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.
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.