Market Power, Not Consumer Welfare: A Return to the Foundations of Merger Law

Congress enacted the Clayton Act in 1914, the Celler-Kefauver Act in 1950, and the Hart-Scott-Rodino Act in 1976 to retard the trend toward corporate consolidation that prevailed in those eras. Section 7 of the Clayton Act prohibits mergers and acquisitions where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” While the language is open to interpretation, it plainly does not say that mergers that may substantially lessen competition or tend to create a monopoly are nevertheless permitted if they advance efficiency or lower prices.

In a series of decisions in the 1960s, the Supreme Court honored Congress’s intent by repeatedly holding that Section 7 does not reflect concerns about prices or efficiencies, and it has never departed from that view. Yet today, the statute is understood in most legal and economic circles in a different fashion: as a kind of cost-benefit analysis that prohibits mergers that increase prices—what I call the “price test,” though it is more familiarly known as the “consumer welfare standard.” Taken to its logical extreme, this view implies that a merger to monopoly—a merger of two firms into one—could be lawful even though the replacement of a duopoly with a monopoly substantially lessens competition and even more obviously “tend[s] to create a monopoly,” in the words of the usually overlooked second clause of Section 7. This implicit revision of Section 7 has weakened merger enforcement, particularly in the case of horizontal mergers, and weaker merger enforcement has been blamed for a range of social ills—including growing concentration, rising prices, stagnant growth, and soaring inequality—resulting in calls for a revival of antitrust law enforcement.

How did this come about? I will argue that the meaning of Section 7 changed in the 1960s and 1970s at the hands of various academics; while their views were initially controversial, their positions became entrenched in the following decades. The academics, mainly economists, took their view to the Department of Justice and the Federal Trade Commission, where they served in policymaking roles, and implemented their ideas in the various merger guidelines issued by those agencies. The lower courts, while initially skeptical of efficiency arguments because of Supreme Court precedents, began to yield to the influence of the agencies’ guidelines, though the transition is not complete. At the same time, I argue that the cost-benefit view of Section 7 expanded as the academics came to see efficiency not only as a defense to a prima facie case under Section 7 but as the basis of the prima facie case itself. This position was absorbed by the courts with little discussion.

The story is a case study of the influence of research on policy, but it has an unusual twist: the employment of key academics in policy positions appears to have played an important, possibly decisive role, in this development. As the law in practice has diverged from statutory language and public policy, the story also raises questions about the role of technocracy in a democratic system.

The claim that the standard for evaluating mergers under Section 7 has changed over time, thanks to the influence of economists, is not a new one. As Herbert Hovenkamp and Carl Shapiro observe:

[M]erger policy is one area where the courts have done a fairly good job of tracking prevailing economic thinking. This has been facilitated by the relatively general language of Section 7 of the Clayton Act, combined with the ability of the DOJ and the FTC, with their deep economic expertise and experience and strong links to academia, to incorporate advances in economic learning into their submissions to the courts. As a leading example of the flexibility of Section 7 of the Clayton Act, both the rise and subsequent decline of structuralism in merger enforcement were accomplished without significant reliance on statutory amendment.

The goal of this paper is not to quarrel with this claim, but to document it and, in the process, to raise questions about the optimistic account of these authors. I argue that the incorporation of advances in economic learning has also introduced distortions—repudiation of congressional intent and broadly supported public policy, and the implementation of a narrow standard for merger evaluation that disregards important social costs of corporate consolidation.

The paper proceeds as follows. Part I describes the meaning and purpose of Section 7 using conventional tools of statutory interpretation and Supreme Court opinions that have provided further elaboration. Part II describes the academic developments and the reception of economic theory in the agencies and courts. Economists and economically oriented lawyers argued and then assumed that a hybrid cost-benefit/price test should be used for merger analysis; most of their work focused on how this should be done. Subsequently, some economists and law professors argued that the theory, which was developed in the 1960s and 1970s, actually reflected the law, which was enacted much earlier. The agencies have mostly accepted this economic theory that mergers should be permitted, regardless of their impact on competition, as long as they do not increase prices. The courts have done so more reluctantly but with similar results.

In Parts III and IV, I discuss the cost of these developments and the possibility of alternatives. I argue that the plain meaning of the statute reflects a concern with the economic power of corporations, or what today is called “market power,” and that this concern reflects a variety of plausible though often-diffuse and hard-to-measure social costs, which I evaluate based on the latest empirical literature. I argue that strong legal and plausible policy grounds require that the price test be replaced with a market-power test, and I suggest that a viable way to implement such a test is through a “margin test,” according to which a merger will be presumptively held to substantially lessen competition if it is likely to increase industry-wide average market power as measured by the expected impact on the margins of the merging firms or the margin of the average firm in the industry.

This paper aims to focus laser-like on merger law, with emphasis on horizontal mergers, but its arguments abut and draw upon two large overlapping literatures, one on the Chicago School and the other on the consumer welfare standard, joining in criticisms of both. The focus on merger law helps clarify the problems—conceptual, legal, normative—with the former methodology and the latter standard.

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