Assessment of Merger-Related Efficiencies Challenged

Economists Ink: A Brief Analysis of Policy and Litigation


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Economist Allison I. Holt, an empirical microeconomist, specializes in quantitative analysis and assessment of damages in antitrust and class action matters.

 

FTC Commissioner Joshua D. Wright recently criticized the Commission’s method of assessing merger-related efficiencies. The criticisms came in his expansive dissenting opinion concerning the Commission’s review of the Ardagh Group’s (Ardagh) proposed acquisition of Saint-Gobain Containers (Saint-Gobain). In his dissent, Commissioner Wright criticized the general methodology used by the Commission in weighing a merger’s potential efficiencies against its potential harms. He explained that there is no economic reason why the burden of proof for substantiating efficiencies from a merger should be greater than the burden for substantiating harms.

In its decision, the Commission determined that the merger between Ardagh and Saint-Gobain would result in harmful unilateral and coordinated anticompetitive effects. Specifically, the Commission found that the merger would increase concentration in an already highly concentrated market that was “vulnerable to post-acquisition coordination.” The Commission also considered “evidence from the parties of verifiable, merger-specific efficiencies that could offset this harm.” Nonetheless, it concluded that these efficiencies “were not merger-specific and could have been achieved absent the acquisition.” Further, the Commission found the parties’ evidence was insufficient to show “that the level of synergies that could be substantiated and verified would outweigh the clear evidence of consumer harm.” Because the Commission voted to issue a Complaint, the merging parties agreed to create a third competitor in the relevant market by divesting six of the nine glass container plants as well as other assets of the newly merged firm to a single buyer within six months.

Commissioner Wright dissented from the decision because he found insufficient evidence that the merger would substantially lessen competition in the market. He argued that “any potential anticompetitive effect arising from the proposed merger is outweighed significantly by the benefits to consumers … [from the] expected cognizable efficiencies.” Commissioner Wright further explained the broader issues that he believed to be problematic in how the Commission generally goes about analyzing efficiency claims.

Prior to the 1997 Merger Guidelines revision, the efficiency defense was considered if the efficiencies were “significant” and the evidence supporting them was “clear and convincing.” The 1997 revision more precisely defined the efficiency defense. In the revision, efficiencies would be considered “cognizable” if they were merger-specific, verifiable, and did “not arise from anticompetitive reductions in output or service.” These changes were made so that mergers with a net pro-competitive effect could go through. Even with this revision, the merging parties still bore the burden of proof of efficiencies, while the agencies bore the burden of proving harms. The 2010 Merger Guidelines did not significantly change the language on efficiencies and continued to suggest that the merging parties would bear the burden of proof of efficiencies.

In his dissent, Commissioner Wright argued that the burden of proof should be the same for both efficiencies and harms. He wrote that there is no sound economic theory to justify requiring that the burden of proof required of the parties in establishing the existence of efficiencies be higher than the burden of proof required of the agencies in establishing anticompetitive effects. Any asymmetry, such as requiring that efficiencies “be proven,” while accepting “probabilistic predictions” of harms, could harm consumer welfare. The Commissioner wrote that the language of the 2010 Merger Guidelines does not require this asymmetry in determining cases, but it does “allow for this [asymmetrical] outcome in practice.” The fact that the Guidelines require verifiability “could be interpreted to impose [a] stricter burden of proof than the agency is willing to accept when it comes to predictions, estimates, presumptions, or simulations of anticompetitive effects.”

Commissioner Wright argued that “symmetrical treatment in both theory and practice of evidence proffered to discharge the respective burdens of proof facing the agencies and merging parties is necessary for consumer-welfare based merger policy.” He concluded that “standard microeconomic analysis” should be used as a guide and that the interpretations of the Guidelines that lead to asymmetric burdens of proof “do not make economic sense and are inconsistent with a merger policy designed to promote consumer welfare.” As it now stands, the high burden of proof of efficiencies essentially overwhelms the efficiency defense. While efficiencies may be part of the reasons for a merger, firms often do not get credit for these efficiencies because the burden of proof is too high. Commissioner Wright cited papers and studies arguing that “the government is accorded greater evidentiary leniency in proving anticompetitive effects than the merging parties are in proving offsetting efficiencies,” and that “the efficiency defense faces an impossibly high burden.”

The Commission majority, in response to Wright’s dissent, disagreed with his concerns that it engaged in an asymmetric treatment of efficiencies that was ultimately harmful to consumer welfare. It contended that it often gives great weight to efficiencies in merger investigations.  Determining both competitive effects and efficiencies requires a certain amount of estimation. The Commission majority argued, however, that efficiencies are harder to verify and quantify because while competitive effects data can come from a variety of sources, data on efficiencies come “almost entirely from the merging parties.” The concern of the majority was that without “independent verification of this party data,” this one-sided possession of information would lead to the efficiency defense dominating Section 7 enforcement. Thus, efficiencies need to be substantiated and verifiable to be cognizable. Therefore, the majority contended that the actions it ordered in the Ardagh case are consistent with the 2010 Merger Guidelines and beneficial to consumers.