Why Merger Guidelines Must Do More to Support Productivity, Innovation, and Global Competitiveness
Antitrust authorities want to revise merger guidelines based on dubious theories of potential harm that fail to recognize how many mergers foster innovation, productivity, and U.S. global competitiveness. New merger guidelines should better account for these considerations.
Soon after being sworn in as chair of the Federal Trade Commission (FTC), Lina Khan issued a joint statement on July 9, 2021, with Richard A. Powers, then the acting assistant attorney general of the Justice Department’s (DOJ) Antitrust Division, to revise merger guidelines for antitrust enforcers. Their primary goal was to implement an aggressive merger enforcement policy despite the lack of evidence that merger enforcement has been lax or that so-called “killer acquisitions” are a real problem.
The two antitrust agencies then issued a joint request for information (RFI) in 2022 that declared regulators’ intent to modernize antitrust enforcement by incorporating “new learning related to firm and market behavior,” particularly “aspects of competition the guidelines may underemphasize or neglect, such as labor market effects and non-price elements of competition like innovation, quality, potential competition, or any ‘trend toward concentration.’” But the questions that followed revealed the agencies’ intent to change current merger guidelines in ways that could stifle innovation and U.S. competitiveness by banning mergers that could be beneficial for consumers and U.S. workers in firms that compete globally. Instead of recognizing that leading firms often operate in global markets and asking how to better review cross-border mergers or how to account for the national competitiveness implications of mergers between domestic firms operating around the world, the RFI focused an overwhelming majority of its questions on potential justifications for banning mergers, from labor market effects to nascent competition theories. This revealed a line of reasoning that would lead inexorably to quashing mergers that could be highly beneficial for consumers and the economy based on dubious evidence to the contrary. Given the agencies’ flawed approach to assessing whether mergers might be beneficial, future merger guidelines should instead place greater weight on innovation, productivity, and competitiveness dynamics.
This report begins with the inventiveness-persuasiveness trade-off: the further antitrust authorities deviate from the established case law, the less likely it is that future merger guidelines will be convincing in courts. Current antitrust authorities must pay more attention to this quandary by seeking to create new merger rules rather than codify them by passing new ones. Second, we examine the merger guidelines and show that despite continuous improvements, they need a more dynamic approach to competition to better account for innovation. Worse, the merger guidelines are primarily silent on international competitiveness issues, which are critically important as the U.S. economy faces key competitiveness challenges, particularly with China. We suggest that future merger guidelines address innovation and competitiveness challenges more effectively, both of which are critical in the age of disruptive innovation and global competition.
Merger guidelines, despite continuous improvements, need a more dynamic approach to competition to better account for innovation. The merger guidelines are primarily silent on international competitiveness issues.
Mergers and acquisitions (M&A) are part of the Schumpeterian process of creative destruction, resulting in and generating innovations that drive entrepreneurial capitalism. Regulatory control of mergers requires guidance for entrepreneurs needing legal predictability and constitutes a powerful deterrent tool for M&A activities. Antitrust officials regularly amend merger guidelines to reflect changes in merger policies and advise entrepreneurs to reasonably predict the legality of a particular merger.
In 2023, the FTC and DOJ proposed new merger rules for public comments. As a result, vertical and horizontal merger standards were condensed into a single set of guidelines. It is arguable whether the new guidelines were required, especially given that the vertical merger guidelines were only recently adopted in 2020 and guidelines are typically a backward-looking exercise aimed at clarifying for, rather than confusing, the courts.
Although, fundamentally, we believe the new criteria are not required, herein we present some guiding concepts for the new merger requirements. This report emphasizes that merger guidelines may not be persuasive in courts if they embrace creative theories of harm from mergers. The trade-off between originality and persuasiveness warrants incremental changes rather than a radical departure from today’s knowledge about the law and economics of mergers—and those incremental changes should focus on fostering dynamic competition with a concern for firms’ international competitiveness.
Merger guidelines are nonbinding documents produced by authorities to provide market participants with a legal perspective of merger policy. They must be intellectually compelling in order to influence judicial judgments because they are not legally binding; otherwise, judges may simply dismiss them. However, because precedents rather than merger guidelines are what govern courts, excessively creative merger guidelines will have little effect on merger case law. In other words, the greater the deviation from the established case law in the merger guidelines, the less impact they will have in practice.
That is why merger guidelines are used to “codify” cases: They are policy documents that provide a retrospective review of merger case law evolution. In this respect, they provide legal certainty, help establish a merger policy over time, and clarify complex matters. They have rarely been proven to be inventive in the past, for obvious reasons, as they lack the legal binding of legislative norms and rely on the persuasiveness of risk-averse judges.
The present reform of the merger guidelines breaks from this good practice in two areas. First, the vertical merger guidelines adopted in 2020 are yet to be tested, as antitrust agencies have abruptly shifted gears by rescinding recently issued guidelines, while the courts have yet to apply them in practice. The objective of this modification is not to improve the codification of merger case law, as sought by the 2020 vertical merger guidelines, but rather to reject such codification and the associated case law—and thereby venture into uncharted territory in terms of merger enforcement. Antitrust officials now advance speculative theories of harm that depart from precedents rather than try to persuade uncreative courts. As such, in a vain attempt to reject the current merger case law, antitrust enforcers have revoked recently approved merger guidelines.
Rather than fundamentally altering the merger guidelines, antitrust agencies should draw on the continual improvements made by prior updates to them.
Second, horizontal merger guidelines have historically been separate from vertical merger guidelines because it is widely understood that mergers between competitors (horizontal mergers) may generate more concerns than vertical mergers between suppliers and distributors might. Both the repeal of merger guidelines and antitrust enforcers’ desire to combine the horizontal and vertical merger guidelines into a single document demonstrates their willingness to scrutinize vertical mergers more closely, thereby not distinguishing between the two types of mergers by associating the stricter scrutiny toward horizontal mergers with the looser scrutiny toward vertical mergers, as courts and the literature have traditionally done. After decades, this remarkable move from a dual set of merger guidelines may persuade courts to stop using criteria that are based on whether a merger is vertical or horizontal.
