Merger Retrospectives Research Articles

Are We Dropping the Crystal Ball? Understanding Nascent & Potential Competition in Antitrust

We root for the underdog, and nascent and potential competitors are the antitrust version of underdogs. They introduce a promising product and innovation with the hopes of challenging the incumbent for supremacy in a market. Yet, are those hopes cancelled before they even begin with powerful incumbents acquiring these nascent and potential competitors? Some even refer to these acquisitions as “killer.” However, is this the full story? Assessments of nascent and potential competition are ultimately about “what if.” What if the upstart competitor grows into the next dominant platform or develops the next blockbuster drug? What if the incumbent knows its market position has a weakness that the entrant will exploit so the incumbent must end the competition before it even begins? On the other hand, what if the nascent competitor never fully develops its potential and engages in a series of missteps? What if the nascent competitor’s innovation can be improved upon and reach the market faster and more widely through the well-oiled machinery of the incumbent? These are all possible scenarios. The problem is that the counterfactual world is never actually observable. Thus, speculative “what ifs” cannot guide antitrust policy—whether in an overly permissive or aggressive manner. What are we left with? What should agencies and courts do in face of such uncertainty? This Article offers a number of propositions to address these concerns and questions in regard to competition that has not been fully realized. First, the Article offers a clear legal and analytical delineation between the doctrines of nascent and potential competition—as there has recently been a degree of “semantic satiation” between these two concepts. Second, some have argued that the acquisition of nascent competitors should be adjudicated using legal standards developed under the Sherman Act, Section 2, which covers monopolization, rather than under the traditional Clayton Act, Section 7, which governs mergers and acquisitions. Yet, the counterfactual exercise is fundamentally different between ex ante merger evaluations (Section 7) and ex post monopolization claims (Section 2). Consequently, based on this fact alone, courts should be cautious to adopt Section 2 approaches to Section 7 issues. Third, when evaluating the wider set of proposals to address the nascent and potential competition problem, which the Article comments on, we must ask whether there is a problem in the first place. To that end, the Article examines a number of recent merger retrospectives. Finally, while using the past to predict the future can be a difficult and uncertain exercise even within mature markets, these hinderances can be overstated. Economic tools are available to frame our approach, and agencies and courts should focus particularly on whether the characteristics and nature of the acquired nascent competitor are sufficiently differentiated from the remaining competitors to warrant increased scrutiny.

Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets

Accumulating evidence points to the need for more vigorous antitrust enforcement in the United States in three areas. First, stricter merger control is warranted in an economy where large, highly efficient and profitable “superstar” firms account for an increasing share of economic activity. Evidence from merger retrospectives further supports the conclusion that stricter merger control is needed. Second, greater vigilance is needed to prevent dominant firms, including the tech titans, from engaging in exclusionary conduct. The systematic shrinking of the scope of the Sherman Act by the Supreme Court over the past 40 years may make this difficult. Third, greater antitrust scrutiny should be given to the monopsony power of employers in labor markets.

