The market share of the alleged violator of antitrust laws is one factor that courts rely on during antitrust cases, as well as the degree of concentration in the industry. Varying standards and methods in measuring market share and concentration of the Justice Department have been changing through the years. They have also been set forth in various merger guidelines.
Here are some of the changes that have occurred.
1968
The 1968 Justice Department merger guidelines were first issued and showed the types of mergers that the department opposes. These were utilized in interpreting the Sherman Act and the Clayton Act. These guidelines helped the government present definitions of highly concentrated industries in terms of specific market share percentages. They were also grounded on the idea that reduced competitions are a result of increased market concentration.
The 1968 guidelines made use of concentration ratios. These are the market shares of the top 4 or 8 in the industry. Here, a highly concentrated industry has 75% of the market acquired by the top four largest firms. It also set forth various share thresholds for acquiring and acquired companies that would drive regulatory attention. Compared to today’s standards, these share thresholds are way smaller.
1982
The 70s was a time when the 968 guidelines were criticized for their limitations. Many argued that a policy that allows more flexibility is needed, that is why in 1982, a new set of guidelines were instituted. William Baxter, a lawyer, and economist was the head of the antitrust division of the Justice Department. He introduced certain quantitative measures in the antitrust process to make it more predictable and consistent with prevailing economic theory.
The HH index or the Herfindahl-Hirschman index was the chief measure in the American antitrust policy, which is the sum of the squares of the market shares of each firm industry. With this new index, a more precise measure is provided than the 1968’s top four or 8 firms in the industry. It accurately measures the impact of increased concentration that would be brought on by a merger of two competitors. However, when using this, it is important to examine the assumption that each of these merged firms would maintain their market shares’ needs. Always consider the post-merger combined market shared even when this may be difficult.
This index has many properties that should always be taken note. For instance, it increases with the number of firms in the industry. It also weighs larger firms more heavily than smaller firms as it sums the squares of firms in the industry.
1984
Another revised merger has been introduced on June 14, 1984, to further refine the antitrust enforcement policies. Just like the criticisms on the first guidelines, the 1982 guidelines were still inflexible and overly mechanistic, especially the HH index. To resolve this issue, the department permitted the consideration of qualitative information aside from the quantitative measures it has been using. This would include things like the efficiency of firms in the industry, the financial viability of potential merger candidates, and the US firms’ ability to compete in foreign markets.
It also introduced in the 1984 5% test, which requires the Justice Department to judge the effects of a potential 5% increase in the price of each product of each merging firm. This is anchored on the assumption that there may be an increase in market power due to the merger. If this happens, the merged firms may have the ability to increase prices. It also tries to know the effects of this increase in competitors and consumers.
Elasticity is one measure in macroeconomics that can indicate the responsiveness of consumers and competitors. The consumers’ responsiveness to a change in the product price can be indicated through the price elasticity of demand, measures are:
- e> 1 Demand is elastic, the quantity adjustment rate is more than the price change percentage.
- e=1 Unitary elasticity, the percentage change in quantity is equal to the percentage change in price.
- e<1 Inelastic demand, the percentage change in quality is less than the percentage change in price.
Greater market power is one implication of an inelastic demand over the 5% price change range. But if demand is elastic, then consumers are not as adversely affected by the merger.
This new guideline, along with the 1982 guidelines, recognized that efficiency-enhancing benefits from mergers are possible. Even if they do not have the force of law, the 1968 guideline can warrant legal considerations.
1992
The latest set of merger guidelines was introduced in 1992 by the Justice Department and the FTC. It was revised in 1997 and is similar to the 1984 guidelines since potential efficiency-enhancing benefits of mergers were also recognized. Here, a merger will be challenged through price increases even if demonstrable efficiency effects exist.
These guidelines clarified the definition of the relevant market which is critical to an antitrust lawsuit. They state that the market is the smallest group of products or areas where a monopoly could raise prices by a certain amount. It also employs the HH index to measure the competitive effects of a merger.
The 5-step process that enforcement authorities follow
- Market. Assess if the merger increases the concentration by considering the relevant market which can be an issue of dispute.
- Competitive effects. Consider the possible anticompetitive effect of the contract.
- Entry into the Market. Does the potential anticompetitive effect have the possibility of being mitigated by entry into the market? The existence of barriers to entry needs to be determined.
- Efficiencies. Could there be certain offsetting efficiency gains that can happen due to the deal? And could offset the negative impact of the anticompetitive effects?
- Failing firm defense: Know if the parties would fail or exit the market but for the merger. These possible negative effects are then weighed against the potential anticompetitive effects. Take note that antitrust authorities are willing to consider the net antitrust efforts of a merger. The participants need to show that the benefits are for the merger.
The 1997 revision highlighted how merger-specific efficiencies may allow companies to compete better and could possibly be translated to lower prices for consumers. However, they can only be attained through a merger.
It is also worth noting that the 2010 merger guidelines clarified that the Justice Department did not really follow the mechanistic, step-by-step process but focused on competitive effects and the analysis and research needed to clarify.
In 2011, the Antitrust Division of the Justice Department issued a Guide to Merger Remedies, emphasizing the proposed remedies for mergers to ensure preserved competitions. They must also guarantee that these have benefits for consumers instead of market participants.
© Image credits to Suzy Hazelwood