These problems expose antitrust agencies’ disregard for the steady improvement of merger guidelines in terms of their persuasiveness in courts. Neo-Brandeisians, fixated on the novelty of future merger guidelines, disregard the approach’s accompanying lack of effectiveness.
Rather than fundamentally altering the merger guidelines, antitrust agencies should draw on the continual improvements made by prior updates and suggest areas for incremental progress.
Courts’ zealous antitrust enforcement and market actors’ demand for legal predictability led to merger guidelines. These merger guidelines now incorporate more economic factors, although a more robust consideration of innovation and competitiveness is desirable.
Merger policy considers innovation and dynamic efficiency. Unilateral effects analysis was the main anticompetitive argument in differentiated product markets in the 1992 merger guidelines. The 2010 U.S. horizontal merger guidelines examine static and dynamic competition and the calibration of competitive effects in mergers with differentiated products. Vertical mergers offer great efficiency potential, and vertical merger guidelines focus on whether a deal is likely to lead to anticompetitive foreclosure that harms consumers.  According to the intellectual property guidelines adopted in 2017, transactions can affect innovation and research and development (R&D) intensity. Merger simulation is yet to be used to assess competitive challenges in the innovation market. Merger guidelines now include innovation and dynamic competition; nevertheless, there is room for further improvement. This report reviews the evolution of merger guidelines before outlining the potential improvements.
Before 1968, courts used the four-firm (CR4) concentration metric, which is the sum of the market shares of the four largest firms, to analyze mergers.6 Small purchases in relatively unconcentrated industries were forbidden because of market concentration laws. The Supreme Court’s 1966 opinion in United States v. Von’s Grocery Co. banned the acquisition of a corporation that would have resulted in a merged entity possessing 1.4 percent of stores (7.5 percent of sales) in the market, with a 1.1 percent increase in CR2 and 3.3 percent increase in CR6. Today, this concentration rise looks minor.8 Reflecting a concern for the direction in which the majority was taking the Court, Justice Stewart wrote in dissent, “The sole consistency that I can find is that in litigation under [section 7 of the Clayton Act], the Government always wins.”
DOJ and the FTC released their first horizontal merger guidelines in 1968. The structure-conduct-performance paradigm, according to which only a deconcentrated market structure can foster innovation, underpinned policies that examined the market structure, corporate conduct, and market performance. The guidelines expected horizontal mergers to increase market concentration, resulting in higher prices and lower output. The 1968 merger guidelines set the CR4 thresholds for “highly concentrated” areas and stated that DOJ would usually contest horizontal mergers in such markets when acquirers and acquired firms’ market shares were above certain values. Given a market concentration, a 15 percent market share firm acquiring a 1 percent market share firm would usually be difficult. Although the thresholds of the guidelines resembled case law, they differed from current judicial judgments, as these guidelines increase the merger threshold. The guidelines’ horizontal and vertical merger thresholds differed from Von’s Grocery’s. The 1968 merger guidelines were persuasive and impactful for the courts.
The 1968 guidelines improved merger policy but had some drawbacks. Dynamic competition—when firms innovate and launch new products or services that disrupt the market—is not explicitly considered in these guidelines, which also ignored the possibility that a merger could eliminate a potential entrant. Moreover, these guidelines do not evaluate the potential impact of mergers on international competitiveness.
The horizontal merger guidelines of 1982 marked considerable advances over the 1968 guidelines. The 1982 guidelines represented advances in economic analysis and included the concept of dynamic competition. The guidelines acknowledged that horizontal mergers could result in efficiency, such as lower production costs, which could benefit consumers, and also brought to light that eliminating a potential entrant could be anticompetitive and the possibility of entry could be a significant competitive restraint on current enterprises. Finally, the guidelines recognized that foreign competition could be essential when considering a merger.
Mergers were more welcome under the 1982 guidelines. The concentration of several levels was changed according to those 1982 guidelines. A new concentration measure, various analytical methods, and nonconcentrated elements were incorporated into the amended guidelines. The Herfindahl-Hirshman Index is the recommended “new” concentration measure (HHI). Large market-share firms are weighted more heavily than smaller market-share enterprises because the HHI squares market shares. The HHI rarely appeared in judgments until the 1982 guidelines, as the case law was nearly entirely written in terms of CR4 or its modifications (CR2 and CR8) before that time. This HHI concentration measure quickly became a dominant factor in the economic analysis of mergers.
However, the 1982 guidelines introduced the “small but significant and non-transitory increase in price” test (or the “SSNIP” test). This test helped define the markets. With a specified 5 percent price increase, the SSNIP test provided a precise statement of an antitrust need reflecting economic principles regarding substitution. However, its overreliance on price to define markets, which determines market power, failed to account for competition on quality and, more generally, the dynamic competition process whereby companies compete over innovation rather than merely over prices.
DOJ and the FTC’s vertical merger guidelines of 1984 articulated the foreclosure argument, which focused on the possibility of a vertical merger to damage competition by denying access to a vital input or distribution route. Although the 1984 guidelines improved the merger policy, they had numerous drawbacks. The guidelines did not explicitly include dynamic competition, which refers to enterprises’ ability to innovate and provide new products or services that disrupt the market. The guidelines also did not consider the effects of vertical mergers on innovation and competition.
Overreliance on price to define markets, which determines market power, fails to account for competition on quality and, more generally, for the dynamic competition process whereby companies compete over innovation rather than merely over prices.
In United States v. Baker Hughes Inc., DOJ argued that entry “can rebut a prima facie case only by clearly showing that entry into the market by competitors would be quick and effective.” The D.C. Circuit unequivocally rejected the proposed standard, stating, “[We] find no merit in the legal standard propounded by the government. It lacks support in the statute, in the case law, and in the government’s own  Merger Guidelines.” Easy entry mitigates the potential anticompetitive impact of a considerable increase in market concentration. The 1992 guidelines formalized what “easy entry” is. They opposed the court’s decision in Baker Hughes by codifying that that entry is “easy” if it could be “timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of concern. In markets where entry is that easy (i.e., where entry passes these tests of timeliness, likelihood, and sufficiency), the merger raises no antitrust concern and ordinarily requires no further analysis.”
