Steven C. Salop & Fiona Scott Morton, The 2010 HMGs Ten Years Later: Where Do We Go From Here? Georgetown Law Faculty Publications and Other Works 2285 (June 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3628548
In the previous issue of the Source, Adam Di Vincenzo, Brian Ryoo, and Joshua Wade offered an insightful discussion of the evolution and the role of market definition in the 2010 Horizontal Merger Guidelines (HMGs). Their article was in celebration of the 10th anniversary of those Guidelines. A recent paper by two leading antitrust scholars and practitioners, Steven C. Salop and Fiona Scott Morton, also uses this anniversary to offer their views as to how the next iteration of the HMGs can further improve the efficacy of those Guidelines in preventing and deterring anticompetitive mergers.
Excessive Focus on False Positives Leading to Under-Enforcement
The foundation for the Salop-Scott Morton (SSM) recommendations is the view that current antitrust enforcement has become too permissive, resulting in considerable consumer harm. Largely propelled by the “Chicago School” in the SSM view, the paper argues that there has been a misplaced effort to avoid challenging a merger that is not anticompetitive—i.e., avoiding a “false positive.” This comes at the cost of missing the “false negatives” that permit anticompetitive mergers to slip through the antitrust screens because of the high level of certainty the agencies (and the courts) require for a successful challenge. As evidence of under-enforcement, SSM cite a number of econometric analyses of cleared consummated mergers suggesting that these mergers led to reduced competition and higher prices.
SSM argue that requiring such a substantial likelihood that the challenged merger will be anticompetitive is misguided. Put differently, the agencies demand near certainty of post-merger anticompetitive conduct before a merger challenge. But SSM note that the legal standard “requires only an ‘appreciable risk’ or a ‘reasonable probability’ that competition will be reduced.” SSM further note that “the HMGs are intended to be consistent with a merger law that is not premised on . . . an overarching focus on preventing false positives . . . .” In particular, SSM underscore the point that the HMGs “reflect the congressional intent that merger enforcement should interdict competitive problems in their incipiency and that certainty about anticompetitive effect is seldom possible and not required for a merger to be illegal.”
SSM also point to evidence that resources required for effective enforcement have substantially lagged behind the increase in merger activity and the dollar value of mergers, contributing to under-enforcement. Faced with resource constraints, the agencies have naturally focused on the most egregious anticompetitive mergers consistent with the HMGs, with a very high percentage of those mergers receiving a second request being successfully challenged.
Against this backdrop, SSM suggest a number of “fixes” to remedy the perceived current under-enforcement. Many of the “fixes” are directed at reducing the agency burdens required to mount a successful challenge and so mitigate the costs of under-enforcement.
Rebuttable Presumption: HHI
The paper notes that over time, the HHI-based anticompetitive presumption (what SSM call “the red zone”) has become more permissive, increasing from a level of 1800 and a delta of 100 to a level of 2500 and a delta of 200. SSM observe that “by announcing this higher internal threshold, the HMGs communicate to courts that a higher threshold for the structural presumption is warranted.”
While SSM do not identify a clear reason for that change, they note the possibility that the more stringent HHI thresholds are the result of the increasing willingness of the agencies to tolerate potentially anticompetitive mergers so as to focus limited enforcement resources on only egregious mergers (which, as SSM note, have HHIs well above the current presumption threshold in the HMGs). If, over time, proposed mergers have even higher HHIs, the agencies may challenge those mergers (while clearing others that are also above the threshold but not by as much). The courts may regard that outcome as indicating that the agencies have effectively raised the HHI thresholds again. In response, SSM advise that the “red zone” thresholds should be lowered to reduce the emphasis on preventing false positives.
Proposed Rebuttable Presumption: GUPPIs
SSM argue that the HMGs should be revised to establish a rebuttable presumption relying on the Gross Upward Pricing Pressure Index (GUPPI) even if the merger does not satisfy the HHI presumption. The GUPPI measures the extent to which the lost sales of one of the merging firms triggered by a price increase are diverted to the second merging firm. Given profit margins for both firms, the greater the diversion to the merging partner, the greater the incentive of the merging firm to raise price post-merger. The GUPPI measures that incentive. SSM suggest that a 10% GUPPI would be a reasonable anticompetitive presumption. A 10% GUPPI will satisfy the 5% SSNIP test for an antitrust market, meaning that the merging firms themselves constitute a relevant antitrust market.
