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Horizontal |
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U.S. Department of Justice and the Federal Trade Commission | ||
Issued: April 2,
1992 | ||
Note: Section 4 of these Guidelines, relating to Efficiencies, appears as it was issued in revised form by the Department of Justice and the Federal Trade Commission on April 8, 1997; and the footnotes in Section 5 of the Guidelines have been renumbered accordingly. The remaining portions of the Guidelines were unchanged in 1997, and appear as they were issued on April 2, 1992. | ||
Table of Contents - Horizontal Merger
Guidelines
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0.2 Overview
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The Guidelines describe the analytical process that the Agency
will employ in determining whether to challenge a horizontal merger. First, the
Agency assesses whether the merger would significantly increase concentration
and result in a concentrated market, properly defined and measured. Second, the
Agency assesses whether the merger, in light of market concentration and other
factors that characterize the market, raises concern about potential adverse
competitive effects. Third, the Agency assesses whether entry would be timely,
likely and sufficient either to deter or to counteract the competitive effects
of concern. Fourth, the Agency assesses any efficiency gains that reasonably
cannot be achieved by the parties through other means. Finally the Agency
assesses whether, but for the merger, either party to the transaction would be
likely to fail, causing its assets to exit the market. The process of assessing
market concentration, potential adverse competitive effects, entry, efficiency
and failure is a tool that allows the Agency to answer the ultimate inquiry in
merger analysis: whether the merger is likely to create or enhance market power
or to facilitate its exercise.
1. Market Definition, Measurement and
Concentration
1.0
Overview
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A
merger is unlikely to create or enhance market power or to facilitate its
exercise unless it significantly increases concentration and results in a
concentrated market, properly defined and measured. Mergers that either do not
significantly increase concentration or do not result in a concentrated market
ordinarily require no further analysis.
The analytic process described in this section ensures
that the Agency evaluates the likely competitive impact of a merger within the
context of economically meaningful markets -- i.e., markets that could be
subject to the exercise of market power. Accordingly, for each product or
service (hereafter "product") of each merging firm, the Agency seeks to define a
market in which firms could effectively exercise market power if they were able
to coordinate their actions.
Market definition focuses solely on demand substitution
factors -- i.e., possible consumer responses. Supply substitution factors --
i.e., possible production responses -- are considered elsewhere in the
Guidelines in the identification of firms that participate in the relevant
market and the analysis of entry. See Sections 1.3 and 3. A market is defined as
a product or group of products and a geographic area in which it is produced or
sold such that a hypothetical profit-maximizing firm, not subject to price
regulation, that was the only present and future producer or seller of those
products in that area likely would impose at least a "small but significant and
nontransitory" increase in price, assuming the terms of sale of all other
products are held constant. A relevant market is a group of products and a
geographic area that is no bigger than necessary to satisfy this test. The
"small but significant and nontransitory" increase in price is employed solely
as a methodological tool for the analysis of mergers: it is not a tolerance
level for price increases.
Absent price discrimination, a relevant market is
described by a product or group of products and a geographic area. In
determining whether a hypothetical monopolist would be in a position to exercise
market power, it is necessary to evaluate the likely demand responses of
consumers to a price increase. A price increase could be made unprofitable by
consumers either switching to other products or switching to the same product
produced by firms at other locations. The nature and magnitude of these two
types of demand responses respectively determine the scope of the product market
and the geographic market.
In contrast, where a hypothetical monopolist likely would
discriminate in prices charged to different groups of buyers, distinguished, for
example, by their uses or locations, the Agency may delineate different relevant
markets corresponding to each such buyer group. Competition for sales to each
such group may be affected differently by a particular merger and markets are
delineated by evaluating the demand response of each such buyer group. A
relevant market of this kind is described by a collection of products for sale
to a given group of buyers.
Once defined, a relevant market must be measured in terms
of its participants and concentration. Participants include firms currently
producing or selling the market's products in the market's geographic area. In
addition, participants may include other firms depending on their likely supply
responses to a "small but significant and nontransitory" price increase. A firm
is viewed as a participant if, in response to a "small but significant and
nontransitory" price increase, it likely would enter rapidly into production or
sale of a market product in the market's area, without incurring significant
sunk costs of entry and exit. Firms likely to make any of these supply responses
are considered to be "uncommitted" entrants because their supply response would
create new production or sale in the relevant market and because that production
or sale could be quickly terminated without significant
loss.(7) Uncommitted entrants are capable of making such quick
and uncommitted supply responses that they likely influenced the market
premerger, would influence it post-merger, and accordingly are considered as
market participants at both times. This analysis of market definition and market
measurement applies equally to foreign and domestic firms.
If the process of market definition and market measurement
identifies one or more relevant markets in which the merging firms are both
participants, then the merger is considered to be horizontal. Sections 1.1
through 1.5 describe in greater detail how product and geographic markets will
be defined, how market shares will be calculated and how market concentration
will be assessed.
7 Probable supply responses that require the entrant to
incur significant sunk costs of entry and exit are not part of market
measurement, but are included in the analysis of the significance of entry. See
Section 3. Entrants that must commit substantial sunk costs are regarded as
"committed" entrants because those sunk costs make entry irreversible in the
short term without foregoing that investment; thus the likelihood of their entry
must be evaluated with regard to their long-term profitability.
1.1 Product Market
Definition
The Agency will first define the relevant product
market with respect to
each of the products of each of the merging firms.
(8)
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1.11 General
Standards
Absent price discrimination, the Agency will
delineate the product market to be a product or group of products such that a
hypothetical profit-maximizing firm that was the only present and future seller
of those products ("monopolist") likely would impose at least a "small but
significant and nontransitory" increase in price. That is, assuming that buyers
likely would respond to an increase in price for a tentatively identified
product group only by shifting to other products, what would happen? If the
alternatives were, in the aggregate, sufficiently attractive at their existing
terms of sale, an attempt to raise prices would result in a reduction of sales
large enough that the price increase would not prove profitable, and the
tentatively identified product group would prove to be too
narrow.
Specifically, the Agency will begin with each product
(narrowly defined) produced or sold by each merging firm and ask what would
happen if a hypothetical monopolist of that product imposed at least a "small
but significant and nontransitory" increase in price, but the terms of sale of
all other products remained constant. If, in response to the price increase, the
reduction in sales of the product would be large enough that a hypothetical
monopolist would not find it profitable to impose such an increase in price,
then the Agency will add to the product group the product that is the next-best
substitute for the merging firm's product.(9)
In considering the likely reaction of buyers to a price
increase, the Agency will take into account all relevant evidence, including,
but not limited to, the following:
(1) evidence that buyers have shifted
or have considered shifting purchases between products in response to
relative changes in price or other competitive
variables; |
The price increase question is then asked for a
hypothetical monopolist controlling the expanded product group. In performing
successive iterations of the price increase test, the hypothetical monopolist
will be assumed to pursue maximum profits in deciding whether to raise the
prices of any or all of the additional products under its control. This process
will continue until a group of products is identified such that a hypothetical
monopolist over that group of products would profitably impose at least a "small
but significant and nontransitory" increase, including the price of a product of
one of the merging firms. The Agency generally will consider the relevant
product market to be the smallest group of products that satisfies this
test.
