Commentary on the Horizontal Merger Guidelines U.S. Department of Justice Federal Trade Commission March 2006 Table of Contents Foreword ........................................................................ v Introduction ..................................................................... 1 Governing Legal Principles ....................................................... 1 Overview of Guidelines Analysis .................................................. 2 The Agencies’ Focus Is on Competitive Effects .................................... 2 Investigations Are Intensively Fact-Driven, Iterative Processes ...................... 3 The Same Evidence Often Is Relevant to Multiple Elements of the Analysis ........... 3 Commentary Outline ............................................................ 4 1. Market Definition and Concentration ........................................... 5 Mechanics of Market Definition ................................................... 5 The Breadth of Relevant Markets .................................................. 6 Evidentiary Sources for Market Definition .......................................... 9 The Importance of Evidence from and about Customers............................ 9 Evidence of Effects May Be the Analytical Starting Point .......................... 10 Industry Usage of the Word “Market” Is Not Controlling ......................... 11 Market Definition and Integrated Analysis......................................... 12 Market Definition Is Linked to Competitive Effects Analysis....................... 12 Market Definition and Competitive Effects Analyses May Involve the Same Facts .... 14 Integrated Analysis Takes into Account that Defined Market Boundaries Are Not Necessarily Precise or Rigid ....................... 15 Significance of Concentration and Market Share Statistics ............................ 15 2. The Potential Adverse Competitive Effects of Mergers ......................... 17 Coordinated Interaction ......................................................... 18 Concentration ............................................................... 20 Additional Market Characteristics Relevant to Competitive Analysis ............... 20 Role of Evidence of Past Coordination .......................................... 22 Maverick and Capacity Factors in Coordination .................................. 24 Unilateral Effects ............................................................... 25 Unilateral Effects from Merger to Monopoly..................................... 26 Unilateral Effects Relating to Capacity and Output for Homogeneous Products ...... 27 Unilateral Effects Relating to Pricing of Differentiated Products .................... 27 Unilateral Effects Relating to Auctions .......................................... 31 Unilateral Effects Relating to Bargaining ........................................ 34 iii 3. Entry Analysis ................................................................ 37 Likelihood of Entry ............................................................. 38 Sunk Costs and Risks Associated with Entry..................................... 38 Consumer Products........................................................ 38 Industrial Products ........................................................ 40 Other Significant Obstacles to Successful Entry .................................. 42 Cost Disadvantages of Entrants ................................................ 45 Timeliness of Entry ............................................................. 45 Sufficiency of Entry ............................................................. 46 4. Efficiencies ................................................................... 49 Efficiencies the Agencies Consider ................................................ 49 Merger-Specific Efficiencies ................................................... 49 Cognizable Efficiencies ....................................................... 51 Verification of Efficiency Claims .................................................. 52 Sufficiency of Efficiencies ........................................................ 55 “Out-of-Market” Efficiencies ..................................................... 56 Fixed-Cost Savings ............................................................. 57 Supporting Documentation ...................................................... 59 Referenced Agency Materials ....................................................... 61 Case Index ....................................................................... 63 U.S. Department of Justice Cases ................................................. 63 Federal Trade Commission Cases ................................................. 66 iv Foreword Mergers between competing firms, i.e., the Department’s and Commission’s increased use “horizontal” mergers, are a significant dynamic of explanatory closing statements following force in the American economy. The vast majority merger investigations. of mergers pose no harm to consumers, and many The Commentary follows on the Agencies’ produce efficiencies that benefit consumers in the February 2004 Merger Enforcement Workshop. form of lower prices, higher quality goods or Over three days, leading antitrust practitioners services, or investments in innovation. Efficiencies and economists who have examined merger policy such as these enable companies to compete more and the Guidelines’ analytical framework effectively, both domestically and overseas. discussed in detail all sections of the Guidelines. Fourteen years ago, to describe their The Workshop focused on whether the analytical application of the antitrust laws to horizontal framework set forth by the Guidelines adequately mergers, the Federal Trade Commission and the serves the dual purposes of leading to appropriate U.S. Department of Justice (collectively, the enforcement decisions on proposed horizontal “Agencies”)—the two federal Agencies mergers, and providing the antitrust bar and the responsible for U.S. antitrust law enforcement— business community with reasonably clear jointly issued the 1992 Horizontal Merger guidance from which to assess the antitrust Guidelines (the “Guidelines”). In 1997, the enforcement risks of proposed transactions. Agencies jointly issued revisions to the Guidelines’ Workshop participants generally agreed that section on Efficiencies. Since these publications the analytical framework set out in the Guidelines were issued, the Agencies have consistently is effective in yielding the right results in applied the Guidelines’ analytical framework to individual cases and in providing advice to parties the horizontal mergers under their review. considering a merger. Thus, the Agencies Today, to provide greater transparency and concluded that a revamping of the Guidelines is foster deeper understanding regarding antitrust neither needed nor widely desired at this time. law enforcement, the Agencies jointly issue this Rather, the Guidelines’ analytic framework has Commentary on the Guidelines. proved both robust and sufficiently flexible to The Commentary continues the Agencies’ allow the Agencies properly to account for the ongoing efforts to increase the transparency of particular facts presented in each merger their decision-making processes. These efforts investigation. include the Agencies’ joint publication of Merger The Agencies also have observed that the Challenges Data, Fiscal Years 1999–2003 (issued antitrust bar and business community would find December 18, 2003), the Commission’s subsequent useful and beneficial an explication of how the publication of Horizontal Merger Investigation Agencies apply the Guidelines in particular Data, Fiscal Years 1996–2003 (issued February 2, investigations. This Commentary is intended to 2004 and revised August 31, 2004), the respond to this important public interest by Department’s Merger Review Process Initiative enhancing the transparency of the analytical (issued October 12, 2001 and revised August 4, process by which the Agencies apply the antitrust 2004), the Reforms to the Merger Review Process laws to horizontal mergers. at the Commission (issued February 16, 2006), and Deborah Platt Majoras Thomas O. Barnett Chairman Assistant Attorney General for Antitrust Federal Trade Commission U.S. Department of Justice March 2006 v Introduction Governing Legal Principles the analytical framework and standards, consistent with the law and with economic The principal federal antitrust laws applicable learning, that the Agencies use to assess whether to mergers are section 7 of the Clayton Act, section an anticompetitive outcome is likely. The unifying 1 of the Sherman Act, and section 5 of the Federal theme of that assessment is “that mergers should Trade Commission Act. Section 7 proscribes a not be permitted to create or enhance market merger the effects of which “may be substantially power or to facilitate its exercise.” Guidelines to lessen competition.” Section 1 prohibits an § 0.1. The Guidelines are flexible, allowing the agreement that constitutes an unreasonable Agencies’ analysis to adapt as business practices “restraint of trade.” Section 5, which the Federal and economic learning evolve. Trade Commission enforces, proscribes “unfair In applying the Guidelines to the transactions methods of competition.” Over many decades, the that each separately reviews, the Agencies strive federal courts have provided an expansive body of to allow transactions unlikely substantially to case law interpreting