The incorporation of the notion of entry into the 1992 merger guidelines contributed to a more dynamic approach to merger analysis wherein the time horizon and subsequent market reactions were to be integrated into the merger analysis. Market structure alone was not sufficient, and antitrust officials had adequately integrated market reactions to assess mergers. The horizontal merger rules of 1992 improved the 1982 guidelines. A more thorough economic analysis was incorporated into the guidelines, including using quantitative tools to estimate market concentration and entry conditions. The guidelines also acknowledged that mergers could have both anticompetitive and pro-competitive consequences, with a balance between the two depending on the unique circumstances of the merger.
The merger guidelines overlooked firms’ global competitiveness. In an increasingly globalized economy, American mergers may impact international competition.
The 1997 merger guidelines—a significant improvement over the previous iteration—advanced merger antitrust analysis, specifying unilateral and coordinated impacts and establishing the antitrust agencies' analytical approach. They began by defining relevant markets—product and geographic areas—in which a merger could harm competition. (According to case law, relevant markets should at the same time be small enough to demonstrate a merger's effect on competition and large enough to represent a given industry’s economic realities.) The guidelines also added unilateral effects, which occur when a merger eliminates a close competitor and gives the merged organization market dominance. Prior rules did not address this. The guidelines helped assess the coordinated effects that arise when a merger improves collaboration between the merged firm and its competitors, resulting in increased prices or decreased output. Finally, the guidelines emphasized the importance of employing both qualitative and quantitative evidence to assess the competitive effects of a merger.
Even with these modifications, the 1997 merger guidelines were too static and needed to consider innovation, dynamic competition, and firms’ global competitiveness. They overlooked the effects of mergers on innovation and dynamic competition, as mergers impact economic growth and consumer welfare because they drive innovation. These 1997 guidelines also overlooked firms’ global competitiveness. In an increasingly globalized economy, American mergers may impact international competition. Antitrust agencies rarely study the effects of foreign competition on U.S. markets and the laws need to provide a clear framework for assessing a merger’s impact on foreign competition.
The 2010 horizontal merger guidelines constituted a significant divergence from previous guidelines in various respects. They recognized that a significant market concentration does not always cause anticompetitive effects. The guidelines also considered entry and dynamic competition when analyzing mergers—and stressed innovation, and mergers’ ability to foster it.
The 2010 merger guidelines emphasized that measuring market shares and market concentration is not an objective in itself but is valuable in illuminating a merger’s potential competition implications. These merger guidelines emphasized the secondary significance of market structure in assessments of unilateral effects. Indeed, antitrust agencies excessively rely more on the value of diverted sales than on the HHI levels in markets with different products when diagnosing unilateral price impacts. Nevertheless, merger guidelines still have gaps: They recognize the importance of innovation but must provide a clear framework for examining a merger’s impact on innovation and competitiveness.
The horizontal merger guidelines do not provide a clear framework for assessing the impact of mergers on international competitiveness. Merger guidelines should establish a more extensive framework for examining a merger’s impact on competitiveness, which could involve reviewing merging firms’ incentives and capacity to enter the market, possible competitors’ barriers to entry, and mergers’ impact on market innovation incentives. Such a study could improve merger analysis and prevent mergers from undermining global market competition.
Vertical merger guidelines, similar to horizontal merger guidelines, do not provide a framework for examining the impact of a merger on innovation, dynamic competition, or international competitiveness. This leads to contradictory merger analysis and entrepreneurial uncertainty.
The 2020 vertical merger guidelines differed significantly from prior guidelines. These guidelines utilized contemporary antitrust scholarship and case law to comprehend better vertical mergers and competition—namely the theory of harm through “raising rivals’ costs.” The guidelines recognized the possibility of vertical mergers hurting competition by raising rivals’ costs or limiting their capacity to compete and provided direction on how authorities should analyze such harm. Generally, the 2020 vertical merger guidelines are “a first public attempt to capture [competition] concerns in a way that is capable of being implemented in enforcement policy,” and they constitute “a very considerable improvement over any Agency or judicial policy statement in the past,” wrote Herbert Hovenkamp.
Despite these advancements, policies have several significant flaws. Vertical merger guidelines, similar to horizontal merger guidelines, do not provide a framework for examining the impact of a merger on innovation, dynamic competition, or international competitiveness. This leads to contradictory merger analysis and entrepreneurial uncertainty. Vertical merger guidelines should be modified to provide a more extensive framework for examining how a merger may affect innovation, dynamic competition, and potential competition. This could involve examining a merging firms’ R&D activities, prior product introduction performance, and a merger’s possible impact on market innovation incentives. Such a study would improve merger analysis and prevent mergers that hurt innovation, dynamic competition, or potential market competition. Consequently, merger guidelines focus excessively on price effects on market definition and market shares.
On the other hand, merger guidelines place insufficient focus on the implications of the international competitiveness of merger analysis. For example, the 2017 acquisition by Qualcomm of NXP Semiconductors exemplifies the need for more robust guidance on global competitiveness. DOJ approved the merger, subject to various restrictions (including divestitures of certain consolidated firm assets), to address market concentration concerns. Although Qualcomm and NXP Semiconductors were global companies competing in international markets, DOJ did not explicitly assess the merger’s possible impact on international competition. In addition, in Meta’s acquisition of Within, the fitness app in the metaverse, the FTC never mentioned TikTok and failed to understand that the American social media company tried to sustain competition with its powerful Chinese rival in adjacent markets where it hoped to regain customers. Although the FTC lost in court, the competition analysis remained domestic, with no consideration of the international ramifications of the merger. Today, antitrust can kneecap companies to compete globally in the gaming industry by, for example, preventing the acquisition of Activision by Microsoft, thus benefitting the Japanese rival, Sony.
Today, antitrust can kneecap companies to compete globally.
