|J. Stephen Stockum, formerly was an economic advisor to an FTC Commissioner. He has advised clients on the antitrust implications of a large number of mergers and acquisitions in a wide variety of industries.|
The draft Merger Guidelines downplay the importance of market definition considerably and provide insights into the Agencies’ approach to market definition beyond the parameters of the hypothetical monopolist test. The emphasis is on flexibility, which implies that different fact situations can lead to defining relatively narrow markets, defining multiple markets, and bypassing market definition entirely.
Whereas the 1992 Guidelines state “[t]he Agency will first define the relevant product market . . .” (Section 1.1, emphasis added), the draft Guidelines emphasize that “[t]he Agencies’ analysis need not start with market definition.” (Section 4) Indeed, the introductory section of the draft Guidelines’ market definition section (nine paragraphs) emphasizes that “the Agencies implement these principles of market definition flexibly” and predominantly provides reasons why market definitions might be misleading and why defining markets may not be a necessary analytical step at all. For example, the draft Guidelines suggest jumping ahead to competitive effects analysis “[w]here analysis suggests alternative and reasonably plausible candidate markets.”(Section 4) So rather than having to support a proposed relevant market, the Agencies seem to suggest that the step may be an unnecessary impediment to assessing the competitive effects of a proposed merger.
Still, market definition remains a significant part of merger analysis. The hypothetical monopolist test (which the draft Guidelines have maintained) will define a market that in some cases might seem broad, and in other cases might seem narrow. The fact that the result of the test seems broad or narrow should not be used to determine the validity of that result. Nonetheless, the draft Guidelines assert that “[d]efining a market broadly . . . can lead to misleading market shares” and “[m]arket shares of different products in narrowly defined markets are more likely to capture the relative competitive significance of these products . . . .” (Section 4).
The 1992 Guidelines say that “[t]he Agency generally will consider the relevant product market to be the smallest group of products that satisfies the [hypothetical monopolist] test.” (Section 1.11) Still there is a substantial difference between this statement and the position of the draft Guidelines. It is one thing to describe how the objective nature of the hypothetical monopolist test leads to the relevant market being the narrowest set of products for which the hypothesized price increase is profitable. It is quite another matter to express a prosecutorial preference for narrow markets independently of the parameters of the analytical test itself.
The draft Guidelines explain that when “relatively distant” competitors are brought into the provisional market via the hypothetical monopolist test, the result may be “overstating their competitive significance as proportional to their shares in an expanded market.” (Section 4) But those competitors would not be brought into the market by the analytical test in the first place unless they were able to defeat an anticompetitive price increase. The competitors obviously are important in a true economic sense. Under the 1992 Guidelines, the competitive significance of firms within the relevant market is addressed only under competitive effects analysis. The revision appears largely to blur the boundary between market definition and analysis of competitive effects. It appears that application of the draft Guidelines will no longer necessitate performing competitive effects analysis within a well-defined (and well-supported) relevant antitrust market.
Other language in the draft Guidelines also suggests that the Agencies may often define very narrow markets. For example, the Agencies may identify relevant markets defined around customers that could be targeted for a price increase. (Section 4.1.4) While defining such “price discrimination markets” is not new to the draft Guidelines, the high degree of prominence of this topic is new. The old Guidelines mention price discrimination only in the section on market definition, measurement, and concentration. The draft Guidelines Section 3, which is devoted entirely to price discrimination, states that “[t]he possibility of price discrimination influences market definition (See Section 4), the measurement of market shares (see Section 5), and the evaluation of competitive effects (see Sections 6 and 7).”
The draft Guidelines not only dramatically raise the prominence of price discrimination, they also make it sound remarkably easy to accomplish. As described in the draft Guidelines, price discrimination only requires two conditions: “differential pricing and limited arbitrage.” Differential pricing requires only that the suppliers “must be able to price differently to targeted customers.” But economics textbooks emphasize that price discrimination only occurs when differential prices are not explained by differential costs, including costs of manufacture, sale, delivery, and other more subtle cost differences, such as potential costs due to uncertainty. This critical economic element of price discrimination, which seriously limits the extent to which differential prices may imply anticompetitive price discrimination, is nowhere to be found in the greatly expanded treatment of price discrimination.
This focus on narrow market definitions alone would not always lead to stricter enforcement, because it might in some instances lead to markets that exclude one of the parties, thus preventing the Agencies from challenging certain mergers. Other language in the draft Guidelines, however, seems to work against that possibility. “The hypothetical monopolist test . . . does not lead to a single relevant market.” (Section 4, emphasis added) While this statement may be true of the particular example (Example 6) preceding the quote, that fact pattern does not appear to be common. The necessary fact pattern for multiple markets to exist under the hypothetical monopolist test is that there are multiple firms, or groups of firms, whose products each individually have sufficient substitutability with the products of the merging parties that adding each one of those products into the provisional market separately satisfies the test. The Agencies’ emphasis of this point appears intended to maintain flexibility to define multiple markets, one of which may include both the merging firms’ products.
The extent to which the courts may deferentially read the draft Guidelines to lessen the Agencies’ burden of proof regarding relevant market definition is yet to be seen. The degree to which the proactive tone and aggressive analytical techniques of the draft Guidelines may deter parties from even attempting many efficiency-enhancing and competitively-innocuous mergers and acquisitions may never be known. One thing that is known is that the Agencies will use inventive analytical approaches to pinpoint plausible threats to competition, in significant part by adding a great deal of flexibility to their approach to market definition.