The Department of Justice and Federal Trade Commission 2023 Merger Guidelines arrived just before Christmas, bringing cheer to advocates of heightened merger enforcement and coal for others more satisfied with the status quo. The Guidelines make a number of contributions to the analysis of mergers. One of the more significant contributions is a section devoted to mergers that eliminate potential competition.
A merger between two firms that do not presently compete with one another can harm potential competition in two ways. It can eliminate the possibility of future competition after entry by one or both of them into a market in which the entrant did not previously compete, which courts have called “actual potential competition;” and it can eliminate the present competitive pressure on firms already in the target market to reduce price or improve product quality in response to the threatened entry by one or both of the merging parties, which courts have called “perceived potential competition.” To simplify exposition, we refer in this paper to price as a measure of competition, in effect a proxy for the various possible dimensions of competition, unless otherwise noted.
The horizontal merger guidelines issued by the Department of Justice and Federal Trade Commission in 1982 and 1984 identified theories of harm from mergers that eliminated actual and perceived potential competition. Agency merger guidelines issued between 1984 and the 2023 revision did not devote special attention to issues of potential competition. The 1992, 1997, and 2010 Horizontal Merger Guidelines applied the same enforcement principles to mergers that eliminated potential and actual competition and did not distinguish between them. For example, the 2010 Horizontal Merger Guidelines stated that “[a] merger between an incumbent and a potential entrant can raise significant competitive concerns.” The 2010 Guidelines did not provide much detail regarding the competition concerns other than to add that “[t]he lessening of competition resulting from such a merger is more likely to be substantial, the larger is the market share of the incumbent, the greater is the competitive significance of the potential entrant, and the greater is the competitive threat posed by this potential entrant relative to others.”
After forty years of comparative silence, the 2023 Merger Guidelines are a welcome addition to guidance regarding merger enforcement for potential competition. The Guidelines emphasize the distinction between perceived and actual potential competition. That distinction is largely a product of court decisions several decades ago. While mergers of potential competitors can result in the two different types of harm denoted by those labels, the legacy of the case law, reflected to some extent in the 2023 Guidelines, is to treat those two types of harm as distinct phenomena, with relatively greater emphasis on the former. Economic evidence shows, however, that the differences between the two types of harm are less important than the treatment of them as distinct phenomena suggests. Harm occurs not infrequently from the elimination of actual potential competition and, when elimination of perceived potential competition has an impact, it often occurs along with and as a consequence of the elimination of actual potential competition. Perhaps more important, economic analysis suggests that mergers with potential and nascent competitors can be harmful even if the probability of actual entry absent the merger is small and that courts have been too skeptical of cases alleging harm to actual potential competition.
Section I provides a high-level framing of the issues raised by mergers that involve potential competition. Section II addresses the economic evidence regarding the competitive effects of potential competition and its implications for merger enforcement. Section III briefly reviews legal and economic considerations regarding merger enforcement aimed at preserving potential competition and assesses the Guidelines’ discussion of mergers that eliminate potential competition. Section IV explores whether standards applied to the evaluation of potential competition as a merger defense should be different from the standards used to assess possible harm from mergers that eliminate potential competition. In Section V, we observe that potential competition has elements in common with innovation competition, and we consider whether the treatment of potential competition in the 2023 Merger Guidelines provides much guidance for mergers that eliminate innovation competition.