Although the guidelines acknowledge that a merger may potentially undermine domestic competition, they do not specifically examine the possibility that a merger may hurt international competitiveness. In today’s more globalized economy, when businesses in the United States confront ever-increasing levels of competition from their counterparts in other countries, this issue takes on a greater degree of significance. Antitrust authorities in the United States must continue to modify their analytic framework to ensure they can appropriately examine mergers’ impact on U.S. economic competitiveness. For example, U.S. antitrust authorities blocked the merger between Staples and Office Depot in 1999 and 2016, despite fierce competition in the sector and European antitrust officials approving the merger. Now the two companies want to merge again, but the time lost has prevented the two companies from consolidating and expanding their businesses abroad—primarily in Europe and Asia—thereby hurting American competitiveness in retail industries. Consolidation can contribute to dynamic competition, ensuring that companies are able to innovate and thus compete globally. It is past time for merger guidelines to integrate the reality of today’s global economy—in which innovation matters.
The following are recommendations for antitrust agencies to change the merger guidelines.
Merger guidelines should build on rather than disregard precedents. The further the recommendations deviate from established case law, the more likely courts will ignore the merger rules. As a result, this non-legally binding document becomes irrelevant in the judicial examination of merger decisions. As the gap between antitrust enforcement and court reviews grows, antitrust agencies create legal uncertainty and confusion for firms and entrepreneurs. Such drift leads to the over-deterrence of economically beneficial mergers, potentially resulting in efficiency costs due to vertical or horizontal nonintegration.
Merger guidelines should better integrate competitiveness concerns. Both the FTC and DOJ see the goal of antitrust as preserving competition. However, competition is not a goal in itself; it is means toward higher living standards and increasingly it should be a means to ensure that U.S. industries—especially technologically sophisticated ones—are globally competitive with China in particular. firms’ competitiveness and innovation are laudable goals that enhance economic development and social progress. Consequently, the goal should be the total economic welfare of the U.S. economy, especially in an era when America’s preeminent tech-economic challenge is to stay ahead of China. America can no longer afford to maintain its myopic and narrow antitrust focus only on competition. This is especially true because the Chinese authorities promote massive mergers among Chinese firms so they can “go out” and dominate global markets, thereby destroying competitors. Absent massive government subsidies on the order provided by the Chinese government, our major defense is firm scale and size. Using a merger policy to limit this needed scale in pursuing more competition will likely weaken the U.S. economy, boost the trade deficit, reduce good jobs, and ultimately generate a lower living standard.
America can no longer afford to maintain its myopic and narrow antitrust focus only on competition. This is especially true because the Chinese authorities promote massive mergers among Chinese firms so they can “go out” and dominate global markets, destroying competitors.
The global competitiveness consequences of blocking mergers or ordering divestitures must be part of antitrust analysis. Studies have demonstrated that aggressive merger policies decrease American competitiveness. Hence, an improved merger policy through amended merger guidelines should be designed to enhance American competitiveness by focusing on productivity growth. In many nations, foreign competition is a significant constraint on the capacity of domestic enterprises to wield market power. Industrial policy can increase productivity under Schumpeterian competition. In theory, international competition should be considered when defining geographically relevant markets. However, in practice, that is rarely the case. Foreign competition, and thus the geographic definition of world markets, is especially intense in sectors wherein products and services can move freely (e.g., digital markets, pharmaceutical firms, financial and insurance services, and transportation services such as vehicles, trains, and aircraft). Merger guidelines should state unequivocally that markets can be established internationally to better depict the reality of competitive dynamics. They should also include an assessment and consideration of competitive effects.
Merger guidelines should also include a framework for interagency coordination in mergers involving critical areas of the economy. Indeed, a refined competitive analysis would require an inter-departmental consensus on merger decisions in a definite set of sectors that face global competition with extraordinarily sensitive mergers. For instance, the Department of Defense (DOD) and the Department of Commerce (DOC) should be involved in mergers between companies in strategically important, internationally traded, technology-driven industries. Absent such interdepartmental coordination, a siloed approach may generate a contradictory approach between antitrust agencies and sectoral departments. Worse, a flawed analysis of domestic competition with consideration for foreign competitors may prevent strategic mergers within the U.S. economy or enable the divestment of strategic assets to foreign rivals, thereby undermining American competitiveness. Congress should pass legislation requiring DOC and DOD consultation before mergers for strategic sectors of the economy are approved.
Additionally, we need more interfirm collaboration to meet competitiveness challenges. Congress should amend the National Cooperative Research Act to allow joint commercialization efforts to exploit American innovation. Likewise, the act should be amended to enable firms to collaborate on technology transfer decisions in nations such as China, which exploits monopolistic power to compel technology transfer from firms seeking to sell there.
A merger policy pursued at the expense of integrating industrial policy considerations would demonstrate consolidation as a feature of technology-intensive markets, rather than as a bug. Merger guidelines are adequate policy documents used to overcome antitrust’s blindness on competitiveness issues.
Merger guidelines should not be biased toward deconcentration. The 2022 RFI stated that “the agencies seek specific examples of mergers that have harmed competition, with descriptions of how the merger harmed competition, including how those mergers made it more difficult for customers, workers, or suppliers to work with the merged firm or competitors of the merged firm or made it more difficult for rivals to compete with the merged firm.” The positive effects of mergers, such as increased innovation through integration and increased productivity through economies of scale, do not seem to be the focus of antitrust agencies that focus excessively on the “harmful” effects of mergers. However, mergers can play a crucial role in driving productivity. Therefore, productive efficiency gains expected from mergers should be balanced against potential price increases, and the former should be given adequate weight, commensurate with their overall positive impact on economic welfare.
Mergers can play a crucial role in driving productivity. Therefore, productive efficiency gains expected from mergers should be balanced against potential price increases, and the former should be given adequate weight, commensurate with their overall positive impact on economic welfare.
If mergers fail to protect competition, then no union should ever be allowed, and the unwinding of mergers should be the order of the day. We need to rebalance the focus of the merger guidelines, incentivizing good mergers (especially ones that increase productivity, innovation. and competitiveness) while deterring bad ones rather than simply preventing most all mergers, particularly when the newly merged entity would be more efficient.