The Record of Weak U.S. Merger Enforcement in Big Tech

The term “Big Tech” is often used to describe the five largest multinational online service or computer hardware and software companies: Amazon, Apple, Facebook, Google, and Microsoft. These companies hold five of the top six slots, by market value, for publicly traded firms. The growth of Big Tech over the past three decades is a function of numerous forces. These range from economic phenomena such as network effects and winner-take-all markets, organic growth resulting from innovative business models and technologies, to expansion through a series of acquisitions of smaller, potential, or nascent rivals. While Big Tech has undoubtedly produced benefits, significant concerns have coalesced around it. The growth of Big Tech has created controversy over the companies’ role in our society and raised a suite of competition issues that are attracting attention from Congress and enforcers. These include effects on innovation and market entry; incentives to compete on price and non-price dimensions of competition such as privacy; and the potential for artificial intelligence-driven algorithmic pricing to facilitate coordinated conduct. The debate over the size and alleged dominance of Big Tech companies has promoted wideranging proposals to use the antitrust laws to break them up. But few of these proposals are driven by a methodological, fact-based analysis. Such analysis would explore the strategic competitive abilities and incentives that are specific to different Big Tech business models, how the companies compete in a variety of individual markets and clusters of related markets, and how alleged conduct potentially runs afoul of the U.S. antitrust laws. Breakup proposals therefore “put the cart before the horse” and fail to provide needed support for more vigorous antitrust enforcement and beneficial reform proposals. This American Antitrust Institute (AAI) White Paper offers a fact-based analysis of one important component of a broader assessment of the competitive issues surrounding Big Tech. It focuses on Big Tech’s acquisition of over 720 smaller, potential, and nascent rivals over almost the last three decades. As is typical of M&A activity, only a portion of these transactions were reportable to the U.S. antitrust agencies under the Hart Scott Rodino Act (HSR) federal premerger reporting requirements.8 A closer look at enforcement data for one major Big Tech industry category reveals that while the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) appear to have subjected a higher than average number of transactions to more extensive agency investigation, only one deal has been challenged in federal court. It does not come as a surprise therefore that the record of U.S. merger enforcement in an important Big Tech industry category is far lower than the record across all sectors, as defined by the rate of merger challenges in federal court. This statistic warrants further inquiry. This White Paper does not investigate whether serial acquisitions by Big Tech companies have created dominance in certain markets, or if they engage in conduct that violates the antitrust laws. Those questions should be the subject of appropriately framed merger retrospectives and antitrust agency inquiries, including the DOJ’s reported investigation into Google. Rather, the analysis herein explores the various reasons why enforcement might be weaker in Big Tech and the policy implications raised by those explanations. The AAI has provided independent, in-depth legal, economic, and policy analysis of antitrust and competition issues for over 20 years. The organization has been outspoken on the issue of competition in the tech sector through its research, education, and advocacy agenda and initiatives. This White Paper begins with an empirical review of the acquisition history of Big Tech and the U.S. antitrust agencies’ limited record of merger enforcement in a major industry area in which many Big Tech firms operate. It then unpacks the limited merger enforcement record and examines why it can and should be invigorated.

Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets

Accumulating evidence points to the need for more vigorous antitrust enforcement in the United States in three areas. First, stricter merger control is warranted in an economy where large, highly efficient and profitable “superstar” firms account for an increasing share of economic activity. Evidence from merger retrospectives further supports the conclusion that stricter merger control is needed. Second, greater vigilance is needed to prevent dominant firms, including the tech titans, from engaging in exclusionary conduct. The systematic shrinking of the scope of the Sherman Act by the Supreme Court over the past 40 years may make this difficult. Third, greater antitrust scrutiny should be given to the monopsony power of employers in labor markets.

Analyzing Vertical Mergers to Avoid False Negatives: Three Recent Case Studies

This article analyzes three recent vertical mergers: a private antitrust case attacking the consummated merger of Jeld-Wen and Craftmaster Manufacturing Inc. (“CMI”) that was cleared by the DOJ in 2012 but subsequently litigated and won by the plaintiff, Steves & Sons in 2018; and two recent vertical merger matters investigated and cleared (with limited remedies) by 3-2 votes by the Federal Trade Commission in early 2019 -- Staples/Essendant and Fresenius/NxStage. There are some factual parallels among these three matters that make it interesting to analyze them together. First, the DOJ’s decision to clear Jeld-Wen/CMI merger appears to be a clear false negative, and the two dissenting Commissioner suggest that the recent FTC decisions similarly are false negatives. Second, the DOJ and possibly the FTC in Staples/Essendant may have overlooked the “Frankenstein Monster” scenario of input foreclosure. Third, both the DOJ and the FTC in Fresenius/NxStage also apparently relied on the absence of complaints in making their clearance decisions. The analysis of these mergers also suggests several policy implications involving the need to analyze the full range of anticompetitive concerns, the potential for merger retrospectives by independent (as opposed to staff) researchers, the height of the evidentiary burden on the agencies to show competitive harm in light of their limited budgets, and the need for greater transparency in Commission statements, as well as the potential errors in relying on a lack of complaints.

Nonprice Effects of Mergers

Antitrust analysis of mergers focuses heavily—some would say, almost exclusively—on price effects. That focus does not reflect the lesser importance of quality, variety, cost, and technological progressiveness in mergers, but rather reflects better analytical tools and predictions for price effects. This article first provides an overview of the distinctive, often problematic, issues raised in evaluating nonprice effects. It then surveys the available empirical evidence on these from merger retrospectives. The evidence suggests that mergers on average may not cause either significant improvements or significant harms in terms of nonprice outcomes. While that might seem to suggest that policy need not be unduly concerned with nonprice effects, sufficient data do not exist for statistical testing. Moreover, variation in the average effects appears large, so that in particular cases nonprice concerns may dominate.