SSM observe that while a GUPPI-based presumption could be implemented by the agencies, it would not now constitute a legal anticompetitive presumption. But agency incorporation of the GUPPI presumption “would be a first step to a legal presumption since the HMGs are designed to influence (i.e., ‘assist’) the law.”
Proposed Rebuttable Presumptions: Potential Competition
Assessing potential competition from a nascent competitor has traditionally been part of an agency investigation. But a renewed focus on nascent competition has led to a much more dire term of art: “killer acquisition,” i.e., the acquisition of a nascent rival producing a product that is either a substitute or complement to that of the acquiring firm but which could otherwise grow to compete with the acquirer’s product. Among other difficulties, challenging a potential competitor acquisition typically requires evidence that the would-be potential entrant has a high likelihood of entry and, if that occurs, a significant competitive effect, a plan for entry, an assessment of the risk that the entrant would not have been successful, and the absence of a sufficient number of alternative entrants. SSM conclude that “[t]hese requirements increase the risk of false negatives as the level of uncertainty inherent in all these predictions is high even while the mean effects may be large.”
To remedy these infirmities, SSM suggest that the agencies directly assess “the consumer welfare effects of the various possible [entry and growth] paths [of the nascent rival] and predict the expected value impact on consumer welfare.” Even if the likelihood of a successful entry is low, the expected loss in consumer surplus can be substantial.
Importantly, SSM recommend that the HMGs include an anticompetitive presumption if a leading firm acquires a small, nascent, or potential competitor. In addition, the HMGs should include an anticompetitive presumption with respect to mavericks in particular “if one of the merging firms in a concentrated market has been a maverick competitor.”
The revised HMGs would rely on these presumptions even if the HHI thresholds are not met. Of course, the courts would need to be convinced that these presumptions are justified, but as previously noted, the use of the presumption by the agencies may influence the courts’ findings.
Modifying Econometric Analysis to Better Account for False Negatives
In evaluating econometric evidence, a key point SSM highlight is that the conventional statistical approach is biased against a finding of anticompetitive effects from a merger and so increases the agency burden to satisfy an anticompetitive presumption in challenging that merger. For example, suppose the adverse competitive effects of a merger were tested statistically and the conclusion turned on whether the relevant “competitive parameter” in an econometric analysis was statistically significant. In conventional practice, if that parameter is significant in (say) 1 out of 100 random outcome possibilities (statistically significant at the 1% level, a standard significance level), one could conclude that the finding is so “rare” that it was unlikely to occur by chance. That result, in turn, would be viewed as supporting a conclusion that the merger would be anticompetitive. Colloquially, before a merger challenge, one wants to be very certain that the merger was anticompetitive by using stringent significance levels (1%, 5%, 10%) in testing for adverse competitive effects.
Suppose the relevant parameter is not statistically significant at these levels. That itself does not mean that the merger is not anticompetitive. It only means that given the emphasis in the current regime of avoiding false positives and so requiring a very high degree of statistical certainty, the high statistical standard would not “identify” that merger as anticompetitive even if it were the case. As SSM argue, “an exclusive focus on false positives is undesirable, both in terms of the text of the law and also from the perspective of consumer welfare.”
To better account for false negatives in the competitive analysis, SSM suggest a “Bayesian” approach, at least at a conceptual level. At the conceptual level (and ignoring statistical detail in this review), first develop an estimate (or judgment) of the likely competitive effects based on (say) a structural presumption, prior studies (e.g. retrospectives), and documents. That may suggest that the merger would be anticompetitive. Second, the conclusion in this first step in the analysis would then be modified (or not) in light of the econometric evidence. If the econometric evidence is weak, that may result in modifying the initial prior that the merger would be anticompetitive.
Other Suggested Modifications
SSM urge the agencies (and scholars) to develop a more complete framework for coordinated effects analyses to replace the “checklist” approach, not a novel suggestion but still an important point. SSM note that some recent papers have empirically identified the adverse consumer effects of collusion and the kinds of circumstances that facilitate that collusion.