In the above analysis, the Agency will use prevailing
prices of the products of the merging firms and possible substitutes for such
products, unless premerger circumstances are strongly suggestive of coordinated
interaction, in which case the Agency will use a price more reflective of the
competitive price.(10) However, the Agency may use likely
future prices, absent the merger, when changes in the prevailing prices can be
predicted with reasonable reliability. Changes in price may be predicted on the
basis of, for example, changes in regulation which affect price either directly
or indirectly by affecting costs or demand.
In general, the price for which an increase will be
postulated will be whatever is considered to be the price of the product at the
stage of the industry being examined.(11) In attempting to
determine objectively the effect of a "small but significant and nontransitory"
increase in price, the Agency, in most contexts, will use a price increase of
five percent lasting for the foreseeable future. However, what constitutes a
"small but significant and nontransitory" increase in price will depend on the
nature of the industry, and the Agency at times may use a price increase that is
larger or smaller than five percent.
1.12 Product Market Definition in the
Presence of Price Discrimination
The analysis of product market definition to this point
has assumed that price discrimination -- charging different buyers different
prices for the same product, for example -- would not be profitable for a
hypothetical monopolist. A different analysis applies where price discrimination
would be profitable for a hypothetical monopolist.
Existing buyers sometimes will differ significantly in
their likelihood of switching to other products in response to a "small but
significant and nontransitory" price increase. If a hypothetical monopolist can
identify and price differently to those buyers ("targeted buyers") who would not
defeat the targeted price increase by substituting to other products in response
to a "small but significant and nontransitory" price increase for the relevant
product, and if other buyers likely would not purchase the relevant product and
resell to targeted buyers, then a hypothetical monopolist would profitably
impose a discriminatory price increase on sales to targeted buyers. This is true
regardless of whether a general increase in price would cause such significant
substitution that the price increase would not be profitable. The Agency will
consider additional relevant product markets consisting of a particular use or
uses by groups of buyers of the product for which a hypothetical monopolist
would profitably and separately impose at least a "small but significant and
nontransitory" increase in price.
8 Although discussed separately, product market definition
and geographic market definition are interrelated. In particular, the extent to
which buyers of a particular product would shift to other products in the event
of a "small but significant and nontransitory" increase in price must be
evaluated in the context of the relevant geographic market.
9 Throughout the Guidelines, the term "next best substitute"
refers to the alternative which, if available in unlimited quantities at
constant prices, would account for the greatest value of diversion of demand in
response to a "small but significant and nontransitory" price
increase.
10 The terms of sale of all other products are held constant
in order to focus market definition on the behavior of consumers. Movements in
the terms of sale for other products, as may result from the behavior of
producers of those products, are accounted for in the analysis of competitive
effects and entry. See Sections 2 and 3.
11 For example, in a merger between retailers, the relevant
price would be the retail price of a product to consumers. In the case of a
merger among oil pipelines, the relevant price would be the tariff -- the price
of the transportation service.
1.2 Geographic Market
Definition
For each product
market in which both merging firms participate, the Agency will determine the
geographic market or markets in which the firms produce or sell. A single firm
may operate in a number of different geographic markets.
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1.21 General
Standards
Absent price discrimination, the Agency will delineate the
geographic market to be a region such that a hypothetical monopolist that was
the only present or future producer of the relevant product at locations in that
region would profitably impose at least a "small but significant and
nontransitory" increase in price, holding constant the terms of sale for all
products produced elsewhere. That is, assuming that buyers likely would respond
to a price increase on products produced within the tentatively identified
region only by shifting to products produced at locations of production outside
the region, what would happen? If those locations of production outside the
region were, in the aggregate, sufficiently attractive at their existing terms
of sale, an attempt to raise price would result in a reduction in sales large
enough that the price increase would not prove profitable, and the tentatively
identified geographic area would prove to be too narrow.
In defining the geographic market or markets affected by a
merger, the Agency will begin with the location of each merging firm (or each
plant of a multiplant firm) and ask what would happen if a hypothetical
monopolist of the relevant product at that point imposed at least a "small but
significant and nontransitory" increase in price, but the terms of sale at all
other locations remained constant. If, in response to the price increase, the
reduction in sales of the product at that location would be large enough that a
hypothetical monopolist producing or selling the relevant product at the merging
firm's location would not find it profitable to impose such an increase in
price, then the Agency will add the location from which production is the
next-best substitute for production at the merging firm's
location.
In considering the likely reaction of buyers to a price
increase, the Agency will take into account all relevant evidence, including,
but not limited to, the following:
(1) evidence that buyers have shifted or have considered
shifting purchases between different geographic locations in response to
relative changes in price or other competitive variables;
(2) evidence that sellers base business decisions on the
prospect of buyer substitution between geographic locations in response to
relative changes in price or other competitive variables;
(3) the influence of downstream competition faced by buyers
in their output markets; and
(4) the timing and costs of switching
suppliers.
The price increase question is then asked for a
hypothetical monopolist controlling the expanded group of locations. In
performing successive iterations of the price increase test, the hypothetical
monopolist will be assumed to pursue maximum profits in deciding whether to
raise the price at any or all of the additional locations under its control.
This process will continue until a group of locations is identified such that a
hypothetical monopolist over that group of locations would profitably impose at
least a "small but significant and nontransitory" increase, including the price
charged at a location of one of the merging firms.
The "smallest market" principle will be applied as it is
in product market definition. The price for which an increase will be
postulated, what constitutes a "small but significant and nontransitory"
increase in price, and the substitution decisions of consumers all will be
determined in the same way in which they are determined in product market
definition.
1.22 Geographic Market Definition in
the Presence of Price Discrimination
The analysis of geographic market definition to this point
has assumed that geographic price discrimination -- charging different prices
net of transportation costs for the same product to buyers in different areas,
for example -- would not be profitable for a hypothetical monopolist. However,
if a hypothetical monopolist can identify and price differently to buyers in
certain areas ("targeted buyers") who would not defeat the targeted price
increase by substituting to more distant sellers in response to a "small but
significant and nontransitory" price increase for the relevant product, and if
other buyers likely would not purchase the relevant product and resell to
targeted buyers,(12) then a hypothetical monopolist would
profitably impose a discriminatory price increase. This is true even where a
general price increase would cause such significant substitution that the price
increase would not be profitable. The Agency will consider additional geographic
markets consisting of particular locations of buyers for which a hypothetical
monopolist would profitably and separately impose at least a "small but
significant and nontransitory" increase in price.
12 This arbitrage is inherently impossible for many services
and is particularly difficult where the product is sold on a delivered basis and
where transportation costs are a significant percentage of the final cost.
1.3 Identification of Firms That
Participate in the Relevant Market
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1.31 Current Producers or
Sellers
The Agency's identification of firms that participate in
the relevant market begins with all firms that currently produce or sell in the
relevant market. This includes vertically integrated firms to the extent that
such inclusion accurately reflects their competitive significance in the
relevant market prior to the merger. To the extent that the analysis under
Section 1.1 indicates that used, reconditioned or recycled goods are included in
the relevant market, market participants will include firms that produce or sell
such goods and that likely would offer those goods in competition with other
relevant products.