Merger guidelines should not pervert the notion of “dynamic competition.” The 2022 RFI seems to adopt the Schumpeterian idea of dynamic competition and twist it not to mean a defense (i.e., firms can merge because of the need to compete dynamically), but rather an offense (i.e., firms can no longer merge because of the need to preserve the process of competition as deconcentration). Indeed, the RFI asks, “Does a formalistic market definition exercise mask the potential for dynamic competition to be lost as a result of a merger, such as through emergent and disruptive competition, competition for the market, and the development of component competition to decrease dependency on stacks of services?” The two notions of dynamic competition are opposite (i.e., dynamic competition as the Schumpeterian way of becoming more innovative and productive through integration; or as the Arrow way—named after Kenneth Arrow, it’s a dynamic process by which companies scale up to compete and innovate—of preserving deconcentrated, small, and mid-sized firms). Blocking mergers in the name of dynamic competition is the misguided result of the myth of “killer acquisition” with atomistic competition (a market structure wherein firms are so numerous that the market represents perfect competition). Instead, the Schumpeterian notion of dynamic competition (i.e., innovation competition rather than solely price competition) constitutes a defense. If merger guidelines are to take innovation seriously, the notion of dynamic competition should relate to Schumpeterian competition, wherein market structure matters less than innovation capabilities. In that regard, a productivity-based merger analysis would not be “debating the size of the company, the market definition, nor what the ‘correct’ HHI should be.” It would assess mergers from their “impact on productivity growth and the health of competition” globally.
The Schumpeterian notion of dynamic competition (i.e., innovation competition rather than solely price competition) constitutes a defense, not an offense, to merger analysis.
Merger guidelines must be careful using such terms as “potential competitor” or “nascent competitor.” To protect a misguided view of dynamic competition, antitrust authorities may block mergers whenever the acquiree appears to be a potential/nascent competitor without providing a clear criteria to measure such controversial notions. Merger guidelines should not shut the exit door for start-ups: Blocking mergers on the basis that the acquiree, as the 2022 RFI puts it, “while small now, might evolve into a competitive force” is a speculative story for a certain loss. Entrepreneurs having fewer exit options will find it harder to gain investors that require acquisition as one of the available exit options. In addition, acquirers may not integrate complementary assets despite commercial opportunities and customer demand. Potential competition should not mean in the merger guidelines that any start-up can effectively compete with any established firm. Rather, potential competition should refer to the Schumpeterian notion of small firms or foreign rivals disciplining the market before entering it; potential competition should constitute a substantiated and credible defense rather than a speculative theory of harm.
Over the past 50 years, the merger guidelines have positively shaped U.S. antitrust policies. They have guided corporations and investors on how DOJ and the FTC review acquisitions based on economic considerations. However, despite these successes, these guidelines have significant drawbacks that have caused inconsistent merger analyses, investor and corporate uncertainty, and possible harm to competition and the U.S. economy.
To overcome these limitations, merger guidelines should be amended to provide a more extensive framework for examining the possible impact of mergers on innovation, dynamic competition, potential competition, productivity, and international competitiveness. Such an examination would provide greater clarity and uniformity in merger analysis and help guarantee that mergers are permitted only if they uphold these crucial competition features. Agencies should also ensure that the guidelines adapt to economic changes, new antitrust scholarships, and case law. Antitrust agencies, economists, and legal experts must collaborate to guarantee that the guidelines reflect the latest antitrust policies and practices.
Merger guidelines should be amended to provide a more extensive framework for examining the possible impact of mergers on innovation, dynamic competition, potential competition, productivity, and international competitiveness.
Merger guidelines need to integrate the notion of dynamic competition in the Schumpeterian sense, not in the Arrow sense. Competition is not a market structure antitrust agencies must keep as atomized as possible. Otherwise, no competition exists in a globalized world in which large companies face significant entrants from foreign markets (mainly in nations such as China, which sees scale as a powerful global weapon). An institutional solution to competitiveness concerns in merger reviews is needed. In addition, merger guidelines need to be useful; therefore, they must align with case precedents. Finally, merger guidelines need a more refined definition of the market to grasp that potential competition leads to reactive integration (i.e., consolidation in the face of a competitive threat) rather than anticompetitive integration.
About the Author
Dr. Aurelien Portuese is the director of the Schumpeter Project on Competition Policy at the Infromation Technology and Innovation Foundation. Dr. Portuese is also an adjunct law professor at the Global Antitrust Institute at George Mason University. As an expert in U.S. and EU antitrust law and economics, he has substantial academic experience, having taught in the United States, the United Kingdom, and France. Dr. Portuese holds a Ph.D. in competition law and economics from the University of Paris II (Sorbonne), an MSc in Political Economy from the London School of Economics, a Master’s degree from Sciences Po Paris, and an LL.M. in Law and Economics from the Universities of Hamburg, Gent, and Bologna. A regular speaker at conferences his most recent book, Algorithmic Antitrust, was published by Springer Books in 2022. For more about Dr. Aurelien Portuese, visit aurelienportuese.com.
The Information Technology and Innovation Foundation (ITIF) is an independent 501(c)(3) nonprofit, nonpartisan research and educational institute that has been recognized repeatedly as the world’s leading think tank for science and technology policy. Its mission is to formulate, evaluate, and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress. For more information, visit itif.org.
. Aurelien Portuese, “Reforming Merger Reviews to Preserve Creative Destruction” (ITIF Report, September 2021), https://itif.org/publications/2021/09/27/reforming-merger-reviews-preserve-creative-destruction/; Jeffrey T. Macher and John W. Mayo, “The Evolution of Merger Enforcement Intensity: What do the Data Show?” 17 Journal of Competition Law & Economics, 3 (2021):708–727. On the Neo-Brandeisian case against mergers, see Lina Khan, “The End of Antitrust History Revisited,” 133 Harvard Law Review (2020):1655–1682, 1672; Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age (New York, NY: Columbia Global Reports, 2018):127–130. On the European side, see Massimo Motta and Martin Peitz, “Big Tech Mergers,” 54 Information Economics and Policy (2021). On the killer acquisition narrative, see Colleen Cunningham, Florian Ederer, and Song Ma, “Killer Acquisitions,” 129(3) Journal of Political Economy (2021):649–702; Axel Gautier and Joe Lamesch, “Mergers in the digital economy,” 54 Information Economics and Policy (2021); Christopher The, Duyti Banerjee, and Chengsi Wang, “Acquisition-induced kill zone,” Discussion Paper no. 2022–24 (2022). But see, Aurelien Portuese, “Reforming Merger Reviews to Preserve Creative Destruction” (ITIF Report, September 2021), https://itif.org/publications/2021/09/27/reforming-merger-reviews-preserve-creative-destruction/.
