The Role of Merger Guidelines
The principal goal of guidelines should be to explain to antitrust practitioners and business people how the Agencies evaluate whether a prospective merger is likely to cause anticompetitive harm. Such guidance should be founded on the fundamental economic principles that inform whether mergers are likely to result in price increases or other diminutions of consumer welfare. In particular, guidelines should include explanations of how harm may arise from various types of mergers, the types of data and information that the agencies find useful in their assessment of mergers, and circumstances likely to lead to requests for additional information or ultimately result in the Agencies filing a complaint.
Economic principles are fundamental to the determination of merger harms and provide an objective platform on which guidelines can be based. Economists often debate which economic factors dominate in merger analysis, but they generally agree on the set of fundamental economic incentives that dictate merger harms. For example, economic principles dictate that a merger of firms with close substitutes will incentivize merging parties to raise prices or lessen quality absent significant mitigating factors such as cost-reducing merger efficiencies or low barriers to entry. Guidelines should clearly set forth relevant economic principles and outline the types of qualitative and quantitative evidence the Agencies consider. Guidelines that do this well do not require or benefit from legal arguments like those in the 2023 Merger Guidelines.
One of the benefits of focusing on core economic issues is that it allows for stable, enduring guidance. This, in turn, provides clarity to practitioners inside and outside the Agencies, and permits firms to contemplate mergers and acquisitions understanding the metrics by which they will be scored. As a result, an ideal set of guidelines should be citable by both the Antitrust Agencies and merging parties when explaining why a given transaction does–or does not–pose a threat to competition and consumer welfare.
Describing the economic framework that is actually used by staff to evaluate mergers informs the business community, makes coherent enforcement both more credible and more predictable, and thus may help prevent obviously anticompetitive mergers. This does not mean the guidelines should never be updated. On the contrary, the framework should be changed as the economics literature advances so as to continue to offer insight into how and why some mergers may harm competition, as well as the means by which the Agencies will seek to distinguish these transactions from procompetitive or benign transactions. For instance, economists are actively generating new results on topics such as vertical mergers, the effects of mergers on labor, and the tools that can be used to predict merger effects. In our experience it is rare for a single paper or set of papers to dramatically shift the approach of agency staff to merger analysis. This means that updates to guidelines can be periodic, occurring as needed to reflect the evolving consensus in the economics literature.
Although many of the fundamental economic principles of merger analysis have been known and generally agreed upon for decades, the tools and evidence the Agencies consider in their evaluation of mergers have evolved and will continue to need to evolve to reflect the characteristics of modern economies. Hence, guidelines should be designed to be general enough to accommodate the application of new methods and learning in pursuit of an enduring objective, the preservation of consumer welfare. Moreover, an emphasis on core objectives should enable them to be updated while maintaining the fundamental economic principles that are their foundation. Guidelines should adapt to account for developments in fast-moving economies, but it is misguided and counterproductive to set aside decades of learning because an administration feels mergers in certain industries have been under- or over-policed.
As we explain further below, the 2023 Merger Guidelines have caused confusion in some places where they appear intentionally to deviate from economic principles in analyses of likely competitive harms.
Where the 2023 Guidelines Went Wrong
More than past guidelines, the 2023 Merger Guidelines appear to reflect the political views and litigation aspirations of the then-current administration, as opposed to well-understood and agreed-upon economic fundamentals that indicate likely merger harms. Whether inadvertently or by design, the 2023 Guidelines marginalized certain economic principles that were seen as posing challenges to merger enforcement. While these changes may have been anticipated to boost the short-term litigation prospects of the Agencies, over the long-run, if maintained, they may be more likely to reduce the credibility of Agencies and thus to endanger meritorious enforcement. Moreover, bucking precedent, the 2023 Guidelines include numerous citations to caselaw to support then-current agency positions. Hence, the 2023 Guidelines read as less grounded in principles and more like a litigation position brief for plaintiffs challenging a merger than previous guidelines.
Several areas in the 2023 Merger Guidelines stand out for their departures from accepted economic consensus. With respect to market definition, the 2023 Merger Guidelines reduce reliance on fundamental economics in favor of less rigorous approaches. Since the introduction of the hypothetical monopolist test (HMT) in the 1982 Guidelines, there has been an increasing recognition by antitrust practitioners that market definition (and associated measures of market shares) should, to the extent possible, reflect the analysis of the likely competitive effects of a merger. The HMT explicitly recognizes this link by focusing attention in market definition on groups of products that are close substitutes for one another. There is no doubt that reasonable people may disagree on the implementation of the HMT in any particular case, but that does not make the economic principles that underlie the HMT and a focus on competitive effects any less relevant.
