Article by Paul Rogers
The competitive consequences of horizontal mergers appear, superficially, to be easily discernible since by definition the merging parties were previously competitors and the merger has eliminated whatever prior competition existed between the parties. Thus, it would seem that the inquiry under section 7 of the Clayton Act, which prohibits corporate acquisitions that “may . . . substantially lessen competition or . . . tend to create a monopoly,” would be straightforward. That is, the antitrust analysis would simply focus on whether the elimination of competition between the merging parties is or could be “substantial” or tending to monopoly. Presumably, an examination of the relative market power of the merged firm and the pre- and post-concentration levels of the relevant market, coupled with a review of historical information about the competitive levels of the market, would reveal the significance of the elimination of competition between the merging partners.
Horizontal merger analysis has traditionally approximated the above thumbnail sketch. Market shares and levels of concentration, coupled with information concerning industry-wide trends of increased concentration, were almost exclusively relied upon as predictors of the anticompetitive consequences of mergers. But, beginning with the Supreme Court's decision in United States v. General Dynamics, antitrust analysis has become at once more complex and, hopefully, better able to ascertain the true impact of horizontal mergers on competition.
In General Dynamics, the Court looked beyond statistical evidence of market shares and focused on the competitive viability of the acquired firm. The Court looked to the financial and technological circumstances of the acquired company and to demand behavior in the market to determine the competitive significance of the elimination of the company as an independent entity. The General Dynamics Court recognized that a financially or technologically weak company is not as significant a competitor as its market position would indicate because its continued ability to compete is suspect.
Further complicating contemporary merger analysis is the frequently made assertion that an otherwise illegal acquisition that will increase market efficiency should be an acceptable defense in an antitrust suit. The courts and the enforcement agencies have traditionally rejected the notion that gains in efficiency may legitimize an otherwise illegal acquisition. However, the attainment of efficiencies has increasingly been recognized as an appropriate (some would argue the only appropriate) antitrust goal. In the merger context, the issue is whether the efficiency gains of the merged firm should offset what otherwise might appear to be an anticompetitive acquisition. The efficiency defense has striking parallels to the defenses legitimized in General Dynamics. Both may amount to justifications that rebut a prima facie case of illegality and both may influence thinking as to when mergers are truly anticompetitive.
The purpose of this article will be to define the parameters of the efficiency defense's uses in the horizontal merger context. The article will inquire initially whether section 7 of the Clayton Act even permits considerations of efficiency. Second, the article will compare efficiency considerations with the General Dynamics defenses in order to determine whether consideration of efficiencies necessitates a different analytical approach. Third, the efficient (or inefficient) nature of horizontal mergers in general will be studied, and an attempt will be made to define and examine specific kinds of efficiencies likely to arise in horizontal mergers so that the merits of individual efficiency arguments can be ascertained. Fourth, functional and statutory requirements will be outlined to demonstrate the pragmatic limitations of the defense. Finally, a case for a limited qualitative efficiency defense will be set forth.
About the Author
Paul Rogers. Associate Professor of Law, Southern Methodist University; B.A., J.D. University of Texas; L.L.M. Columbia University.
Citation
58 Tul. L. Rev. 503 (1983)