Further, SSM highlight the recent substantial and growing literature on the effect of institutional investments in rivals on softening downstream competition. A discussion of the potential anticompetitive effects of common ownership in the HMGs would be useful, as would further agency research into the effect of common ownership on competition.
Finally, the paper suggests that the HMG revisions might consider accounting for the possibility of substantial but low probability shocks to the market that can lead to higher prices if, for example, the merger consolidates plants to take advantage of (say) scale economies. While a seeming static efficiency, fewer plants each with greater capacity might be more prone to a disruption if (say) COVID-19 were to close one of the now larger plants. The resulting pricing pressure might have been mitigated if there were no post-merger plant closures, even if those plants were higher cost than the consolidated plants. SSM consider this outcome an adverse competitive effect that might be reckoned in the competitive analysis as a cost to attaining the efficiencies. But SSM acknowledge the issues of how to gauge both the likelihood of low probability events and the magnitude of the harm if they occur are substantial at best.
Some Concluding Observations
The gravamen of this paper is the view that the agency enforcement of antitrust policy has been so focused on avoiding the harm from false positives that it has all but ignored the costs of false negatives and so resulting in clearing mergers harmful to consumers. In addition, this under-enforcement of antitrust policy has been amplified by resource constraints at the agencies. Thus, the “lax” enforcement policy is a result of the combination of these two characteristics, and proposed revisions to the HMGs may help remedy this perceived policy failing. Those with views that under-enforcement is not an issue, i.e., the focus on false positives is appropriate, will no doubt find the SSM suggestions as likely to harm consumers.
While the “Chicago School” may have emphasized the importance and the cost of false positives (to the near exclusion of harms from false negatives), one might wonder whether the enforcement policies would have been any different if SSM’s revisions were adopted and if the driving force for case selection was a resource-constrained agency. One would expect that the agencies would in any event focus on challenging the most egregious mergers, an outcome consistent with the broad enforcement patterns cited by SSM. Nonetheless, with no relaxing of the resource constraint but with “relaxation” of the HMGs’ constraints as suggested by SSM, the mix of cases pursued by the agencies would likely change. For example, more resources might be diverted to nascent competitor acquisitions. Overall, if this new case mix is generated by focusing on those mergers that are likely to create the most consumer harm, the proposed revisions to the HMGs would improve consumer welfare even with resource constraints, if the SSM concerns are valid. And by easing the agency burdens in developing additional rebuttable presumptions, resources may be released to expand the enforcement frontier.
Against that backdrop, the SSM paper should be regarded more as a menu of HMG changes that may improve enforcement and consumer welfare rather than as one that has filled in all of the details of those changes, a point acknowledged by SSM. While more than food for thought, many of the paper’s recommendations will require considerable effort to implement, if they can be implemented at all. That would include developing a coordinated effects framework, taming the speculation that can accompany potential competition concerns, and providing much greater guidance on econometrics “reform.” And the devil is in the details of how these changes are implemented. Still, in principle, the HMGs’ incorporation of some important presumptions could be modified relatively easily, such as lowering the HHI “red zone” thresholds, including a GUPPI-based presumption, and including a leading-firm presumption regarding mergers of actual rivals, nascent competitors, and mavericks.
With respect to econometric “reform” in particular, while some or many regard the false-positive bias of conventional hypothesis testing as excessive, the practical solution to optimally reducing this bias is not at all obvious. The SSM-suggested Bayesian approach could conceptually at least provide a basis for looking at the statistical conclusions in a broader context, but the implementation details are sparse. Having said that, in my own view, research that creates a more optimal balance between false negatives and false positives would advance the interests of consumers.
However, the suggestion that merger policy should account for the low probability occurrence of a substantial market disruption may be a bridge too far. Even if an otherwise competitive merger would render a response to the disruption more difficult and even if in principle antitrust policy should account for these effects (and many would likely argue that would be inappropriate), SSM acknowledge the important issue of “whether the potential for such shocks can be identified in advance and whether the harms are sufficiently high to make such low probability events worth taking into account in merger analysis.”
In sum, the paper is a cornucopia of ideas on how to improve antitrust enforcement by better accounting for the cost of false negatives, ideas well worth exploring. Some ideas are easily implementable if a consensus emerged that supported those ideas. Others will require much further research and likely substantial debate but the absence of detail in these proposals should be no bar to considering their merits.
—John R. Woodbury