Consistent with that, previous iterations of guidelines increasingly had recognized limitations in the probative value of market definition and market shares. By contrast, the 2023 Merger Guidelines take a more aggressive stance on structural metrics almost from the start. For instance, section 2.1 provides thresholds above which horizontal mergers are “presumed to substantially lessen competition or tend to create a monopoly,” citing previous guidelines and caselaw, prior to any discussion of what makes relevant markets relevant.
The 2023 Merger Guidelines appear to want to avoid potential challenges posed by the connection between relevant markets and competitive effects by reverting to approaches to market definition that, although supported by caselaw that is more than a half-a-century old, have only tenuous connections to the relevant economics of merger analysis. If the goal of enforcement is to preserve competition and thereby benefit the economy, the Agencies should not suggest or support tools which do not reliably advance those goals, particularly when better tools are available.
In particular, the 2023 Merger Guidelines appear to endorse methods of market definition that have no direct connection to the economics of likely competitive effects, e.g., so-called “Brown Shoe Factors,” as being co-equal with the hypothetical monopolist test. As we noted in Sandford et al. (2024), the 2023 Merger Guidelines not only explicitly reintroduce the Brown Shoe Factors to the guidelines for the first time in nearly four decades, but also, unlike previous guidelines which described such practical indicia as a means of supporting the HMT, the 2023 Merger Guidelines assert that Brown Shoe Factors are an independently valid way to define relevant markets. Although practical indicia may at times be the best available evidence on demand substitution and thus for market definition, such evidence is best used in service of the HMT and not in place of it. While prioritizing observable characteristics as Brown Show ostensibly does may sound appealing, in practice it may not always be clear what characteristics matter. In order to know whether the plaintiffs or defendants have stronger qualitative arguments, one must understand how any Brown Show characteristics correspond with consumer decision-making, i.e., how they influence consumer substitution.
In our prior work, we also described ways in which the 2023 Merger Guidelines indicate a greater reluctance to consider potential procompetitive effects of mergers that have long been recognized by economics. First, the guidelines did this implicitly by reducing the concentration thresholds under which mergers are considered presumptively problematic. Second, the 2023 Merger Guidelines changed the language that was in previous guidelines in ways that appear to make the standard of evidence required to credit merger-related efficiencies significantly more difficult for the parties to meet. Finally, the 2023 Merger Guidelines gratuitously show skepticism toward any merger efficiency. stating that “procompetitive efficiencies are often speculative.” The claim that efficiencies are often speculative is an explicitly empirical claim which lacks any clear foundation. This contrasts starkly with the 2010 Horizontal Merger Guidelines, which noted that mergers may often be associated with positive outcomes and an increase in competition.
Separately, unlike previous horizontal merger guidelines, the 2023 Merger Guidelines incorporate a guideline—Guideline 5—that describes how the Agencies intend to review non-horizontal mergers. Concerningly, the 2023 Merger Guidelines leave an impression that non-horizontal mergers are just as dangerous to competition as horizontal mergers and should be evaluated similarly. We explained in Sandford et al. (2024) why consideration of non-horizontal mergers fundamentally differs from that of horizontal mergers. For example, incentives analogous to those that can cause upward pricing pressure in horizontal mergers can cause downward pricing pressure in vertical mergers. Although economic theory is clear that non-horizontal transactions can have competition-harming effects, it is equally unambiguous that such transactions may be associated with procompetitive effects. An economic analysis of a vertical merger must balance procompetitive and anticompetitive effects, a task the 2023 Merger Guidelines explicitly disclaim by relegating analysis of procompetitive effects to a footnote stating that analysis of procompetitive effects is the responsibility of merging parties. Given a lack of empirical evidence to suggest the net effect of vertical mergers is commonly adverse to competition, there is no sound basis for the guidelines’ evident dismissal of the potential procompetitive effects that can result from vertical and conglomerate transactions. If the goal of merger guidelines is to provide guidance about how the agencies will vet and prosecute mergers likely to result in harm to consumers, the 2023 Merger Guidelines’ treatment of non-horizontal transactions is not helpful.
How Revised Merger Guidelines Can Restore Sustainable Guidance
Given the controversy surrounding the 2023 Merger Guidelines, including some of their features discussed above, the new administration may revise them in the next four years. This section explains how the 2023 Merger Guidelines could be revised to outline a framework under which the Agencies collect and analyze evidence regarding the potential competitive effects of a merger. Such guidelines would resonate more broadly with the antitrust community and be more universally relied on. Our experiences with the 2010 Horizontal Merger Guidelines, as both FTC economists and private sector economists, was that the document was commonly used as the basis of dialog between the agencies and merging parties during the course of an investigation, as well as between agencies, parties, and courts during litigation. As we have explained previously, the litigation-focused language in the 2023 Merger Guidelines makes them ill-suited for this role, and in our experiences they have not materially changed the analyses conducted by agency staff or the types of engagement between the agencies and outside parties. Our hope is that the next version of the guidelines can restore the guidelines’ rightful place as the basis for discourse between merging parties, the Agencies, and courts, which will improve the merger review process.
