Category Archives: Law

All proposed corporate mergers above a certain size have to go through review by antitrust regulators. The Federal Trade Commission (FTC) and the Justice Department have written guidelines for that review process to help their officials decide which mergers to allow, and which to block. Those guidelines are currently being updated for the first time in more than a decade.

The guidelines are not binding, and are not always followed to the letter, but they heavily influence agency actions, and companies plan their mergers—or decline to merge—based on those guidelines. This round of revisions lacks transparency. Revisions usually have publicly available advance drafts, open hearings, input from panels of outside experts, and other accountability measures. This round of revisions has had almost none of that. About the only transparency measure current FTC Chair Lina Khan has permitted so far has been a public comment period.

While it is difficult to comment on something when the agency is not allowing anyone outside the agency to read it, my colleague Jessica Melugin and I weighed in with some principles for effective merger guidelines (footnote omitted):

• First, the process requires more transparency than the FTC is currently providing.

• Second, vertical mergers should be presumed to be competitive.

• Third, if the FTC’s policy goal is to have fewer mergers, then the policy solution lies outside antitrust enforcement. Not everything is an antitrust issue.

Our policy recommendations for improving transparency include adopting a set procedure for guideline revisions. An off-the-shelf option is to follow the Administrative Procedure Act’s (APA) notice-and-comment rulemaking process. Another option is an in-house version of the APA process that includes public drafts, open hearings, an expert panel, and a public comment period. Additionally, all merger cases should take place in independent Article III courts, not in the FTC’s in-house administrative courts, where the agency pays the judges’ salaries and sets the procedures.

Vertical mergers should be presumed competitive. They are a form of the old make-it-or-buy-it decision that every company, household, and individual faces daily. The answer to these decisions, whether at the individual or the firm level, often depends on which option has lower transaction costs. The FTC’s merger guidelines should require the agency to consider potential transaction cost savings in proposed deals.

The FTC, when reviewing vertical mergers, should also consider the potential elimination of double marginalization (EDM), which results in lower consumer prices. Every company in a vertical supply chain marks up the price to earn a profit. Vertical mergers eliminate some of these multiple-markup opportunities. The evidence shows that these EDM savings typically result in lower consumer prices.

In merger reviews where the FTC can prove that a vertical merger would raise rivals’ costs, this should be measured against consumer benefits due to EDM. The FTC’s list of risks arising from mergers should be equally applied to risks of denying mergers—namely, whether blocking a merger “can lead to higher prices, fewer or lower-quality goods or services, or less innovation.” If consumers benefit on net, the deal should be presumed competitive.Antitrust policy is supposed to protect the competitive process, not this or that competitor.

Finally, if the FTC’s policy goal is to reduce the number of mergers, the answers often lie outside of antitrust. The FTC’s guidelines should require it to consider less intrusive policy alternatives. For example, post-Sarbanes-Oxley and Dodd-Frank financial regulations make raising capital and initial public offerings (IPOs) costly and difficult. By comparison, a firm in the process of scaling up may find it easier to be acquired than to run through the gamut of financial regulations to go public.

That said, the FTC should adopt an agnostic approach regarding the number and size of mergers. Mergers are neither inherently good nor bad; they are part of the ongoing competitive process.

Our full comments are posted here. The full FTC docket, including more than 400 other public comments, is here.

See also the recent CEI paper by former FTC chair Timothy J. Muris and former FTC Bureau of Economics director Bruce H. Kobayashi on the stalled Illumina-GRAIL merger, which would lead to improved early cancer detection tests. CEI’s dedicated antitrust site is here.

The FTC’s public comment period is open to the public, and is open until April 21. If you would like to add your own comments, you can submit them here.

Yesterday, I wrote about four problems with Sen. Elizabeth Warren (D-MA) and Rep. Mondaire Jones (D-NY)’s new antitrust bill, the Prohibiting Anti-Competitive Mergers Act. There is a fifth problem: Its $5 billion threshold for automatically rejecting mergers is not indexed for inflation.

That is important. If inflation continues at its current 7.9 percent annual rate, the $5 billion threshold would fall to $4.6 billion in current dollars after just one year. Even if inflation gets back under control relatively quickly, this “bracket creep” effect would, after a few years, increasingly affect mergers outside of Sen. Warren and Rep. James’ big tech targets. Maybe this is by design, and maybe it isn’t. Either way, it’s bad policy.

Mission creep is a serious problem in antitrust policy, as I also pointed out earlier this week in a letter to a conservative state attorney general who wants to use antitrust enforcement to punish progressive political advocacy. Antitrust policy is supposed to be about competition.

The neo-Brandeisian movement that inspired the Warren-Jones bill also wants to expand antitrust regulation. Its advocates see it as a way to address economic inequality, democracy, and climate change, among other competition-unrelated issues.

This new bill, advertised at targeting big tech companies, would, after a few years of even moderate inflation, make that kind of mission creep inevitable. It would affect industries with low levels of market concentration and little to do with today’s tech bugbears. And it would have a chilling effect across the economy on new innovations and new ways to find lower prices for consumers.

There is yet another antitrust bill in Congress. The Prohibiting Anticompetitive Mergers Act, sponsored by Sen. Elizabeth Warren (D-MA) and Rep. Mondaire Jones (D-NY), seeks to prevent big tech mergers larger than $5 billion. While companies could appeal this automatic denial in court, they would have to prove the Federal Trade Commission, the Justice Department, or both acted in an “arbitrary and capricious” manner in denying a merger. That is an uphill climb that stacks the deck against companies, and may dissuade many from even trying.

Additionally, it would empower regulators to retroactively undo completed mergers if they result in the merged entity having a market share over 50 percent at some point in the future.

There are several problems with the bill. First, it might not stay on the books for long if it passes, because the U.S. Constitution prohibits ex post facto laws. Unwinding past mergers that were legal at the time they were approved almost certainly qualifies as ex post facto, and courts are unlikely to look favorably on any unwinding attempts if they are met with legal challenges.

Second, the 50 percent market share threshold for enforcement is arbitrary. Fifty percent of which market? Regulators are free to define that as narrowly as they choose. As I’ve noted before, any market can be a monopoly if you define it narrowly enough. The relevant market fallacy is already too common in antitrust. This bill would be an open invitation for regulators to abuse it even further. This is another area where regulators frequently run into trouble in court.

Third, good policy is predictable and stable. The Prohibiting Anticompetitive Mergers Act would be neither. Companies and investors need to be able to plan ahead to bring new innovations or pursue new ways to lower prices. If they try something only to have it undone by regulators after the fact, why even bother? This chilling effect is one of antitrust policy’s most significant costs, and it is often unseen.

Fourth, not everything is an antitrust issue. There is a reason so many startups seek to be acquired by big tech companies: overly burdensome financial regulations. The Sarbanes-Oxley and Dodd-Frank laws make it difficult for growing companies to raise capital on their own or go public. It is often easier for a startup to sell out to a bigger company that already has those resources in-house. If Sen. Warren and Rep. Jones want fewer big tech acquisitions, they should make financial regulations more reasonable, so smaller firms can get the capital they need while staying independent.

Those are just the start of the Prohibiting Anticompetitive Mergers Act’s problems. It is unlikely to pass, since Sen. Amy Klobuchar (D-MN) and Rep. David Cicilline (D-RI), two of Congress’ most powerful antitrust voices, conspicuously declined to support it. Even if it is more of a statement bill than a serious proposal, it is still important to nip it in the bud. There are better ways to make the economy more competitive.