Prado and Bauer reviewed 32,367 venture capital deals and 392 tech start-up acquisitions by large platforms and found the following results: “challenge broad claims about the existence of short-term, negative impacts of Big Tech acquisitions on innovation, because of the creation of ‘kill zones’ for start-ups. Our findings do not imply that such ‘kill zones’ might not exist in specific cases, but there does not seem to be a systematic pattern across industry segments and extended periods. This should raise a flag of caution for current, competition policy discussions about imposing restrictions on the ability of Big Techs to acquire startups,” in Tiago S. Prado and Johannes M. Bauer, “Big Tech platform acquisitions of start-ups and venture capital funding for innovation,” 59 Information Economics and Policy (2022):1–24.
. Aurelien Portuese, Julie Carlson, “Revising Merger Guidelines While Preserving the Process of Creative Destruction”, (ITIF Comments, March 21, 2022), https://www2.itif.org/2022-doj-ftc-merger-enforcement-rfi.pdf
. The claim that aggressive merger enforcement is required due to excessive market consolidation is unsubstantiated, see Robert Atkinson and Filipe Lage de Sousa, “No, Monopoly Has Not Grown” (ITIF Report, June 2021), https://itif.org/publications/2021/06/07/no-monopoly-has-not-grown/; Robert Kulick and Andrew Card, “Industrial Concentration in the United States: 2002–2017” (NERA March 2022), https://www.nera.com/content/dam/nera/publications/2022/2022.03_CoC%20NERA%20Report_FINAL.pdf
. Aurelien Portuese, “Reforming Merger Reviews to Preserve Creative Destruction” (ITIF Report, September 2021), https://itif.org/publications/2021/09/27/reforming-merger-reviews-preserve-creative-destruction/
. Thomas G. Wollmann, “Stealth Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino Act,” 1(1) American Economic Review (2019):77–94.
. See 5 U.S.C. § 553(b)(A); Syncor Int’l Corp. v. Shalala, 127 F.3d 90,94 (D.C. Cir. 1997).
. On how the 2010 merger guidelines strongly influenced judicial outcomes, see Carl Shapiro and Howard Shelanski, “Judicial Response to the 2010 Horizontal Merger Guidelines,” 58 Review of Industrial Organization (2021):51–79.
. Leah Brannon and Kathleen Bradish, “The Revised Horizontal Merger Guidelines: Can the Courts Be Persuaded?” The Antitrust Source (2010):1–4
. Hillary Greene, “Guidelines Institutionalization: The Role of Merger Guidelines in Antitrust Discourse,” 48 William & Mary Law Review (3) (2006):771–857 (who notes on 779, “On the most basic level, antitrust guidelines constitute the federal agencies’ codification of their enforcement policies. In the first instance, then, these guidelines must be understood in terms of how the agencies navigate the sphere of prosecutorial discretion available to them.”).
. Daniel Francis, “Revisiting The Merger Guidelines: Protecting an Enforcement Asset,” CPI Antitrust Chronicle, November 2022 (“My own view is that guidelines should primarily aim to describe agency practice to the public, to courts, and to businesses. They are an explanatory document to tell the world what the FTC and DOJ does when undertaking merger review.”).
. Michael L. Katz and Howard A. Shelanski, “Merger Policy and Innovation: Must Enforcement Change to Account for Technological Change?” 5 Innovation Policy and Economics, 109 (2005):109–165; Michael L. Katz and Howard A. Shelanski, “Mergers and Innovation,” 74 Antitrust Law Journal, 1 (2007):1–85.
. Malcom B. Coate and Shawn W. Ulrick, “Unilateral Effects Analysis in Differentiated Product Markets: Guidelines, Policy, and Change,” 48 Review of Industrial Organization (2016):45–68.
. Tommaso Valletti and Hans Zenger, “Merger with Differentiated Products: where Do We Stand?” 58 Review of Industrial Organization (2021):179–212.
. Gregory J. Werden, “Vertical Merger Guidelines and the Rule of Law,” 67 Antitrust Bulletin 3 (2022):406–423.
. Federal Trade Commission, Department of Justice, Antitrust Guidelines for the Licensing of Intellectual Property (2017), https://www.ftc.gov/system/files/documents/public_statements/1049793/ip_guidelines_2017.pdf
. Roy J. Epstein and Daniel L. Rubinfeld, “Merger Simulation: A Simplified Approach With New Applications,” 69 Antitrust Law Journal (2001):883–919.
. United States v. Von’s Grocery Co, 384 U.S. 270 (1966)
. See, for instance, Crane Co. v. Harsco Corp, 509 F. Supp. 115 (D. Del. 1981); United States v. Hammermill Paper Co., 429 F. Supp. 1271 (W.D. Pa. 1977)
. Caroline E. Mayer, “Administration Eases Merger Guidelines,” The Washington Post, June 15, 1982 (quoting Attorney General William French Smith having said that the Merger Guidelines “constitute an evolutionary change but a very important change from the practice of prior administrations.”).
. See Litton Industries, 82 F.T.C. 793 (1973), vacated, 85 F.T.C. 333, modified, 86 F.T.C. 589 (1975); United States v. Black & Decker Manufacturing Co, 430 F. Supp. 729, 748 n.38 (D. Md. 1976); Marathon Oil Co. v. Mobil Corp, 530 F. Supp. 315, 323 n.15 (N.D. Ohio 1981).
. Pabst Brewing Co. v. G. Heileman Brewing Co, No. 88-C-078-C, 1988 WL 237452 (W.D. Wis. Aug. 19, 1988). See also Hillary Greene, “Guidelines Institutionalization: The Role of Merger Guidelines in Antitrust Discourse,” 48 William & Mary Law Review (3) (2006):771–857 (who notes on 791, “In a sample of thirty-eight rulings from 1985 to 1990 which included nearly all of the rulings involving the DOJ and private parties as plaintiffs, I found that when CR and HHIs were both mentioned, the HHI concentration measure dominated the discussion and holdings in a very strong majority of the rulings.”).