A RETROSPECTIVE ON MERGER RETROSPECTIVES IN THE UNITED STATES

Over the last decade, merger retrospectives have become increasingly popular in the economic literature. However, it is far from clear what implications can be drawn from these analyses, because the results suffer from a sample selection problem that undermines their implications. This article uses models of the Federal Trade Commission's enforcement activity to estimate challenge probabilities and address the selection issue. Although the small size of the sample limits the statistical interpretation of the results, general observations are possible. First, significant price effects generally appear in markets with very high challenge probabilities. When challenge probabilities are moderate, say 30 to 70 percent, retrospective results generate price effects in roughly half of the studies. For markets with low challenge probabilities, no price effects are observed in the retrospectives related to collusion theories. Positive price effects are observed for most of the retrospectives in differentiated goods markets, but theoretical analyses imply that most those results are highly problematic. Although retrospectives, interpreted in light of the likely competitive concern, can serve as a test for merger policy, an anomaly between the retrospective and the relevant policy prediction requires some type of case study to be undertaken to resolve the stark difference in implications prior to the analysis. More complete case studies are needed to fulfill the true promise of the retrospective research regime.

What Can Merger Retrospectives Tell Us? An Assessment of European Mergers

In this review of retrospective European merger studies we provide a discussion of the price effect of analysed mergers and examine whether the antitrust agency made the right decisions. We find that remedied mergers, on average, were not followed by a price-increase, suggesting that, in our sample, merger interventions were effective at eliminating problems. High market concentration was more likely to lead to higher post-merger prices, although remedies were able to reduce post-merger price-increases, even in concentrated markets. We look at a number of reasons why prices may increase post-merger and find little evidence of genuine agency errors.

Inconvenient truths on merger retrospective studies

Inconvenient truths prevent econometric merger retrospective studies from substantially altering our understanding of competitive effects from horizontal mergers. Econometrics cannot definitively determine the effects of particular mergers, and if they could, econometric merger retrospectives could not provide enough evidence to ground merger assessments in data on actual merger effects rather than in economic theory and legal presumptions. If merger retrospectives are to have some prospect of recalibrating merger enforcement, they must be transformed from econometric exercises into case studies examining the details of the relevant agency’s assessment, but inconvenient truths likely prevent much from being learned through even such studies.

Inconvenient Truths on Merger Retrospective Studies

Inconvenient truths prevent econometric merger retrospective studies from substantially altering our understanding of competitive effects from horizontal mergers. Econometrics cannot definitively determine the effects of particular mergers, and if they could, econometric merger retrospectives could not provide enough evidence to ground merger assessments in data on actual merger effects rather than in economic theory and legal presumptions. If merger retrospectives are to have some prospect of recalibrating merger enforcement, they must be transformed from econometric exercises into case studies examining the details of the relevant agency’s assessment, but inconvenient truths likely prevent much from being learned through even such studies.

Predicting Merger Outcomes: How Accurate are Event Studies, Market Structure Determinants and Agency Decisions

Merger analysis is an exercise in prediction. This paper analyzes the accuracy of two leading methods of predicting merger outcomes – stock market event studies, and a market-structure/Merger Guidelines approach – as well as the accuracy of antitrust agencies’ decisions whether or not to challenge mergers. The basis for these evaluations of accuracy is a data base of actual price effects of some forty mergers compiled from published merger retrospectives. This paper finds that event studies systematically underpredict the incidence of anticompetitive outcomes, while market structure criteria overpredict competitive problems. Since market structure serves primarily as an initial screen for agency analysis,initial over-inclusiveness may be the optimal first stage of the process of policy determination.

A Meta-Study of Merger Retrospectives in the United States

Over the last decade, merger retrospectives have become increasingly popular. However, it is far from clear what implications can be drawn from these analyses, because the results suffer from a sample selection problem. This paper uses models of the Federal Trade Commission’s enforcement activity to estimate challenge probabilities and address the selection issue. Although the small size of the meta-study panel limits the statistical interpretation of the results, general observations are possible. First, significant price effects appear in the matters with very high challenge probabilities. When challenge probabilities are moderate, roughly 30-60 percent, retrospective results generate price effects in half the studies. For low challenge probabilities, no price effects are observed in the retrospectives related to collusion theories. Positive effects are noted for retrospectives in some consumer goods markets, but theoretical analysis implies these results are questionable. Although retrospectives, interpreted in light of the likely competitive concern, can serve as a test for merger policy, policy predictions also serve as a test of the credibility of the retrospectives.

