Academic journal article Economic Inquiry

Empirical Evidence on FTC Enforcement of the Merger Guidelines

Academic journal article Economic Inquiry

Empirical Evidence on FTC Enforcement of the Merger Guidelines

Article excerpt

The Justice Department's 1982/1984 merger guidelines identify various factors-- concentration, entry barriers, ease of collusion, efficiency--that would thereafter determine whether the government will challenge a merger. Analysts have criticized enforcement agencies, however, for not following the guidelines, and criticize the guidelines themselves for not identifying the weights attached to the factors. Using a 1982-86 sample of seventy horizontal mergers, we examine which factors influenced Federal Trade Commission decisions to challenge mergers. The relative importance of the guidelines and other factors in merger challenges is measured, and related empirical issues are also explored.

I. INTRODUCTION

The 1982/1984 "merger guidelines" adopted by the Antitrust Division of the Department of Justice (DOJ) and followed by the Federal Trade Commission (FTC) marked important antitrust policy changes by the Reagan administration. The Herfindahl index replaced the fourfirm ratios used in the old (1968) guidelines as the measure of concentration. Other non-concentration factors (barriers to entry, ease of collusion) were elevated in importance. In the 1984 revision of the 1982 guidelines, efficiency considerations were for the first time generally included as a relevant factor.

However, commentators who applauded the newer guidelines have complained subsequently that the Reagan administration did not apply them. The objections of two veteran academic antitrusters, Krattenmaker and Pitofsky [1988, 232], are typical:

Certainly, in many respects, the announced merger guidelines are a substantial accomplishment .... This accomplishment, however, has been almost completely undercut by the Administration's behavior in ignoring those guidelines in practice and instead enforcing, without any public explanation, a merger policy that was not only exceptionally lenient but substantially at odds with professed standards.

In an earlier paper (Coate et al. [1990]), we, along with coauthor Richard Higgins, tested one hypothesis why merger policy (at least at the FTC in 1982-86) has departed from mere enforcement of the guidelines: politics. We showed how external pressures imposed on the Commission by Congress to block mergers, independent of the factors identified in the guidelines as meriting a merger challenge, are a statistically significant factor in the FTC's decision whether to challenge a merger.

In the present paper, we use the same data--seventy horizontal mergers from 1982 to 1986--to examine in greater detail the charges that the FTC has not followed the guidelines, plus several related issues not considered in our earlier article. These include the extent to which various guidelines factors are either necessary or sufficient for the Commission to vote to challenge a merger, and the role of the new efficiency criterion in merger evaluation. An econometric model is presented as one approach to determine how the FTC balances the various guidelines factors. This allows an estimate of the relative importance and influence of lawyers and economists in the evaluation process. Finally, the data also permit an appraisal of the extent to which a structuralist or Chicago approach to competition issues dominated merger votes at the FTC during the relevant period.

Section II discusses briefly the factors identified in the merger guidelines and the process by which the Commission determines whether to oppose a proposed merger. That section also identifies several testable hypotheses concerning the Commission's reliance on the guidelines variables. Section III then explains the data to be used for testing. Section IV, the bulk of the paper, presents empirical evidence concerning the FTC's use of the guidelines and related issues.

II. EVALUATING MERGERS AT THE FEDERAL

TRADE COMMISSION

The Merger Guidelines

The Federal Trade Commission enforces (along with the Justice Department) the federal antitrust laws, including those applicable to mergers. …

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