. 908 F.2d 981, 983 (D.C. Cir. 1990).
. Horizontal Merger Guidelines, reprinted in 4 Trade Reg. Rep. (CCH) 13,104 (Apr. 7, 1992), § 3.0.
. Carl Shapiro, The 2010 Horizontal Merger Guidelines, “From Hedgehog to Fox in Forty Years,” 77 Antitrust Law Journal (2010):701–759.
. Craig T. Peters and Jeffrey M. Wilder, “Ten Years of the 2010 HMG: A Perspective from the Department of Justice,” 58 Review of Industrial Organization (2021):13–31. Dennis W. Carlton, “Revising the Horizontal Merger Guidelines,” 6(3) Journal of Competition Law and Economics (2010):619–652.
. Alison Oldale, Joel Schrag, and Christopher Taylor, “The 2010 Horizontal Merger Guidelines at Ten: A View from the FTC’s Bureau of Economics,” 58 Review of Industrial Organization (2021):33–50.
. Ibid. See also Christine Varney, “An update on the review of the horizontal merger guidelines” (remarks as prepared for the horizontal merger guidelines review project’s final workshop) (2010), https://www.justice.gov/atr/fle/518236/download; Carl Shapiro, “The 2010 horizontal merger guidelines: From hedgehog to fox in forty years,” Antitrust Law Journal, 77(1) (2010):49–107.
. Richard J. Gilbert and Daniel L. Rubinfeld, “Revising Horizontal Merger Guidelines: Lessons from the U.S. and the E.U.,” In Michael Faure and Xinzhu Zhang (Eds.), Competition Policy And Regulations: Recent Developments In China, Europe And The US, Edward Elgar (2010).
. Carl Shapiro, “Vertical Mergers and Input Foreclosure Lessons from the AT&T/Time Warner Case,” 59 Review of Industrial Organization (2021):303–341 (“the 2020 Vertical Merger Guidelines … are a major improvement over the 1984 Non-Horizontal Merger Guidelines.”).
. Roger D. Blair, “The 2020 Vertical Merger Guidelines,” 59 Review of Industrial Organization (2021):133–138.
. Herbert Hovenkamp, “Competitive Harm from Vertical Mergers,” 59 Review of Industrial Organization (2021):139–160.
. Steven C. Salop, “A Suggested Revision of the 2020 Vertical Merger Guidelines,” 67(3) The Antitrust Bulletin (2022):371–389.
. Michael A. Salinger, “The New Vertical Merger Guidelines: Muddying the Waters,” 59 Review of Industrial Organization (2021):161–176.
. Aurelien Portuese, “U.S. Antitrust Kneecaps Companies Trying to Compete Globally,” RealClearMarkets, April 10, 2023, https://www.realclearmarkets.com/articles/2023/04/10/us_antitrust_kneecaps_companies_trying_to_compete_globally_892620.html
. Graham Rapier, “Staples is trying to buy Office Depot for a third time, this time offering $2.1 billion in cash for the competitor,” Business Insider, January 2021, https://www.businessinsider.in/retail/news/staples-is-trying-to-buy-office-depot-for-a-third-time-this-time-offering-2-1-billion-in-cash-for-the-competitor/articleshow/80218240.cms
. Thomas M. Jorde and David J. Teece, “Introduction” in Thomas M. Jorde and David J. Teece (Eds.), Antitrust, Innovation, and Competitiveness (New York, Oxford University Press, 1992):3–28, 12. (“The American antitrust laws are an important element of U.S. industrial policy. Moreover, U.S. antitrust laws are a more central aspect of industrial policy in the United States than in Europe or Japan.”).
. Robert Atkinson and Ian Clay, “Wake Up, America: China is Overtaking the United States in Innovation Output” (ITIF Report, November 2022), https://www2.itif.org/2023-us-v-china-innovation.pdf
. Ibid. (“Our point is simply that as foreign commerce continues to become increasingly important, U.S. antitrust system looks increasingly antiquated as a guardian of American economic welfare.”) See also Robert Atkinson, “Antitrust Can Hurt U.S. Competitiveness,” Wall Street Journal, July 5, 2021, https://www.wsj.com/articles/antitrust-can-hurt-u-s-competitiveness-11625520340; Robert Atkinson, “Time to Incorporate Competitiveness Into Anti-Trust,” American Compass, August 30, 2020, https://americancompass.org/time-to-incorporate-competitiveness-into-anti-trust/
. See Seong Somi, “Strategic antitrust policy promoting mergers to enhance domestic competitiveness,” Ph.D. Dissertation, Yale University (May 1989) (“Our analysis shows: if merging firms attain significant cost savings through mergers, and if we ignore distributional issues, antitrust regulations based on the usual definition of ‘anticompetitive mergers’—those which increase market price and decrease output of US firms—might be regarded as too restrictive from the overall perspective of US welfare.”) See also Joseph F. Winterscheid, “Foreign Competition and U.S. Merger Analysis,” 65 Antitrust Law Journal (1996):241–252 (“By and large, each successive iteration [of Merger Guidelines’ revisions] has provided the business community with additional guidance on enforcement policy, guidance that has been incrementally enhanced by the agencies’ intervening experience and learning. The agencies’ treatment of foreign competition is a notable exception to this otherwise exemplary track record.”).
. Report of the President’s Commission on Industrial Competitiveness (1985) (“Section 7 of the Clayton Act and other antitrust statutes should be modified to recognize the potential efficiency gains from business combinations and to reflect the reality of global competition and global market definitions where appropriate. In addition, specific antitrust exemptions should be considered for mergers that promote national objectives.”). See also Seong Somi, “Strategic antitrust policy promoting mergers to enhance domestic competitiveness,” Ph.D. Dissertation, Yale University (May 1989).
. Robert Atkinson, “What Kind of Industrial Policy: Progressive or Hamiltonian?” (ITIF Report, March 2023); Robert Atkinson, “Sectoral Policies to Drive Productivity Growth” (ITIF Report, October 2021).