This is not a call for the next guidelines to take a laissez faire approach to merger enforcement. As former enforcers, and long-time practitioners, we know that competition matters, and that some proposed mergers warrant challenges. The Agencies appropriately blocked many mergers under the 2010 Horizontal Merger Guidelines, and we are unaware of any way in which enforcement would have been strengthened or more mergers blocked had those guidelines contained the non-economic language present in the 2023 Merger Guidelines. Indeed, by some measures, enforcement has decreased under the Biden administration, relative to the past several administrations. To the extent this was driven by the Agencies being unable to prioritize enforcement of harmful mergers, this is an unfortunate outcome. We hope the next version of guidelines will return to a focus on providing clear guidance on how the Agencies evaluate mergers to preserve competition and forestall the acquisition of market power, objectives wholly aligned with fundamental economics. Such an outcome may well arm Agency staff with more effective tools for identifying and prioritizing problematic mergers. In our experiences, economics can lead to more aggressive enforcement than a pure reliance on qualitative factors and a myopic focus on interpreting potentially dated caselaw, in that the bright-line rules of a legal approach can miss economically meaningful competitive effects of a merger. The goal of the guidelines should be to describe an administrable, predictable, and sound enforcement regime, rather than to change the intensity of enforcement.
It is not surprising that changes in administrations can change points of emphasis in merger enforcement. Hence, it is important that merger guidelines be flexible enough to accommodate such shifts. In most cases, this should require no change to the language in the guidelines. For example, some administrations may be willing to challenge mergers whose potential harms are more uncertain or attenuated, and views commonly vary between administrations as to which industries or sectors are most likely to present competitive problems. However, the fundamental economic principles that indicate merger harms do not shift with administrations, and thus an administration should be able to more actively pursue, say, vertical merger enforcement without any change to the guidelines simply by spending more resources developing evidence in support of the applicable economic principles or by being willing to litigate with relatively weaker evidence.
Certainly, share and concentration thresholds above which a merger is more likely to be scrutinized can be a useful signal to markets about how the Agencies evaluate horizontal mergers. The 2010 Horizontal Merger Guidelines raised the thresholds in an effort to offer more accurate guidance as to which mergers were most likely to be challenged by the agencies. The 2023 Merger Guidelines reverted to the 1997 thresholds, ostensibly in an effort to increase enforcement. We see no evidence that either change resulted in materially changed enforcement. Carl Shapiro and Howard Shelanski, two of the architects of the 2010 Horizontal Merger Guidelines, produce data indicating that the change in thresholds in the 2010 Horizontal Merger Guidelines resulted in no change in the average concentration levels associated with challenged mergers. We are unaware of a single horizontal merger challenge brought by a Biden-era Agency that would not have met the 2010 thresholds.
Such empirical evidence indicates that changing thresholds are unlikely to change enforcement, and thus should reflect actual Agency practice. To attempt to drive enforcement through the setting of thresholds is to attempt to use the tail to wag the dog. Agencies are free to place different weights on share thresholds—or even to pursue cases whose shares fall below the guidelines’ thresholds—as resources and enforcement priorities shift, but there is no clear economic basis for changing thresholds from administration to administration.
Economically moored guidelines can accommodate shifting priorities as budgets and leadership changes. Thus, there is no reason for guidelines to change with every administration, and agencies have other means to communicate policy priorities, such as statements, speeches by agency leadership, or simply through case selection which can communicate priorities by example.
It is our hope that the next iteration of the guidelines does not reflect any particular political agenda. In our view, fundamental economics are not political and thus can be a useful anchor to which the guidelines can be tethered. Because guidelines that principally reflect economics will not be political, they are more likely to be useful across different administrations with different priorities. The next guidelines should seriously consider input from academic economists, government economists, and other antitrust practitioners. The guidelines should reflect the most relevant economic principles and explain those principles to the antitrust and business communities. The 2010 Horizontal Merger Guidelines, which built on years of dialogue, represent a useful model in this regard.
