Proposed new guidelines stack the deck against mergers by politicizing market definitions, presuming guilt, and adding uncertainty to the process.
Proposed new guidelines stack the deck against mergers by politicizing market definitions, presuming guilt, and adding uncertainty to the process.
T he Biden administration has unveiled a draft version of new merger guidelines, courtesy of the Federal Trade Commission and the Department of Justice. This is a big deal. Antitrust regulators review all proposed mergers above a certain size and can veto the deals. The guidelines are not binding law, but they do signal to companies whether a deal is likely to pass muster, saving time and lawyers’ fees. The proposed new merger guidelines stack the deck against mergers by politicizing market definitions, presuming guilt, and adding uncertainty to the process.
Regulators calculate market concentration using the Herfindahl–Hirschman Index (HHI), which tallies how many companies are in a given market and how much market share each one has. The index assigns a score of 1 to 10,000, where 10,000 is a perfect monopoly.
For example, a four-company market where each firm has 25 percent share has an HHI score of 2,500. A different four-company market where one company has 97 percent market share and the other three each have 1 percent has a 9,412 HHI score, and probably an antitrust case.
That 2,500 mark is the traditional threshold for where regulators take a closer look at a merger. The new guidelines lower that threshold to 1,800. And where a 2,500 score wouldn’t mean an automatic no, the new lower threshold comes close: “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.”
This flips the burden of proof from the government to prove a company’s guilt to a company to prove its innocence. Companies must prove innocence by demonstrating that they meet certain conditions spelled out elsewhere in the guidelines.
Worse, regulators can define “relevant markets” any way they want to, which means they can get almost any HHI score they want. Computer scientists call this a garbage-in, garbage-out problem, and it is an example of what’s called the relevant-market fallacy. It is fatal to the index’s integrity.
HHI might sound fancy because it uses math, but it is so easily politicized that it is analytically useless. Regulators can and should abandon it altogether.
Market-definition word games were already a problem under the old guidelines. Between the lower HHI threshold, the presumption of guilt, and FTC chairwoman Lina Khan’s ideological animus against mergers, the new guidelines’ economic costs could be staggering. Consumers would pay higher prices when companies can’t combine to take advantage of large-scale efficiencies. Start-ups would lose a way to gain access to the resources they need to get their innovations to the masses. Smaller rivals would go out of business when they should be able to combine and stay competitive against a dominant competitor.
The lower HHI threshold is just one of many ways Khan is trying to rewrite antitrust law away from consumer protection and toward a populist big-is-bad approach. The polite phrase for her views is old-fashioned. Antitrust law moved on from Khan’s approach decades ago in favor of a consumer-welfare standard: Are consumers better or worse off? In reality, big isn’t automatically bad. Rather, big must behave badly, such as by raising prices or restricting supply, before enforcers act. Khan’s smokestack-era views are why the cases cited in the new guidelines have an average year of 1975.
The potential saving grace to this fiasco is that judges decide merger cases, not the Federal Trade Commission. Courts have repeatedly rejected Khan’s attempts to use ultra-narrow market definitions and revive discredited antitrust theories in cases involving Microsoft, Meta, and the cancer-detection companies Illumina and Grail.
Courts will also likely be skeptical of cases brought under the new merger guidelines. But even if the judicial wall holds, there will still be costs. Pro-competitive mergers in groceries, health care, and technology that might have gone through before without a hassle might now spend years in court and cost millions in legal fees in cases they are likely to ultimately win. This government persecution increases transaction costs, not market competition.
Other companies might decide not to merge at all, not wanting to deal with the expenses and bad publicity from a hostile agency. And that may well be the message that the FTC and DOJ want to give.
Just 22 days before the release of the draft-merger guidelines, the FTC and the Justice Department proposed changes to the pre-merger notification rules under the Hart-Scott-Rodino (HSR) Act. Under the act, all mergers over a certain size must be reviewed before closing. Merging parties submit the HSR form and other required documentation to regulators, and regulators can also send a second request to gather additional information on the proposed merger.
At present, compliance requires about 37 preparation hours. But the proposed changes would increase that time to 144 hours per filing because of a large increase in the amount of paperwork required. Only 3.1 percent of filings receive second requests, but the new rules would burden all transactions, even those with few or no antitrust concerns. This will discourage pro-competitive mergers.
These opportunity costs would deprive consumers of lower prices and new innovations they will never realize because they will never happen. Since Khan’s FTC isn’t likely to win many cases under the new guidelines, about the only winners from her new guidelines will be lawyers.
Ryan Young is a senior economist at the Competitive Enterprise Institute. Alex Reinauer is a research fellow at CEI and runs its Eye on FTC project.