. Michael P. O’Brien, “Foreign Competition in Relevant Geographic Markets: Antitrust Law in World Markets,” 7(37) Northwestern Journal of International Law & Business (1985):37–75 (“One important aspect of antitrust law that must include foreign competition is the relevant geographic market used to define the area in which effects on competition must be examined.”); Philippe Aghion, Mathias Dewatripont, and Patrick Rey, “Corporate Governance, Competition Policy and Industrial Policy,” 41(3) European Economic Review (1997):797–805.
. Philip Areeda, “Antitrust Law as Industrial Policy,” in Thomas M. Jorde and David J. Teece (Eds.), Antitrust, Innovation, and Competitiveness (New York, Oxford University Press, 1992):29–46 (“If we can be realistic in identifying competition, especially foreign competition, where it exists, and in recognizing that productivity, efficiency, and innovation are not inexorable but have to be worked at, then the Sherman Act may well be around for another century.”).
. Alden F. Abbott, “Foreign competition and relevant market definition under the Department of Justice’s Merger Guidelines,” The Antitrust Bulletin (1985):299–336 (“The incorporation of foreign competition in geographic market analysis inevitably will remain a complex and imperfect task. In recognition of this fact, antitrust merger enforcement officials should attempt to devise a framework that minimizes the social resource cost of taking foreign competition into account.”).
. See, for an older discussion with a diverging perspective, Thomas J. Schoenbaum, “The International Trade Laws and the New Protectionism: The Need for a Synthesis with Antitrust,” 19 North Carolina. Journal of International Law and Commercial Regulation (1994):393–436.
. George Hay, John C. Hilke, and Philip B. Nelsom, “Geographic Market Definition in an International Context,” 64 Chicago-Kent Law Review (1988):711–739 (“The Guidelines very clearly reflect, however, the inadequacy of historical market shares as a guide to market power, and the need to examine what foreign sellers could achieve if domestic producers were to raise prices.”).
. A similar proposal was suggested in the Report of the President’s Commission in 1985 (“The Administration should create a procedure under which interested Government agencies have the opportunity to work with the Department of Justice in setting antitrust policy particularly with respect to mergers and other types of business combinations.”).
. Thomas M. Jorde and David J. Teece, “Innovation, Cooperation, and Antitrust,” in Thomas M. Jorde and David J. Teece (Eds.), Antitrust, Innovation, and Competitiveness (New York, Oxford University Press, 1992):47–70 (advocating for registration and certification approaches for cooperative commercialization ventures).
. Ibid. (“The policy changes we advance are certainly no panacea for the severe problems the U.S> high technology industry is experiencing currently. But in bringing American antitrust policy closer to Europe and Japan, we will at least purge the influence of dogma that no longer deserves a place in U.S. industrial policy. In time, reduced antitrust exposure will help clear the way for beneficial cooperation, thereby reducing incentives for mergers and acquisitions.”).
. Department of Justice, Federal Trade Commission, “Request for Information on Merger Enforcement,” January 18, 2022, https://www.regulations.gov/docket/FTC-2022-0003. See also Aurelien Portuese, Julie Carlson, “Revising Merger Guidelines While Preserving the Process of Creative Destruction”, (ITIF Comments, March 21, 2022), https://www2.itif.org/2022-doj-ftc-merger-enforcement-rfi.pdf.
. Also referred to as “innovation competition”; see Daniel F. Spullber, “Antitrust and Innovation Competition,” 00 Journal of Antitrust Enforcement (2022):1–57.
. On the killer acquisition narrative, see Colleen Cunningham, Florian Ederer, and Song Ma, “Killer Acquisitions,” 129(3) Journal of Political Economy (2021):649–702; Axel Gautier and Joe Lamesch, “Mergers in the digital economy,” 54 Information Economics and Policy (2021); Christopher The, Duyti Banerjee, and Chengsi Wang, “Acquisition-induced kill zone,” Discussion Paper no. 2022–24 (2022). But see, Aurelien Portuese, “Reforming Merger Reviews to Preserve Creative Destruction” (ITIF Report, September 2021), https://itif.org/publications/2021/09/27/reforming-merger-reviews-preserve-creative-destruction/; Jeffrey T. Macher and John W. Mayo, “The Evolution of Merger Enforcement Intensity: What do the Data Show?” 17 Journal of Competition Law & Economics, 3 (2021):708–727
. Philip Areeda, “Antitrust Law as Industrial Policy,” in Thomas M. Jorde and David J. Teece (Eds.), Antitrust, Innovation, and Competitiveness (New York, Oxford University Press, 1992):29–46 (“At least since Schumpeter wrote nearly fifty years ago, innovation has been thought to contribute far more to our well-being than keeping prices closes to costs through competition.”).
. Daniel F. Spullber, “Antitrust and Innovation Competition,” 00 Journal of Antitrust Enforcement (2022):1–57 (“Antitrust should view horizontal mergers in the context of technological change. Innovation competition calls for increased attention to the effects of mergers on non-price competition. The HMGs recognize the critical importance of innovation competition for merger policy. In contrast, the traditional economic analysis of horizontal mergers emphasizes their price effects.”).
. Michael E. Porter, “Competition and Antitrust: Toward a Productivity-Based Approach to Evaluating Mergers and Joint Ventures,” 46(4) Antitrust Bulletin (2001):919–948, 948.
. See Daniel Francis, “Revisiting The Merger Guidelines: Protecting an Enforcement Asset,” CPI Antitrust Chronicle, November 2022; John Yun, “Potential Competition, Nascent Competitors, and Killer Acquisitions,” The Global Antitrust Report on Digital Economy (2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3733716; John Yun, “Are We Dropping the Crystal Ball? Understanding Nascent & Potential Competition in Antitrust,” 104 Marquette Law Review (2021):613–660.
. Bilal Sayyed, “Actual Potential Entrants, Emerging Competitiors, and the Merger Guidelines,” TechFreedom Report (December 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4308233
. Joe Kennedy, “Monopoly Myths: Is Big Tech Creating ‘Kill Zones’? (ITIF Report, November 2020), https://itif.org/publications/2020/11/09/monopoly-myths-big-tech-creating-kill-zones/