1.32 Firms That Participate Through
Supply Response
In addition, the Agency will identify other firms not
currently producing or selling the relevant product in the relevant area as
participating in the relevant market if their inclusion would more accurately
reflect probable supply responses. These firms are termed "uncommitted
entrants." These supply responses must be likely to occur within one year and
without the expenditure of significant sunk costs of entry and exit, in response
to a "small but significant and nontransitory" price increase. If a firm has the
technological capability to achieve such an uncommitted supply response, but
likely would not (e.g., because difficulties in achieving product acceptance,
distribution, or production would render such a response unprofitable), that
firm will not be considered to be a market participant. The competitive
significance of supply responses that require more time or that require firms to
incur significant sunk costs of entry and exit will be considered in entry
analysis. See Section 3.(13)
Sunk costs are the acquisition costs of tangible and
intangible assets that cannot be recovered through the redeployment of these
assets outside the relevant market, i.e., costs uniquely incurred to supply the
relevant product and geographic market. Examples of sunk costs may include
market-specific investments in production facilities, technologies, marketing
(including product acceptance), research and development, regulatory approvals,
and testing. A significant sunk cost is one which would not be recouped within
one year of the commencement of the supply response, assuming a "small but
significant and nontransitory" price increase in the relevant market. In this
context, a "small but significant and nontransitory" price increase will be
determined in the same way in which it is determined in product market
definition, except the price increase will be assumed to last one year. In some
instances, it may be difficult to calculate sunk costs with precision.
Accordingly, when necessary, the Agency will make an overall assessment of the
extent of sunk costs for firms likely to participate through supply
responses.
These supply responses may give rise to new production of
products in the relevant product market or new sources of supply in the relevant
geographic market. Alternatively, where price discrimination is likely so that
the relevant market is defined in terms of a targeted group of buyers, these
supply responses serve to identify new sellers to the targeted buyers.
Uncommitted supply responses may occur in several different ways: by the
switching or extension of existing assets to production or sale in the relevant
market; or by the construction or acquisition of assets that enable production
or sale in the relevant market.
1.321 Production Substitution and
Extension: The Switching or Extension of Existing Assets to Production or Sale
in the Relevant Market
The productive and distributive assets of a firm sometimes
can be used to produce and sell either the relevant products or products that
buyers do not regard as good substitutes. Production substitution refers to the
shift by a firm in the use of assets from producing and selling one product to
producing and selling another. Production extension refers to the use of those
assets, for example, existing brand names and reputation, both for their current
production and for production of the relevant product. Depending upon the speed
of that shift and the extent of sunk costs incurred in the shift or extension,
the potential for production substitution or extension may necessitate treating
as market participants firms that do not currently produce the relevant
product.(14)
If a firm has existing assets that likely would be shifted
or extended into production and sale of the relevant product within one year,
and without incurring significant sunk costs of entry and exit, in response to a
"small but significant and nontransitory" increase in price for only the
relevant product, the Agency will treat that firm as a market participant. In
assessing whether a firm is such a market participant, the Agency will take into
account the costs of substitution or extension relative to the profitability of
sales at the elevated price, and whether the firm's capacity is elsewhere
committed or elsewhere so profitably employed that such capacity likely would
not be available to respond to an increase in price in the
market.
1.322 Obtaining New Assets for
Production or Sale of the Relevant Product
A firm may also be able to enter into production or sale
in the relevant market within one year and without the expenditure of
significant sunk costs of entry and exit, in response to a "small but
significant and nontransitory" increase in price for only the relevant product,
even if the firm is newly organized or is an existing firm without products or
productive assets closely related to the relevant market. If new firms, or
existing firms without closely related products or productive assets, likely
would enter into production or sale in the relevant market within one year
without the expenditure of significant sunk costs of entry and exit, the Agency
will treat those firms as market participants.
13 If uncommitted entrants likely would also remain in the
market and would meet the entry tests of timeliness, likelihood and sufficiency,
and thus would likely deter anticompetitive mergers or deter or counteract the
competitive effects of concern (see Section 3, infra), the Agency will consider
the impact of those firms in the entry analysis.
14 Under other analytical approaches, production substitution
sometimes has been reflected in the description of the product market. For
example, the product market for stamped metal products such as automobile hub
caps might be described as "light metal stamping," a production process rather
than a product. The Agency believes that the approach described in the text
provides a more clearly focused method of incorporating this factor in merger
analysis. If production substitution among a group of products is nearly
universal among the firms selling one or more of those products, however, the
Agency may use an aggregate description of those markets as a matter of
convenience.
1.4 Calculating Market
Shares
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1.41 General
Approach
The Agency normally will calculate market shares for all
firms (or plants) identified as market participants in Section 1.3 based on the
total sales or capacity currently devoted to the relevant market together with
that which likely would be devoted to the relevant market in response to a
"small but significant and nontransitory" price increase. Market shares can be
expressed either in dollar terms through measurement of sales, shipments, or
production, or in physical terms through measurement of sales, shipments,
production, capacity, or reserves.
Market shares will be calculated using the best indicator
of firms' future competitive significance. Dollar sales or shipments generally
will be used if firms are distinguished primarily by differentiation of their
products. Unit sales generally will be used if firms are distinguished primarily
on the basis of their relative advantages in serving different buyers or groups
of buyers. Physical capacity or reserves generally will be used if it is these
measures that most effectively distinguish firms.(15)
Typically, annual data are used, but where individual sales are large and
infrequent so that annual data may be unrepresentative, the Agency may measure
market shares over a longer period of time.
In measuring a firm's market share, the Agency will not
include its sales or capacity to the extent that the firm's capacity is
committed or so profitably employed outside the relevant market that it would
not be available to respond to an increase in price in the
market.
1.42 Price Discrimination
Markets
When markets are defined on the basis of price
discrimination (Sections 1.12 and 1.22), the Agency will include only sales
likely to be made into, or capacity likely to be used to supply, the relevant
market in response to a "small but significant and nontransitory" price
increase.
1.43 Special Factors Affecting Foreign
Firms
Market shares will be assigned to foreign competitors in
the same way in which they are assigned to domestic competitors. However, if
exchange rates fluctuate significantly, so that comparable dollar calculations
on an annual basis may be unrepresentative, the Agency may measure market shares
over a period longer than one year.
If shipments from a particular country to the United
States are subject to a quota, the market shares assigned to firms in that
country will not exceed the amount of shipments by such firms allowed under the
quota.(16) In the case of restraints that limit imports to some
percentage of the total amount of the product sold in the United States (i.e.,
percentage quotas), a domestic price increase that reduced domestic consumption
also would reduce the volume of imports into the United States. Accordingly,
actual import sales and capacity data will be reduced for purposes of
calculating market shares. Finally, a single market share may be assigned to a
country or group of countries if firms in that country or group of countries act
in coordination.
15 Where all firms have, on a forward-looking basis, an
equal likelihood of securing sales, the Agency will assign firms equal shares.
16 The constraining effect of the quota on the importer's
ability to expand sales is relevant to the evaluation of potential adverse
competitive effects. See Section 2.