Economic principles for which developing a consensus would be particularly important include the ways and extent to which mergers create efficiencies. As noted above and in Sandford et al. (2024), economists and the agencies recognize that mergers can create efficiencies. Hence, it important that the ways in which agencies assess efficiencies are clearly explained. Such a discussion also should point to ways in which merging parties’ claims of efficiencies can be substantiated. The 2023 Merger Guidelines are lacking in this respect; although we agree that merging parties are more likely to have actionable information on likely efficiencies than the Agencies, we see no reason why this balance would allow the Agencies to wash their hands of the analysis of procompetitive effects to the extent indicated by the 2023 Merger Guidelines. This is perhaps particularly true when procompetitive effects are borne out of the same change in incentives as potential adverse price effects, as is commonly true with vertical and other non-horizontal mergers. Our experience with the 2023 Merger Guidelines is that merging parties see no point in trying to substantiate merger efficiencies in advocacy because the agencies will not credit them no matter what. We do not think this reflects the relevant economics or actual merger outcomes, and we believe the lack of substantive engagement is not conducive to good policy or credible enforcement. Our hope is that the next iteration of the guidelines will offer meaningful guidance as to which merger efficiencies should be credited so that merging parties and the Agencies can have meaningful discourse around them.
If the next version of the merger guidelines continues to include a discussion of non-horizontal mergers, it should do so in a way that better reflects the consensus view of economists as to important distinctions between horizontal and vertical mergers. The 2023 Merger Guidelines give the impression that vertical mergers are just as likely as horizontal mergers to be harmful and can be analyzed using the merging parties’ shares alone. This is not a credible position as a matter of basic economics. For example, the 2023 Merger Guidelines relegate elimination of double marginalization (EDM), which derives from similar (but opposing) economic incentives as does adverse price effects resulting from a horizontal merger, to a footnote and states that EDM is subject to the same high cognizability standards as other merger efficiencies. In short, despite fundamental differences in the relevant economics, the 2023 Merger Guidelines suggest that the evaluation of horizontal and vertical mergers should be similar.
In our view, more useful merger enforcement guidance would be provided by acknowledging the fundamental differences between vertical and horizontal mergers, including in how each plausibly can cause competitive harm and merger efficiencies. As we have argued, if the goal is to block mergers that harm consumers while allowing those expected to benefit them, there is simply no substitute for serious and substantive engagement with the full range of effects on incentives caused by non-horizontal transactions. The withdrawn 2020 Vertical Merger Guidelines addressed these points in a more coherent fashion.
The economic principles included in any future guidelines should be specific enough to be useful but general enough to apply to all (or nearly all) industries, and should avoid calling out specific industries. For instance, after a string of losses in hospital cases, the FTC turned things around by providing evidence of the harmful effects of some hospital mergers and of the factors that would predict such harm. This was not accomplished by issuing guidelines specific to hospitals. The current focus on “big tech”—dating to at least the first Trump administration—has led to a consideration of tech-specific guidelines, and indeed the 2023 Merger Guidelines added a guideline specifically for platform markets. Although so-called two-sided markets may indeed present distinct issues that can usefully be described in guidelines, having a guidelines section specific to platforms is confusing.
For instance, the 2023 Merger Guidelines discuss a vertical foreclosure concern that appears to be specific to platforms (a “conflict of interest” between a platform and its participants). The document does not say whether the vertical foreclosure concerns which may be presented by platforms are distinct from those which may be presented by other industries. If they are, guidelines could usefully explain the genesis of their distinctiveness, and how it matters for enforcement. Do we need to understand new economic principles and tools to assess platform markets? Previous guidelines have proven useful in assessing markets with particular features (e.g., network effects in the context of communications markets) without adding separate sections for them, and we suggest future guidelines return to this approach.
Our experience working for each of the last several administrations (and, more recently, working in private practice) is that the analyses conducted by agency staff in the course of merger investigations do not materially change from administration to administration. In our experiences, staff are appropriately focused on understanding how the incentives of the firms would change following a merger, based on documentary evidence, interviews with market participants, an understanding of economic theory, and an analysis of relevant data. Our experience has also been that the Agency process can be a black box to outsiders, even to those with past experience interacting with the Agencies. This is unfortunate, as in our views the Agencies have everything to lose and nothing to gain from the kind of opacity evinced by the 2023 Merger Guidelines.
Finally, we hope that the next iteration of the guidelines will remove all citations to caselaw. The DOJ and FTC staff are experienced at evaluating the competitive effects of mergers and at applying modern economic techniques. By citing caselaw, the 2023 Merger Guidelines appear to provide guidance based only on cases the agencies have won, sometimes more than a half a century ago, rather than on sound economics. In our opinion, current agency thinking is best conveyed through economic principles, applicable evidence, and objectives that we think all stakeholders can agree upon, not legal arguments.
The authors are Partners at Econic Partners. The views expressed in this paper are those of the authors, and not necessarily those of Econic Partners or its clients.
