm conduct and in the mergers and acquisitions area.

DYNAMIC COMPETITION IN ANTITRUST LAW

How would competition policy be shaped if it were to explicitly favor Schumpeterian (dynamic) competition over neoclassical (static) competition? Schumpeterian competition is the kind of competition that is engendered by product and process innovation. Such competition does not merely bring price competition. It tends to overturn the existing order. A “neo-Schumpeterian” framework for antitrust analysis that favors dynamic competition over static competition would put less weight on market share and concentration in the assessment of market power and more weight on assessing potential competition and enterprise-level capabilities. By embedding recent developments in evolutionary economics, the behavioral theory of the firm, and strategic management into antitrust analysis, one can develop a more robust framework for antitrust economics. Such a framework is likely to ease remaining tensions between antitrust and intellectual property. It is also likely to reduce confidence in the standard tools of antitrust economics when the business environment manifests rapid technological change. It appears that the Antitrust Division of the U.S. Department of Justice (DOJ) has attempted to incorporate more dynamic analysis, but the result has been inconsistent across different mergers and different doctrinal areas of antitrust law. Moreover, a complicating factor in the transformation of the law is the fact that the federal courts have, by embracing the reasoning in the Merger Guidelines promulgated several decades ago by the Antitrust Division and the Federal Trade Commission (FTC), caused antitrust case law to ossify around a decidedly static view of antitrust. Put differently, in the years since 1980, the Division and the FTC have successfully persuaded the courts to adopt a more explicit economic approach to merger analysis, yet one that has a static view of competition. The result is not a mere policy preference. It is law. To change that law to have a more dynamic view of competition will therefore require a sustained intellectual effort by the enforcement agencies (as well as by scholars and practitioners) that, once more, engages the courts to re-examine antitrust law, as they did in the late 1970s during the ascendancy of the Chicago School, when antitrust law became infused with its current, static understanding of competition. A necessary but not sufficient condition for that effort is a public process by which the Division and the FTC revisit and restate the Merger Guidelines in a manner that clarifies and defends the role of dynamic competition in antitrust analysis. We therefore applaud the announcement of the antitrust agencies in September 2009 to solicit public comment on the possibility of updating the Merger Guidelines. Assuming that the Division and the FTC decide to revise the existing Merger Guidelines, those revised guidelines (and useful complementary undertakings, such as generalized guidelines on market power and remedies) then will require leadership by the enforcement agencies to persuade the courts that antitrust doctrine should evolve accordingly. That neo-Schumpeterian process may take a decade or longer to accomplish, but it is a path that we believe the Roberts Court is willing to travel.

The Year in Review: Economics at the Antitrust Division, 2008–2009

This paper covers the activities of the Economic Analysis Group (EAG) of the Antitrust Division, U.S. Department of Justice, during 2008–2009. It describes the economic analysis undertaken by EAG in several important investigations, and in other activities as an advocate for competition.

The consequences of the US DOJ’s antitrust activities: A macroeconomic perspective

Do the antitrust law enforcement activities of the US Department of Justice act as exogenous “technology shocks” or as “markup shocks” limiting market power and promoting economic growth? We analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention: the ratio of the Antitrust Division’s budgetary expenditures to GDP as well as the numbers of civil and criminal antitrust cases instituted. We find that changes in the levels of these policy variables act like negative technology shocks and that the negative effects are transitory; antitrust policy generates no subsequent offsetting increases in productivity.

GOOGLE AND THE PROPER ANTITRUST SCRUTINY OF ORPHAN BOOKS

We examine the consumer-welfare implications of Google’s project to scan a large proportion of the world’s books into digital form and to make these works accessible to consumers through Google Book Search (GBS). In response to a class action alleging copyright infringement, Google has agreed to a settlement with the plaintiffs, which include the Authors Guild and the Association of American Publishers. A federal district court must approve the settlement for it to take effect. Various individuals and organizations have advocated modification or rejection of the settlement, based in part on concerns regarding Google’s claimed ability to exercise market power. The Antitrust Division has confirmed that it is investigating the settlement. We address concerns of Professor Randal Picker and others, especially concerns over the increased access to “orphan books,” which are books that retain their copyright but for which the copyright holders are unknown or cannot be found. The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds. JEL: K20; K21; L40; L41; L50; O34

Toward an Expansive Reading of FTC Act § 5: Beyond the Sherman Act and an Ex Post Model of Enforcement

