The US Department of Justice (DOJ) and the Federal Trade Commission (FTC) (collectively, “the Agencies”) have solicited public comments on the revisions that the Agencies are making to the Horizontal Merger Guidelines, which are used by the Agencies to evaluate the potential competitive effects of mergers and acquisitions under the federal antitrust laws. Economists from NERA’s Global Antitrust and Competition Policy Practice submitted comments on the proposed revisions on 3 June 2010. The authors believe that the proposed Horizontal Merger Guidelines (“Proposed Guidelines”) appropriately shift the focus of merger analysis, but that the Proposed Guidelines could be further revised or clarified in four important ways.

The Proposed Guidelines appropriately shift the focus of merger analysis in five principal ways. First, the Proposed Guidelines describe an approach that emphasizes empirical analysis and the various types of evidence that the Agencies will consider in evaluating competitive effects. Second, they reflect a shift towards direct competitive effects analysis and away from market definition as the first step in a merger review. Third, they recognize that the competitive effects of a merger potentially extend beyond price effects to include effects on innovation, product variety, product quality, and service, all of which, along with price, are determinants of consumer welfare. Fourth, the Proposed Guidelines are useful because they reflect actual agency practice and approaches to merger review. Fifth, the illustrative examples in the Proposed Guidelines are particularly valuable because they add to the transparency by describing how those principles are likely to be applied.

The authors’ suggestions on how the Proposed Guidelines could be further revised or clarified fall into four categories:

1. They strongly urge that the Proposed Guidelines explicitly make the point that it is not reliable to use market shares to evaluate the degree of competition among products or firms when the assumptions of the market share approach have not been checked for consistency with the facts that describe the nature of consumer demand in the markets at issue.
2. They argue that the proposed standard for evaluating whether entry is likely to be sufficient to discipline supracompetitive pricing post-merger has been raised in a way that is not economically justified. In particular, requiring the scale of entry to be at least the scale and scope of one of the merging firms generally will be too stringent a standard.
3. They explain why a market definition test based on an analysis of value-added prices focuses the analysis too narrowly. In many cases, the value-added service is not actually purchased by customers on a standalone basis in the marketplace.
4. They explain why the competitive effects discussion in the Proposed Guidelines should include an integrated assessment of the cost efficiencies and output-enhancing activities that affect overall prices or output. These efficiencies are as much a competitive effect of the merger as any price effect due to reduced rivalry. A competitive effects analysis that leaves efficiencies for a separate review is flawed in that it implicitly gives lesser weight to the procompetitive role that the merged firm may play in the market post-transaction.

Additional information regarding the Horizontal Merger Guidelines Review Project is available at http://www.ftc.gov/bc/workshops/hmg/index.shtml.