The “merger guidelines” that have been published by the Federal Trade Commission and the US Department of Justice since 1969–with updates happening every 10-15 years–serve an unusual role. They are not federal regulations like, say, rules about what level of pollutants can be emitted from the Environmental Protection Administration. Instead, the merger guidelines seek to spell out the established legal and economic understanding of how to think about whether a merger is permissible. When an antitrust suit goes to trial, it has been common for all parties to agree on the merger guidelines themselves–although of course they are disagreeing on how the guidelines apply to the specific case at hand.
Thus, when President Biden’s antitrust regulators announced that they were withdrawing the earlier merger guidelines with the intention of writing new ones, there’s been a lot of interest over what might happen. I wrote about this, for example, in “Antitrust: Dilatancy Before the Earthquake?” (June 8, 2023). Now, the draft of the merger guidelines for purposes of public comment has been published.
The concern over the new merger guidelines was that Biden’s antitrust authorities were no longer trying to convey a sense of the law as it is, but rather were trying to use new merger guidelines as a way of altering the law. The concern appears to be a real one. For an overview of some issues, see the WSJ article by Jason Furman and Carl Shapiro, both economists with partisan Democratic affiliations, in “How Biden Can Get Antitrust Right: New draft competition guidelines released last week need revision. Not all mergers are bad” (July 27, 2023). They write:
Merger guidelines aren’t enforceable regulations. They have also never attempted to be a legal brief or offered an interpretation of the case law. Instead they have described widely accepted economic principles that the Justice Department and the FTC use to analyze mergers. As a result, the guidelines have commanded widespread respect and bipartisan support. Amazingly, for at least 25 years, when regulators have challenged mergers in court, the merging firms themselves have accepted the framework articulated in the guidelines.The new draft guidelines depart sharply from previous iterations by elevating regulators’ interpretation of case law over widely accepted economic principles. The guidelines have long helped courts use economic reasoning to evaluate government challenges to mergers. They shouldn’t become a debatable legal brief or, worse, a political football. Regulators say the guidelines are out of date and need to be updated to reflect the modern economy. Yet their draft draws heavily on Brown Shoe Co. v. U.S. (1962), a widely criticized Supreme Court case.
Furman and Shapiro dig down into some specific details of what they like and don’t like about the new guidelines, and I’m sure there will more commentary in the next few months about the details. Here, I want to focus on an overall point about antitrust and mergers: what is the overall policy goal here? The usual answer is to allow mergers that make consumers better off, whether by reducing prices or by providing products of higher quality, and to disallow mergers that would make consumers worse off.
The Brown Shoe case has been an example of how not to do antitrust. The case was about a proposed merger between two shoe companies: Brown Shoe and GR Kinney. The shoe industry was not very concentrated. Brown She made about 4% of all shoes in the US; Kinney made 0.5%. At the retail level, the two companies combined for 2.3% of the shoe stores in the US. The goal of the merger was that the retail outlets of both stores would then be able to sell shoes from both companies.
But the court held that this level of industrial concentration was excessive, which is highly questionable. But the court also held that the merger could lead to greater efficiency that would allow prices for shoes to decline, which could hurt other shoe companies. In Brown Shoe, in other words, the goal of antitrust regulation was not to help consumers with lower prices or improved quality of service; instead, the goal of antitrust was, paradoxically, to limit competition in the name of avoiding harm to competitors.