1.5 Concentration and Market
Shares
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Market concentration is a function of the number of firms
in a market and their respective market shares. As an aid to the interpretation
of market data, the Agency will use the Herfindahl-Hirschman Index ("HHI") of
market concentration. The HHI is calculated by summing the squares of the
individual market shares of all the participants.(17) Unlike
the four-firm concentration ratio, the HHI reflects both the distribution of the
market shares of the top four firms and the composition of the market outside
the top four firms. It also gives proportionately greater weight to the market
shares of the larger firms, in accord with their relative importance in
competitive interactions.
The Agency divides the spectrum of market concentration as
measured by the HHI into three regions that can be broadly characterized as
unconcentrated (HHI below 1000), moderately concentrated (HHI between 1000 and
1800), and highly concentrated (HHI above 1800). Although the resulting regions
provide a useful framework for merger analysis, the numerical divisions suggest
greater precision than is possible with the available economic tools and
information. Other things being equal, cases falling just above and just below a
threshold present comparable competitive issues.
1.51 General
Standards
In evaluating horizontal mergers, the Agency will consider
both the post-merger market concentration and the increase in concentration
resulting from the merger.(18) Market concentration is a useful
indicator of the likely potential competitive effect of a merger. The general
standards for horizontal mergers are as follows:
a) Post-Merger HHI Below 1000. The Agency regards markets in this
region to be unconcentrated. Mergers resulting in unconcentrated markets are
unlikely to have adverse competitive effects and ordinarily require no further
analysis.
b) Post-Merger HHI Between 1000 and 1800. The Agency regards markets
in this region to be moderately concentrated. Mergers producing an increase in
the HHI of less than 100 points in moderately concentrated markets post-merger
are unlikely to have adverse competitive consequences and ordinarily require no
further analysis. Mergers producing an increase in the HHI of more than 100
points in moderately concentrated markets post-merger potentially raise
significant competitive concerns depending on the factors set forth in Sections
2-5 of the Guidelines.
c) Post-Merger HHI Above 1800. The Agency regards markets in this
region to be highly concentrated. Mergers producing an increase in the HHI of
less than 50 points, even in highly concentrated markets post-merger, are
unlikely to have adverse competitive consequences and ordinarily require no
further analysis. Mergers producing an increase in the HHI of more than 50
points in highly concentrated markets post-merger potentially raise significant
competitive concerns, depending on the factors set forth in Sections 2-5 of the
Guidelines. Where the post-merger HHI exceeds 1800, it will be presumed that
mergers producing an increase in the HHI of more than 100 points are likely to
create or enhance market power or facilitate its exercise. The presumption may
be overcome by a showing that factors set forth in Sections 2-5 of the
Guidelines make itunlikely that the merger will create or enhance market power
or facilitate its exercise, in light of market concentration and market
shares.
1.52 Factors Affecting the
Significance of Market Shares and Concentration
The post-merger level of market concentration and the change in concentration
resulting from a merger affect the degree to which a merger raises competitive
concerns. However, in some situations, market share and market concentration
data may either understate or overstate the likely future competitive
significance of a firm or firms in the market or the impact of a merger. The
following are examples of such situations.
1.521 Changing Market
Conditions
Market concentration and market share data of necessity are based on
historical evidence. However, recent or ongoing changes in the market may
indicate that the current market share of a particular firm either understates
or overstates the firm's future competitive significance. For example, if a new
technology that is important to long-term competitive viability is available to
other firms in the market, but is not available to a particular firm, the Agency
may conclude that the historical market share of that firm overstates its future
competitive significance. The Agency will consider reasonably predictable
effects of recent or ongoing changes in market conditions in interpreting market
concentration and market share data.
1.522 Degree of Difference Between
the Products and Locations in the Market and Substitutes Outside the
Market
All else equal, the magnitude of potential competitive harm from a merger is
greater if a hypothetical monopolist would raise price within the relevant
market by substantially more than a "small but significant and nontransitory"
amount. This may occur when the demand substitutes outside the relevant market,
as a group, are not close substitutes for the products and locations within the
relevant market. There thus may be a wide gap in the chain of demand substitutes
at the edge of the product and geographic market. Under such circumstances, more
market power is at stake in the relevant market than in a market in which a
hypothetical monopolist would raise price by exactly five
percent.
17 For example, a market consisting of four firms with
market shares of 30 percent, 30 percent, 20 percent and 20 percent has an HHI of
2600 (302 + 302 + 202 + 202 = 2600). The HHI ranges from l0,000 (in
the case of a pure monopoly) to a number approaching zero (in the case of an
atomistic market). Although it is desirable to include all firms in the
calculation, lack of information about small firms is not critical because such
firms do not affect the HHI significantly.
18 The
increase in concentration as measured by the HHI can be calculated independently
of the overall market concentration by doubling the product of the market shares
of the merging firms. For example, the merger of firms with shares of 5 percent
and 10 percent of the market would increase the HHI by l00 (5 x l0 x 2 = l00).
The explanation for this technique is as follows: In calculating the HHI before
the merger, the market shares of the merging firms are squared individually:
(a)2 + (b)2. After the merger, the sum of those
shares would be squared: (a + b)2 , which equals a2 + 2ab + b2 . The increase in the HHI therefore is
represented by 2ab.
2. The Potential Adverse Competitive
Effects of Mergers
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2.0
Overview
Other things being equal, market concentration affects the
likelihood that one firm, or a small group of firms, could successfully exercise
market power. The smaller the percentage of total supply that a firm controls,
the more severely it must restrict its own output in order to produce a given
price increase, and the less likely it is that an output restriction will be
profitable. If collective action is necessary for the exercise of market power,
as the number of firms necessary to control a given percentage of total supply
decreases, the difficulties and costs of reaching and enforcing an understanding
with respect to the control of that supply might be reduced. However, market
share and concentration data provide only the starting point for analyzing the
competitive impact of a merger. Before determining whether to challenge a
merger, the Agency also will assess the other market factors that pertain to
competitive effects, as well as entry, efficiencies and failure.
This section considers some of the potential adverse
competitive effects of mergers and the factors in addition to market
concentration relevant to each. Because an individual merger may threaten to
harm competition through more than one of these effects, mergers will be
analyzed in terms of as many potential adverse competitive effects as are
appropriate. Entry, efficiencies, and failure are treated in Sections
3-5.
2.1 Lessening of Competition
Through Coordinated Interaction
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A merger may diminish competition by enabling the firms
selling in the relevant market more likely, more successfully, or more
completely to engage in coordinated interaction that harms consumers.
Coordinated interaction is comprised of actions by a group of firms that are
profitable for each of them only as a result of the accommodating reactions of
the others. This behavior includes tacit or express collusion, and may or may
not be lawful in and of itself.
Successful coordinated interaction entails reaching terms
of coordination that are profitable to the firms involved and an ability to
detect and punish deviations that would undermine the coordinated interaction.
Detection and punishment of deviations ensure that
coordinating firms will find it more profitable to adhere to the terms of
coordination than to pursue short-term profits from deviating, given the costs
of reprisal. In this phase of the analysis, the Agency will examine the extent
to which post-merger market conditions are conducive to reaching terms of
coordination, detecting deviations from those terms, and punishing such
deviations. Depending upon the circumstances, the following market factors,
among others, may be relevant: the availability of key information concerning
market conditions, transactions and individual competitors; the extent of firm
and product heterogeneity; pricing or marketing practices typically employed by
firms in the market; the characteristics of buyers and sellers; and the
characteristics of typical transactions.
