Academic journal article Texas Law Review

Measuring Anticompetitive Effects of Mergers When Buyer Power Is Concentrated

Academic journal article Texas Law Review

Measuring Anticompetitive Effects of Mergers When Buyer Power Is Concentrated

Article excerpt

I. Introduction

Little more than twenty years ago, when the number three and six retailers in the Los Angeles grocery market attempted to merge into the region's number two ranked competitor, the response from the Department of Justice and the Supreme Court was swift.1 In interpreting the Clayton Act, the Court struck down the proposed merger, noting that this type of merger was evidence of "exactly the threatening trend toward concentration which Congress wanted to halt."2 That the proposed merger would have resulted in a consolidation of only 7.5% of the market was nonetheless alarming.3 In fact, the Supreme Court concluded that the long and constant trend toward fewer competitors was "exactly the sort of trend which Congress, with power to do so, declared must be arrested."4 So offensive was the proposed merger that the Supreme Court did not simply reverse the district court, but directed the court to order its divestiture "without delay. "5

What a difference twenty-three years make. In 1999, Exxon and Mobil, the number one and two producers of domestic oil respectively, announced plans to effectuate a merger without a challenge from the Department of Justice.6

This period of relative inactivity in antitrust enforcement has occurred at the same time as, and has perhaps been a partial cause of, the enormous rise in the rate of mergers and acquisitions. There has been an expansion of merger activity at rates that dwarf those of the "go-go '80s. "7 The rate of mergers and acquisitions has increased for five consecutive years, now constituting more than two trillion dollars in transactions annually in the United States alone.8 During this period, antitrust enforcement has, tellingly, been almost dormant. It has been more than twenty years since the U.S. Supreme Court has heard a merger case. While considerable newsplay has been given to the Microsoft case, this case is the exception that proves the rule of government inactivity in antitrust enforcement. What accounts for such a dramatic dropoff in antitrust activity?

Antitrust laws came about from the basic notion that big is bad. Justice Brandeis, writing in Standard Oil, judged bigness a "curse" that justified court-ordered breakups.9 In arguing for his proposed antitrust legislation in 1890, Senator Sherman threatened that communism or socialism could result from a popular backlash against the power of concentrated industries.10 The recent evolution away from this notion occurred when economists began to analyze the effects of mergers and to conclude that, often, the result of consolidations was to increase efficiencies and thereby reduce consumer costs. This doctrine, developed in the Chicago school of legal-economic analysis, reached its zenith in Robert Bork's 1978 book The Antitrust Paradox. In particular, Bork wrote that the dangers of a vertical merger-one in which a retailer, for example, acquires its supplier-were exaggerated. Instead, "efficiency necessarily benefits consumers by lowering the costs of goods and services . . . whether the business unit is a competitor or a monopolist."11 Far from assuming that monopolies were bad, the Bork view was that consolidation was, of itself, largely irrelevant; instead the necessary analysis depended on a merger's effect on consumers.12

However, despite the more sophisticated evolution in antitrust analysis it was observed that profits tended to be higher in concentrated industries. This suggested that there was, at best, pricing power or, at worst, some element of collusion when there were clear market leaders. Judicial rulings, however, did not go beyond the most basic tools of economic analysis.

II. Economic Tools of Analysis: The Cournot Model/HHI Index

The economic tools of antitrust analysis have developed rapidly in sophistication during the past thirty years. One of the first instruments used in this period to measure market concentration in the context of mergers was a computation of the aggregate percentage of market share for sales held by a given number of firms. …

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