Inconvenient Truths and Constructive Suggestions on Merger Retrospective Studies

A merger retrospectives research agenda should be pursued. It should stress careful evaluation of agency assessments of the competitive effects of mergers in the hope of improving the accuracy of the enforcement process. But several inconvenient truths may prevent much from being learned, and “a little learning is a dangerous thing.”

Static and dynamic merger effects: A market share based empirical analysis

Merger-specific efficiencies continue to play a relatively small role in merger enforcement and merger retrospectives. Motivated by the paucity of empirical analyses of merger-specific efficiencies, we examine a merger's market share effects. Standard merger theory predicts that if merger-specific efficiencies are present, the merged firm should regain market share in the long run. We estimate short- and long-run merger effects on market shares from the divestiture of Texaco's Canadian assets. Using a difference-in-difference specification we compare changes for the merging firm against changes for other vertically integrated firms in the same market. A general equilibrium type effect renders our estimates biased but the sign of each effect is consistently estimated. Our approach is a useful complement to across-market comparisons, which are often hindered by the difficulty of finding control markets that experience the same supply and demand shocks as the treatment markets.

Does Merger Control Work? A Retrospective on U.S. Enforcement Actions and Merger Outcomes

The accuracy and efficacy of merger control are important questions that have long posed challenges for policy evaluation. The growing number of merger retrospectives provide an opportunity to conduct such an analysis since they measure the outcomes of actual mergers. This paper compiles all available merger retrospectives that meet scholarly criteria, resulting in 48 mergers with measured price outcomes. It supplements this data base with information about the actions taken by U.S. antitrust agencies with respect to those particular mergers - whether they were cleared, or approved with remedies, or opposed. If remedies were imposed, conduct remedies are distinguished from structural remedies, since many observers view the latter as more likely effective. We find that the antitrust agencies cleared the studied mergers about as often as they imposed remedies, although the percent cleared has risen over time. We further find that most transactions resulted in increases in prices post-merger, suggesting a permissive antitrust posture. The price increases were considerably greater for mergers subject to conduct remedies than divestitures, corroborating doubt about the efficacy of conduct approaches. Finally, we find that the agencies cleared mergers without substantial price effects systematically and significantly more often than mergers resulting in large price increases. This suggests that agencies have been able to distinguish, on average, case deserving of approval from those raising the most serious competitive concerns.

The Predictive Power of Merger Analysis

This article looks first at the process courts use to resolve merger challenges and finds that in the area of product market definition, merger analysis is reasonably strong. Market definition remains complex and subjective, however, and could be improved, or avoided altogether, through econometric techniques such as merger simulation. Judicial analysis of entry is much weaker. Courts ask whether the market is protected by entry barriers but rarely ask whether the barriers are high enough to make entry unprofitable. The article also examines the results of “marginal” mergers, mergers that would have been blocked had the government and courts been somewhat more aggressive. Measured in this way, merger analysis is not seriously off target: the merger retrospectives find that very few transactions led to sharp price changes. They also find, however, that a large proportion of marginal mergers resulted in small price increases, which suggests that in appropriate cases, enforcement agencies and courts should be more willing to predict anticompetitive effects.

Static and Dynamic Merger Effects: A Market Share Based Empirical Analysis

Merger-specific efficiencies continue to play a relatively small role in merger enforcement and merger retrospectives. Motivated by the paucity of empirical analyses of merger-specific efficiencies, we examine a merger's market share effects. Standard merger theory predicts that if merger-specific efficiencies are present, the merged firm should regain market share in the long-run. We estimate short and long-run merger effects on market shares from the divestiture of Texaco's Canadian assets. We use a difference-in-difference specification that compares changes for the merging firm with changes for other vertically integrated firms in the same market. Our approach is a useful complement to across market comparisons, which are often hindered by the difficulty of finding control markets that experience the same supply and demand shocks as the treatment markets.

Difference in Differences Analysis in Antitrust: What Does it Really Measure?

Merger retrospectives often use a difference in differences (DID) approach to measure the price effects of mergers. As used in these studies, this approach implicitly assumes that the price in the control market fully controls for supply and demand shocks in the treatment market if the two markets experience the same demand and supply shocks. In this paper, we first show that this is only true if the parameters that determine how supply and demand shocks affect price are the same in the two markets. We then show that in many plausible circumstances the DID approach could either overestimate or underestimate the price effects of a merger.