Certain market conditions that are conducive to reaching
terms of coordination also may be conducive to detecting or punishing deviations
from those terms. For example, the extent of information available to firms in
the market, or the extent of homogeneity, may be relevant to both the ability to
reach terms of coordination and to detect or punish deviations from those terms.
The extent to which any specific market condition will be relevant to one or
more of the conditions necessary to coordinated interaction will depend on the
circumstances of the particular case.
It is likely that market conditions are conducive to
coordinated interaction when the firms in the market previously have engaged in
express collusion and when the salient characteristics of the market have not
changed appreciably since the most recent such incident. Previous express
collusion in another geographic market will have the same weight when the
salient characteristics of that other market at the time of the collusion are
comparable to those in the relevant market.
In analyzing the effect of a particular merger on
coordinated interaction, the Agency is mindful of the difficulties of predicting
likely future behavior based on the types of incomplete and sometimes
contradictory information typically generated in merger investigations. Whether
a merger is likely to diminish competition by enabling firms more likely, more
successfully or more completely to engage in coordinated interaction depends on
whether market conditions, on the whole, are conducive to reaching terms of
coordination and detecting and punishing deviations from those
terms.
2.11 Conditions Conducive to Reaching
Terms of Coordination
Firms coordinating their interactions need not reach
complex terms concerning the allocation of the market output across firms or the
level of the market prices but may, instead, follow simple terms such as a
common price, fixed price differentials, stable market shares, or customer or
territorial restrictions. Terms of coordination need not perfectly achieve the
monopoly outcome in order to be harmful to consumers. Instead, the terms of
coordination may be imperfect and incomplete -- inasmuch as they omit some
market participants, omit some dimensions of competition, omit some customers,
yield elevated prices short of monopoly levels, or lapse into episodic price
wars -- and still result in significant competitive harm. At some point,
however, imperfections cause the profitability of abiding by the terms of
coordination to decrease and, depending on their extent, may make coordinated
interaction unlikely in the first instance.
Market conditions may be conducive to or hinder reaching
terms of coordination. For example, reaching terms of coordination may be
facilitated by product or firm homogeneity and by existing practices among
firms, practices not necessarily themselves antitrust violations, such as
standardization of pricing or product variables on which firms could compete.
Key information about rival firms and the market may also facilitate reaching
terms of coordination. Conversely, reaching terms of coordination may be limited
or impeded by product heterogeneity or by firms having substantially incomplete
information about the conditions and prospects of their rivals' businesses,
perhaps because of important differences among their current business
operations. In addition, reaching terms of coordination may be limited or
impeded by firm heterogeneity, for example, differences in vertical integration
or the production of another product that tends to be used together with the
relevant product.
2.12 Conditions Conducive to Detecting
and Punishing Deviations
Where market conditions are conducive to timely detection
and punishment of significant deviations, a firm will find it more profitable to
abide by the terms of coordination than to deviate from them. Deviation from the
terms of coordination will be deterred where the threat of punishment is
credible. Credible punishment, however, may not need to be any more complex than
temporary abandonment of the terms of coordination by other firms in the
market.
Where detection and punishment likely would be rapid,
incentives to deviate are diminished and coordination is likely to be
successful. The detection and punishment of deviations may be facilitated by
existing practices among firms, themselves not necessarily antitrust violations,
and by the characteristics of typical transactions. For example, if key
information about specific transactions or individual price or output levels is
available routinely to competitors, it may be difficult for a firm to deviate
secretly. If orders for the relevant product are frequent, regular and small
relative to the total output of a firm in a market, it may be difficult for the
firm to deviate in a substantial way without the knowledge of rivals and without
the opportunity for rivals to react. If demand or cost fluctuations are
relatively infrequent and small, deviations may be relatively easy to
deter.
By contrast, where detection or punishment is likely to be
slow, incentives to deviate are enhanced and coordinated interaction is unlikely
to be successful. If demand or cost fluctuations are relatively frequent and
large, deviations may be relatively difficult to distinguish from these other
sources of market price fluctuations, and, in consequence, deviations may be
relatively difficult to deter.
In certain circumstances, buyer characteristics and the
nature of the procurement process may affect the incentives to deviate from
terms of coordination. Buyer size alone is not the determining characteristic.
Where large buyers likely would engage in long-term contracting, so that the
sales covered by such contracts can be large relative to the total output of a
firm in the market, firms may have the incentive to deviate. However, this only
can be accomplished where the duration, volume and profitability of the business
covered by such contracts are sufficiently large as to make deviation more
profitable in the long term than honoring the terms of coordination, and buyers
likely would switch suppliers.
In some circumstances, coordinated interaction can be
effectively prevented or limited by maverick firms -- firms that have a greater
economic incentive to deviate from the terms of coordination than do most of
their rivals (e.g., firms that are unusually disruptive and competitive
influences in the market). Consequently, acquisition of a maverick firm is one
way in which a merger may make coordinated interaction more likely, more
successful, or more complete. For example, in a market where capacity
constraints are significant for many competitors, a firm is more likely to be a
maverick the greater is its excess or divertable capacity in relation to its
sales or its total capacity, and the lower are its direct and opportunity costs
of expanding sales in the relevant market.(19) This is so
because a firm's incentive to deviate from price-elevating and output-limiting
terms of coordination is greater the more the firm is able profitably to expand
its output as a proportion of the sales it would obtain if it adhered to the
terms of coordination and the smaller is the base of sales on which it enjoys
elevated profits prior to the price cutting deviation.(20) A
firm also may be a maverick if it has an unusual ability secretly to expand its
sales in relation to the sales it would obtain if it adhered to the terms of
coordination. This ability might arise from opportunities to expand captive
production for a downstream affiliate.
19 But excess capacity in the hands of non-maverick firms
may be a potent weapon with which to punish deviations from the terms of
coordination.
20 Similarly, in a market where product design or quality is
significant, a firm is more likely to be an effective maverick the greater is
the sales potential of its products among customers of its rivals, in relation
to the sales it would obtain if it adhered to the terms of coordination. The
likelihood of expansion responses by a maverick will be analyzed in the same
fashion as uncommitted entry or committed entry (see Sections 1.3 and 3)
depending on the significance of the sunk costs entailed in
expansion.
2.2 Lessening of Competition Through
Unilateral Effects
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A merger may diminish competition even if it does not lead
to increased likelihood of successful coordinated interaction, because merging
firms may find it profitable to alter their behavior unilaterally following the
acquisition by elevating price and suppressing output. Unilateral competitive
effects can arise in a variety of different settings. In each setting,
particular other factors describing the relevant market affect the likelihood of
unilateral competitive effects. The settings differ by the primary
characteristics that distinguish firms and shape the nature of their
competition.