This paper is an edited and lightly footnoted version of Remarks made at a session convened during the American Antitrust Institute’s most recent annual conference. The session was entitled “Can FTC Section 5 and E.U. Article 82 Converge?” The paper distinguishes between the “domestic question” of whether FTC Section 5 should be interpreted to go beyond Sherman Act Section 2, and the “cosmopolitan question” of whether convergence with Article 82 is desirable and achievable. The paper focuses on the domestic question; to the extent an expansive use of Section 5 would foster convergence, that would be a side benefit. The paper asserts three propositions: First, there is a strong and undisputed historical basis for the view that the FTCA is something different in kind from both the Sherman and Clayton Acts. Second, in this light, the FTC’s institutional character is properly understood as a competition commission to investigate, report, advise against, and if necessary stop practices deemed unfair methods of competition, ex ante, in their incipiency. The FTC is not an antitrust enforcement agency like the DOJ Antitrust Division. Third, federal court decisions beginning in the 1960s unanimously support the view that the FTC Section 5 and its enforcement by the Commission legitimately serve competition policy understood more broadly than antitrust law, i.e., than the Sherman Act. In sum, the FTC has a long-standing Congressional mandate and judicial invitation to be bold, to push past the antitrust laws, to investigate and stop in their incipiency “unfair methods of competition.” The Commission should be an innovator and investigator rather than an enforcer; it should spend significant resources working at the cutting edge of economic theory and legal doctrine. The FTC mission, properly understood, is to engage in research and development of competition policy at the forefront of changing commercial circumstances.

RAIL REFORM ON TRACK

SHIPPERS OF CHEMICALS, coal, and other bulk commodities are one step closer to achieving their long-sought goal of ending what they contend is the railroad industry’s monopoly pricing power. Earlier this month, two Senate committee chairmen agreed to join forces in crafting comprehensive legislation to reform federal rail policy. Efforts are also under way in the House of Representatives to repeal exemptions that freight rail companies enjoy from federal antitrust law. These congressional efforts are supported by the Justice Department’s Antitrust Division. On the Senate side, a floor vote on legislation to repeal the exemptions was canceled on June 1 after Sens. Herb Kohl (D-Wis.), the bill’s chief sponsor, and John D. Rockefeller (D-W.Va.) agreed to include the antitrust provisions in a broader measure being developed to overhaul the Surface Transportation Board (STB), the regulatory agency that referees rate and service disputes between rail shippers and carriers. Kohl, who chairs the Senate Judiciary ...

The Case for Different Preliminary Injunction Standards in Merger Challenges

Much is made of the different standards that the Federal Trade Commission and the Antitrust Division of the Department of Justice must meet when seeking a preliminary injunctions against a merger on antitrust grounds. The differing standards that apply reflect the different natures of the agencies, and were designed for the same reasons that the agencies were designed as concurrent enforcers. Why, then, do the agencies divide pre-merger reviews under the Hart-Scott-Rodino across industry lines? This system subjects the merging companies to different standards because of their industry affiliations. If, as critics maintain, the standards are indeed different, industries will consistently be subjected to more or less stringent merger review based upon which side of the line they fall.This article argues that the problem isn't that the agencies are different and make use of different preliminary injunction standards, but instead it is that the division of merger review between the agencies by industry inappropriately splits the merger review market, and undermines the purpose of decentralizing antitrust enforcement generally between the DOJ and FTC.

Competition issues in restructuring ports and railways including brief consideration of these sectors in India

EAG Discussion Papers are the primary vehicle used to disseminate research from economists in the Economic Analysis Group (EAG) of the Antitrust Division. These papers are intended to inform interested individuals and institutions of EAG=s research program and to stimulate comment and criticism on economic issues related to antitrust policy and regulation. The Antitrust Division encourages independent research by its economists. The views expressed herein are entirely those of the author and are not purported to reflect those of the United States Department of Justice.

Grading the Clinton Antitrust Policy as Enforced by the Antitrust Division of the Department of Justice

Grading the Clinton Antitrust Policy as Enforced by the Antitrust Division of the Department of Justice

The Year in Review: Economics at the Antitrust Division, 2007–2008

This paper covers the activities of the Economic Analysis Group (EAG) of the Antitrust Division, U.S. Department of Justice, during 2007–2008. It describes the economic analysis undertaken by EAG in several important investigations, and in other activities as an advocate for competition.