I’ll note that there is sometimes an argument made that “Brown Shoe has never been overruled by the Supreme Court.” This is technically true, in the sense that no Supreme Court decision has written “we now overrule Brown Shoe.” But a series of court decisions has made Brown Shoe obsolete for a long time. For a case-by-case overview of how this happened, see this short essay by Herbert Hovenkamp, a preeminent scholar of antitrust law (“Did the Supreme Court Fix `Brown Shoe?”ProMarket, May 12, 2023). Hovenkamp writes about the case:
The Supreme Court’s 1962 Brown Shoe decision is sharply at odds with what courts do today in merger cases. Its troublesome doctrine was that antitrust law should be concerned about market concentration without regard to prices. It even indicated approval for the district court’s conclusion that the merger was harmful because it resulted “in lower prices or in higher quality for the same price….” Under that rationale, the principal beneficiaries of merger enforcement are not consumers or labor. The main benefits accrue to firms who are not integrated or are dedicated to older technologies. Today, by contrast, merger policy is heavily focused on mergers that threaten price increases or sometimes reduced innovation. Brown Shoe is indefensible if antitrust is concerned about competitive market performance and innovation.
Some readers will remember Douglas Ginsburg, who President Reagan announced would be nominated for a position on the US Supreme Court back in 1987, but who then withdrew his name from consideration after controversies over having smoked marijuana earlier in life. Although Ginsburg never ended up on the Supreme Court, he continued his career as a federal judge. He has written “Wither the Consumer Welfare Standard?” for the Harvard Journal of Law & Public Policy (Winter 2023, pp. 69-85).
As Ginsburg points out, the idea that consumer welfare should be the goal of antitrust law–via lower prices for existing goods, or provision of new and improved goods–is a relatively new viewpoint, dating back to the 1970s. For example, Ginsburg points out that Robert Pitofsky wrote a book in 1979 warning about the danger of large firms and how they might use their political influence. But in response to the idea that antitrust law should therefore focus on discouraging large firms, Ginsburg offers two main points. One is that if the concern is that big firms will use their political power to injure consumers, then the goal of antitrust remains consumer protection. However, if the concern is the more nebulous idea of how political competition should work in the United Stated, then there are many policy tools other than antitrust that are more direct and appropriate. Ginsburg writes:
Corporate political influence, which is usually used for “rent-seeking,” is a legitimate cause for concern. The result is too often a crony capitalism that distorts resource allocation, unjustly re-wards some and harms others, and is antithetical to the market competition that benefits consumers and the economy. …
In any event, it does not necessarily follow that antitrust enforcement is an appropriate preventative measure for corporate political influence. … There are a number of problems with using merger control to that end. First, and most obviously, it precludes realizing whatever efficiencies are motivating the merger, to the detriment of consumers. Second, size is a rather poor proxy for political influence. Many small firms and, particularly, associations of small firms, have substantial political clout, often besting large firms on the other side of an issue. Consider insurance agents versus insurance companies; automobile dealers versus automobile manufactur-ers; and gasoline retailers versus petroleum companies. These “small dealers and worthy men,” as Justice Peckham called them in 1897, prevail consistently, both in the state and the federal legislatures. Finally, some firms attain size—and perhaps also political influence—simply because they are successful in satisfying consumers.
Ginsburg also goes through a variety of other goals that have been proposed for antitrust law.
[O]ther voices have championed different goals for antitrust. All are arguably worthy goals, but ask yourself whether they are best, or even reasonably, achieved by reforming antitrust law or enforcement policy. They include the preservation of jobs that would be rendered redundant if a merger were approved; countering income inequality; preserving small, locally owned businesses … ; protecting the privacy of consumers’ personal data; and safeguarding the environment.
Traditional antitrust decisions focused on consumer welfare can be plenty hard, with room for reasonable differences of opinion. But it’s helpful for it to have a single goal. As a counterexample, imagine if a corporation must follow certain environmental rules, but the company could only be in compliance with those environmental rules if it also preserved jobs, supported greater income equality, reduced its political lobbying, helped consumers, and so on and so on. Or imagine that when the IRS check to see if a company has paid its taxes, it also evaluated whether the company preserved jobs, supported greater income equality, reduced its political lobbying, followed environmental rules, and so on and so on. Now imagine that all government authorities–antitrust, tax, environmental, political giving, and so on–all were taking all of these issues into account, all the time. The result would be a chaotic, politicized, and unaccountable form of government.