2.21 Firms Distinguished Primarily by
Differentiated Products
In some markets the products are differentiated, so that
products sold by different participants in the market are not perfect
substitutes for one another. Moreover, different products in the market may vary
in the degree of their substitutability for one another. In this setting,
competition may be non-uniform (i.e., localized), so that individual sellers
compete more directly with those rivals selling closer
substitutes.(21)
A merger between firms in a market for differentiated
products may diminish competition by enabling the merged firm to profit by
unilaterally raising the price of one or both products above the premerger
level. Some of the sales loss due to the price rise merely will be diverted to
the product of the merger partner and, depending on relative margins, capturing
such sales loss through merger may make the price increase profitable even
though it would not have been profitable premerger. Substantial unilateral price
elevation in a market for differentiated products requires that there be a
significant share of sales in the market accounted for by consumers who regard
the products of the merging firms as their first and second choices, and that
repositioning of the non-parties' product lines to replace the localized
competition lost through the merger be unlikely. The price rise will be greater
the closer substitutes are the products of the merging firms, i.e., the more the
buyers of one product consider the other product to be their next
choice.
2.211 Closeness of the Products of
the Merging Firms
The market concentration measures articulated in Section 1
may help assess the extent of the likely competitive effect from a unilateral
price elevation by the merged firm notwithstanding the fact that the affected
products are differentiated. The market concentration measures provide a measure
of this effect if each product's market share is reflective of not only its
relative appeal as a first choice to consumers of the merging firms' products
but also its relative appeal as a second choice, and hence as a competitive
constraint to the first choice.(22) Where this circumstance
holds, market concentration data fall outside the safeharbor regions of Section
1.5, and the merging firms have a combined market share of at least thirty-five
percent, the Agency will presume that a significant share of sales in the market
are accounted for by consumers who regard the products of the merging firms as
their first and second choices.
Purchasers of one of the merging firms' products may be
more or less likely to make the other their second choice than market shares
alone would indicate. The market shares of the merging firms' products may
understate the competitive effect of concern, when, for example, the products of
the merging firms are relatively more similar in their various attributes to one
another than to other products in the relevant market. On the other hand, the
market shares alone may overstate the competitive effects of concern when, for
example, the relevant products are less similar in their attributes to one
another than to other products in the relevant market.
Where market concentration data fall outside the
safeharbor regions of Section 1.5, the merging firms have a combined market
share of at least thirty-five percent, and where data on product attributes and
relative product appeal show that a significant share of purchasers of one
merging firm's product regard the other as their second choice, then market
share data may be relied upon to demonstrate that there is a significant share
of sales in the market accounted for by consumers who would be adversely
affected by the merger.
2.212 Ability of Rival Sellers to
Replace Lost Competition
A merger is not likely to lead to unilateral elevation of
prices of differentiated products if, in response to such an effect, rival
sellers likely would replace any localized competition lost through the merger
by repositioning their product lines.(23)
In markets where it is costly for buyers to evaluate
product quality, buyers who consider purchasing from both merging parties may
limit the total number of sellers they consider. If either of the merging firms
would be replaced in such buyers' consideration by an equally competitive seller
not formerly considered, then the merger is not likely to lead to a unilateral
elevation of prices.
2.22 Firms Distinguished Primarily by
Their Capacities
Where products are relatively undifferentiated and
capacity primarily distinguishes firms and shapes the nature of their
competition, the merged firm may find it profitable unilaterally to raise price
and suppress output. The merger provides the merged firm a larger base of sales
on which to enjoy the resulting price rise and also eliminates a competitor to
which customers otherwise would have diverted their sales. Where the merging
firms have a combined market share of at least thirty-five percent, merged firms
may find it profitable to raise price and reduce joint output below the sum of
their premerger outputs because the lost markups on the foregone sales may be
outweighed by the resulting price increase on the merged base of
sales.
This unilateral effect is unlikely unless a sufficiently
large number of the merged firm's customers would not be able to find economical
alternative sources of supply, i.e., competitors of the merged firm likely would
not respond to the price increase and output reduction by the merged firm with
increases in their own outputs sufficient in the aggregate to make the
unilateral action of the merged firm unprofitable. Such non-party expansion is
unlikely if those firms face binding capacity constraints that could not be
economically relaxed within two years or if existing excess capacity is
significantly more costly to operate than capacity currently in
use.(24)
21 Similarly, in some markets sellers are primarily
distinguished by their relative advantages in serving different buyers or groups
of buyers, and buyers negotiate individually with sellers. Here, for example,
sellers may formally bid against one another for the business of a buyer, or
each buyer may elicit individual price quotes from multiple sellers. A seller
may find it relatively inexpensive to meet the demands of particular buyers or
types of buyers, and relatively expensive to meet others' demands. Competition,
again, may be localized: sellers compete more directly with those rivals having
similar relative advantages in serving particular buyers or groups of buyers.
For example, in open outcry auctions, price is determined by the cost of the
second lowest-cost seller. A merger involving the first and second lowest-cost
sellers could cause prices to rise to the constraining level of the next
lowest-cost seller.
22 Information about consumers' actual first and second
product choices may be provided by marketing surveys, information from bidding
structures, or normal course of business documents from industry participants.
23 The timeliness and likelihood of repositioning responses
will be analyzed using the same methodology as used in analyzing uncommitted
entry or committed entry (see Sections 1.3 and 3), depending on the significance
of the sunk costs entailed in repositioning.
24 The timeliness and likelihood of non-party expansion will
be analyzed using the same methodology as used in analyzing uncommitted or
committed entry (see Sections 1.3 and 3) depending on the significance of the
sunk costs entailed in expansion.
3. Entry Analysis
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3.0
Overview
A merger is not likely to create or enhance market power
or to facilitate its exercise, if entry into the market is so easy that market
participants, after the merger, either collectively or unilaterally could not
profitably maintain a price increase above premerger levels. Such entry likely
will deter an anticompetitive merger in its incipiency, or deter or counteract
the competitive effects of concern.
Entry is that easy if entry would be timely, likely, and
sufficient in its magnitude, character and scope to deter or counteract the
competitive effects of concern. In markets where entry is that easy (i.e., where
entry passes these tests of timeliness, likelihood, and sufficiency), the merger
raises no antitrust concern and ordinarily requires no further
analysis.
The committed entry treated in this Section is defined as
new competition that requires expenditure of significant sunk costs of entry and
exit.(25) The Agency employs a three-step methodology to assess
whether committed entry would deter or counteract a competitive effect of
concern.
The first step assesses whether entry can achieve
significant market impact within a timely period. If significant market impact
would require a longer period, entry will not deter or counteract the
competitive effect of concern.
The second step assesses whether committed entry would be
a profitable and, hence, a likely response to a merger having competitive
effects of concern. Firms considering entry that requires significant sunk costs
must evaluate the profitability of the entry on the basis of long term
participation in the market, because the underlying assets will be committed to
the market until they are economically depreciated. Entry that is sufficient to
counteract the competitive effects of concern will cause prices to fall to their
premerger levels or lower. Thus, the profitability of such committed entry must
be determined on the basis of premerger market prices over the
long-term.
A merger having anticompetitive effects can attract
committed entry, profitable at premerger prices, that would not have occurred
premerger at these same prices. But following the merger, the reduction in
industry output and increase in prices associated with the competitive effect of
concern may allow the same entry to occur without driving market prices below
premerger levels. After a merger that results in decreased output and increased
prices, the likely sales opportunities available to entrants at premerger prices
will be larger than they were premerger, larger by the output reduction caused
by the merger. If entry could be profitable at premerger prices without
exceeding the likely sales opportunities -- opportunities that include
pre-existing pertinent factors as well as the merger-induced output reduction --
then such entry is likely in response to the merger
The third step assesses whether timely and likely entry
would be sufficient to return market prices to their premerger levels. This end
may be accomplished either through multiple entry or individual entry at a
sufficient scale. Entry may not be sufficient, even though timely and likely,
where the constraints on availability of essential assets, due to incumbent
control, make it impossible for entry profitably to achieve the necessary level
of sales. Also, the character and scope of entrants' products might not be fully
responsive to the localized sales opportunities created by the removal of direct
competition among sellers of differentiated products. In assessing whether entry
will be timely, likely, and sufficient, the Agency recognizes that precise and
detailed information may be difficult or impossible to obtain. In such
instances, the Agency will rely on all available evidence bearing on whether
entry will satisfy the conditions of timeliness, likelihood, and
sufficiency.
25 Supply responses that require less than one year and
insignificant sunk costs to effectuate are analyzed as uncommitted entry in
Section 1.3.
3.1 Entry
Alternatives
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The Agency will examine the timeliness, likelihood, and
sufficiency of the means of entry (entry alternatives) a potential entrant might
practically employ, without attempting to identify who might be potential
entrants. An entry alternative is defined by the actions the firm must take in
order to produce and sell in the market. All phases of the entry effort will be
considered, including, where relevant, planning, design, and management;
permitting, licensing, and other approvals; construction, debugging, and
operation of production facilities; and promotion (including necessary
introductory discounts), marketing, distribution, and satisfaction of customer
testing and qualification requirements.(26) Recent examples of
entry, whether successful or unsuccessful, may provide a useful starting point
for identifying the necessary actions, time requirements, and characteristics of
possible entry alternatives.
26 Many of these phases may be undertaken simultaneously.
3.2 Timeliness of
Entry
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In order to deter or counteract the competitive effects of
concern, entrants quickly must achieve a significant impact on price in the
relevant market. The Agency generally will consider timely only those committed
entry alternatives that can be achieved within two years from initial planning
to significant market impact.(27) Where the relevant product is
a durable good, consumers, in response to a significant commitment to entry, may
defer purchases by making additional investments to extend the useful life of
previously purchased goods and in this way deter or counteract for a time the
competitive effects of concern. In these circumstances, if entry only can occur
outside of the two year period, the Agency will consider entry to be timely so
long as it would deter or counteract the competitive effects of concern within
the two-year period and subsequently.
27 Firms which have committed to entering the market prior
to the merger generally will be included in the measurement of the market. Only
committed entry or adjustments to pre-existing entry plans that are induced by
the merger will be considered as possibly deterring or counteracting the
competitive effects of concern.
3.3 Likelihood of
Entry
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An entry alternative is likely if it would be profitable
at premerger prices, and if such prices could be secured by the
entrant.(28) The committed entrant will be unable to secure
prices at premerger levels if its output is too large for the market to absorb
without depressing prices further. Thus, entry is unlikely if the minimum viable
scale is larger than the likely sales opportunity available to entrants.
Minimum viable scale is the smallest average annual level
of sales that the committed entrant must persistently achieve for profitability
at premerger prices.(29) Minimum viable scale is a function of
expected revenues, based upon premerger prices,(30) and all
categories of costs associated with the entry alternative, including an
appropriate rate of return on invested capital given that entry could fail and
sunk costs, if any, will be lost.(31)
Sources of sales opportunities available to entrants
include: (a) the output reduction associated with the competitive effect of
concern,(32) (b) entrants' ability to capture a share of
reasonably expected growth in market demand,(33) (c) entrants'
ability securely to divert sales from incumbents, for example, through vertical
integration or through forward contracting, and (d) any additional anticipated
contraction in incumbents' output in response to entry.(34)
Factors that reduce the sales opportunities available to entrants include: (a)
the prospect that an entrant will share in a reasonably expected decline in
market demand, (b) the exclusion of an entrant from a portion of the market over
the long term because of vertical integration or forward contracting by
incumbents, and (c) any anticipated sales expansion by incumbents in reaction to
entry, either generalized or targeted at customers approached by the entrant,
that utilizes prior irreversible investments in excess production capacity.
Demand growth or decline will be viewed as relevant only if total market demand
is projected to experience long-lasting change during at least the two year
period following the competitive effect of concern.
28 Where conditions indicate that entry may be profitable at
prices below premerger levels, the Agency will assess the likelihood of entry at
the lowest price at which such entry would be profitable.
29 The concept of minimum viable scale ("MVS") differs from
the concept of minimum efficient scale ("MES"). While MES is the smallest scale
at which average costs are minimized, MVS is the smallest scale at which average
costs equal the premerger price.
30 The expected path of future prices, absent the merger,
may be used if future price changes can be predicted with reasonable
reliability.
31 The minimum viable scale of an entry alternative will be
relatively large when the fixed costs of entry are large, when the fixed costs
of entry are largely sunk, when the marginal costs of production are high at low
levels of output, and when a plant is underutilized for a long time because of
delays in achieving market acceptance.
32 Five percent of total market sales typically is used
because where a monopolist profitably would raise price by five percent or more
across the entire relevant market, it is likely that the accompanying reduction
in sales would be no less than five percent.
33 Entrants' anticipated share of growth in demand depends
on incumbents' capacity constraints and irreversible investments in capacity
expansion, as well as on the relative appeal, acceptability and reputation of
incumbents' and entrants' products to the new demand.
34 For example, in a bidding market where all bidders are on
equal footing, the market share of incumbents will contract as a result of
entry.
3.4 Sufficiency of
Entry
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Inasmuch as multiple entry generally is possible and
individual entrants may flexibly choose their scale, committed entry generally
will be sufficient to deter or counteract the competitive effects of concern
whenever entry is likely under the analysis of Section 3.3. However, entry,
although likely, will not be sufficient if, as a result of incumbent control,
the tangible and intangible assets required for entry are not adequately
available for entrants to respond fully to their sales opportunities. In
addition, where the competitive effect of concern is not uniform across the
relevant market, in order for entry to be sufficient, the character and scope of
entrants' products must be responsive to the localized sales opportunities that
include the output reduction associated with the competitive effect of concern.
For example, where the concern is unilateral price elevation as a result of a
merger between producers of differentiated products, entry, in order to be
sufficient, must involve a product so close to the products of the merging firms
that the merged firm will be unable to internalize enough of the sales loss due
to the price rise, rendering the price increase unprofitable.
4. Efficiencies
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(Revised Section 4 Horizontal Merger
Guidelines Issued by the U.S. Department of Justice and the Federal Trade
Commission April 8, 1997)
Competition usually spurs firms to achieve efficiencies
internally. Nevertheless, mergers have the potential to generate significant
efficiencies by permitting a better utilization of existing assets, enabling the
combined firm to achieve lower costs in producing a given quantity and quality
than either firm could have achieved without the proposed transaction. Indeed,
the primary benefit of mergers to the economy is their potential to generate
such efficiencies.
Efficiencies generated through merger can enhance the
merged firm's ability and incentive to compete, which may result in lower
prices, improved quality, enhanced service, or new products. For example,
merger-generated efficiencies may enhance competition by permitting two
ineffective (e.g., high cost) competitors to become one effective (e.g., lower
cost) competitor. In a coordinated interaction context (see Section 2.1),
marginal cost reductions may make coordination less likely or effective by
enhancing the incentive of a maverick to lower price or by creating a new
maverick firm. In a unilateral effects context (see Section 2.2), marginal cost
reductions may reduce the merged firm's incentive to elevate price. Efficiencies
also may result in benefits in the form of new or improved products, and
efficiencies may result in benefits even when price is not immediately and
directly affected. Even when efficiencies generated through merger enhance a
firm's ability to compete, however, a merger may have other effects that may
lessen competition and ultimately may make the merger
anticompetitive.
The Agency will consider only those efficiencies likely to
be accomplished with the proposed merger and unlikely to be accomplished in the
absence of either the proposed merger or another means having comparable
anticompetitive effects. These are termed merger-specific
efficiencies.(35) Only alternatives that are practical in the
business situation faced by the merging firms will be considered in making this
determination; the Agency will not insist upon a less restrictive alternative
that is merely theoretical.
Efficiencies are difficult to verify and quantify, in part
because much of the information relating to efficiencies is uniquely in the
possession of the merging firms. Moreover, efficiencies projected reasonably and
in good faith by the merging firms may not be realized. Therefore, the merging
firms must substantiate efficiency claims so that the Agency can verify by
reasonable means the likelihood and magnitude of each asserted efficiency, how
and when each would be achieved (and any costs of doing so), how each would
enhance the merged firm's ability and incentive to compete, and why each would
be merger-specific. Efficiency claims will not be considered if they are vague
or speculative or otherwise cannot be verified by reasonable
means.
Cognizable efficiencies are merger-specific efficiencies
that have been verified and do not arise from anticompetitive reductions in
output or service. Cognizable efficiencies are assessed net of costs produced by
the merger or incurred in achieving those efficiencies.
The Agency will not challenge a merger if cognizable
efficiencies are of a character and magnitude such that the merger is not likely
to be anticompetitive in any relevant market.(36) To make the
requisite determination, the Agency considers whether cognizable efficiencies
likely would be sufficient to reverse the merger's potential to harm consumers
in the relevant market, e.g., by preventing price increases in that market. In
conducting this analysis,(37) the Agency will not simply
compare the magnitude of the cognizable efficiencies with the magnitude of the
likely harm to competition absent the efficiencies. The greater the potential
adverse competitive effect of a merger--- as indicated by the increase in the
HHI and post-merger HHI from Section 1, the analysis of potential adverse
competitive effects from Section 2, and the timeliness, likelihood, and
sufficiency of entry from Section 3--- the greater must be cognizable
efficiencies in order for the Agency to conclude that the merger will not have
an anticompetitive effect in the relevant market. When the potential adverse
competitive effect of a merger is likely to be particularly large,
extraordinarily great cognizable efficiencies would be necessary to prevent the
merger from being anticompetitive.
In the Agency's experience, efficiencies are most likely
to make a difference in merger analysis when the likely adverse competitive
effects, absent the efficiencies, are not great. Efficiencies almost never
justify a merger to monopoly or near-monopoly.
The Agency has found that certain types of efficiencies
are more likely to be cognizable and substantial than others. For example,
efficiencies resulting from shifting production among facilities formerly owned
separately, which enable the merging firms to reduce the marginal cost of
production, are more likely to be susceptible to verification, merger-specific,
and substantial, and are less likely to result from anticompetitive reductions
in output. Other efficiencies, such as those relating to research and
development, are potentially substantial but are generally less susceptible to
verification and may be the result of anticompetitive output reductions. Yet
others, such as those relating to procurement, management, or capital cost are
less likely to be merger-specific or substantial, or may not be cognizable for
other reasons.
35 The Agency will not deem efficiencies to be
merger-specific if they could be preserved by practical alternatives that
mitigate competitive concerns, such as divestiture or licensing. If a merger
affects not whether but only when an efficiency would be achieved, only the
timing advantage is a merger-specific efficiency.
36 Section 7 of the Clayton Act prohibits mergers that may
substantially lessen competition "in any line of commerce . . . in any section
of the country." Accordingly, the Agency normally assesses competition in each
relevant market affected by a merger independently and normally will challenge
the merger if it is likely to be anticompetitive in any relevant market. In some
cases, however, the Agency in its prosecutorial discretion will consider
efficiencies not strictly in the relevant market, but so inextricably linked
with it that a partial divestiture or other remedy could not feasibly eliminate
the anticompetitive effect in the relevant market without sacrificing the
efficiencies in the other market(s). Inextricably linked efficiencies rarely are
a significant factor in the Agency's determination not to challenge a merger.
They are most likely to make a difference when they are great and the likely
anticompetitive effect in the relevant market(s) is small.
37 The result of this analysis over the short term will
determine the Agency's enforcement decision in most cases. The Agency also will
consider the effects of cognizable efficiencies with no short-term, direct
effect on prices in the relevant market. Delayed benefits from efficiencies (due
to delay in the achievement of, or the realization of consumer benefits from,
the efficiencies) will be given less weight because they are less proximate and
more difficult to predict.
5. Failure and Exiting
Assets
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5.0
Overview
Notwithstanding the analysis of Sections 1-4 of the
Guidelines, a merger is not likely to create or enhance market power or to
facilitate its exercise, if imminent failure, as defined below, of one of the
merging firms would cause the assets of that firm to exit the relevant market.
In such circumstances, post-merger performance in the relevant market may be no
worse than market performance had the merger been blocked and the assets left
the market.
5.1 Failing Firm
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A merger is not likely to create or enhance market power
or facilitate its exercise if the following circumstances are met: 1) the
allegedly failing firm would be unable to meet its financial obligations in the
near future; 2) it would not be able to reorganize successfully under Chapter ll
of the Bankruptcy Act;(38) 3) it has made unsuccessful
good-faith efforts to elicit reasonable alternative offers of acquisition of the
assets of the failing firm(39) that would both keep its
tangible and intangible assets in the relevant market and pose a less severe
danger to competition than does the proposed merger; and 4) absent the
acquisition, the assets of the failing firm would exit the relevant
market.
38 11 U.S.C. §§ 1101-1174 (1988).
39 Any offer to purchase the assets of the failing firm for
a price above the liquidation value of those assets -- the highest valued use
outside the relevant market or equivalent offer to purchase the stock of the
failing firm -- will be regarded as a reasonable alternative
offer.
5.2 Failing
Division
A similar argument can be made for "failing" divisions as
for failing firms. First, upon applying appropriate cost allocation rules, the
division must have a negative cash flow on an operating basis. Second, absent
the acquisition, it must be that the assets of the division would exit the
relevant market in the near future if not sold. Due to the ability of the parent
firm to allocate costs, revenues, and intracompany transactions among itself and
its subsidiaries and divisions, the Agency will require evidence, not based
solely on management plans that could be prepared solely for the purpose of
demonstrating negative cash flow or the prospect of exit from the relevant
market. Third, the owner of the failing division also must have complied with
the competitively-preferable purchaser requirement of Section 5.1.