Mergers

The United States is in the midst of a "merger wave." The number of mergers reported under the Hart-Scott-Rodino Act rose from 1,529 in 1991 to a record 3,702 in 1997 -- a 142 percent jump. During this period, the FTC successfully challenged a host of potential mergers, saving consumers millions of dollars that they otherwise would have paid in higher prices. Identifying and challenging anticompetitive mergers is a difficult task that can take thousands of hours of investigative work and often, litigation.

Most mergers actually benefit competition and consumers by allowing firms to operate more efficiently. But some are likely to lessen competition. That, in turn, can lead to higher prices, reduced availability of goods or services, lower quality of products, and less innovation. Indeed, some mergers create a concentrated market, while others enable a single firm to raise prices.

In a concentrated market, there are only a few firms. The danger is that they may find it easier to lessen competition by colluding. For example, they may agree on the prices they will charge consumers. The collusion could be in an explicit agreement, or in a more subtle form -- known as tacit coordination or coordinated interaction. Firms may prefer to cooperate tacitly rather than explicitly because tacit agreements are more difficult to detect, and some explicit agreements may be subject to criminal prosecution.

When a merger enables a single firm to increase prices without coordinating with its competitors, it has created a unilateral effect. A firm might be able to increase prices unilaterally if it has a large enough share of the market, if the merger removes its closest competitor, and if the other firms in the market can’t provide substantial competition.

Generally, at least two conditions are necessary for a merger to have a likely anticompetitive effect: The market must be substantially concentrated after the merger; and it must be difficult for new firms to enter the market in the near term and provide effective competition. The reason for the second condition is that firms are less likely to raise prices to anticompetitive levels if it is fairly easy for new competitors to enter the market and drive prices down.

Under these conditions, one of three basic kinds of mergers might facilitate coordinated or unilateral anticompetitive behavior: horizontal mergers, which involve two competitors; vertical mergers, which involve firms in a buyer-seller relationship; and potential competition -- or conglomerate mergers -- in which one of the firms is likely to enter the market and become a potential competitor of the other.

Horizontal mergers
In a horizontal merger, the acquisition of a competitor could increase market concentration and increase the likelihood of collusion. The elimination of head-to-head competition between two leading firms may result in unilateral anticompetitive effects.

Witness the recent attempt by Staples, Inc., one "superstore" retailer of office supplies, to acquire Office Depot, another giant retailer of office supplies. In many areas of the country, the merger would have reduced the number of superstore competitors, often leaving Staples as the only superstore in the area. Evidence from the companies’ pricing data showed that Staples would have been able to keep prices up to 13 percent higher after the merger than without the merger. The FTC blocked the merger, saving consumers an estimated $1.1 billion over five years.

Vertical mergers
Vertical mergers involve firms in a buyer-seller relationship -- a manufacturer merging with a supplier of component products, or a manufacturer merging with a distributor of its products. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. This is called a "vertical foreclosure" or "bottleneck" problem.

Take the merger of Time Warner, Inc., producers of HBO and other video programming, and Turner Corp., producers of CNN, TBS, and other programming. The FTC was concerned that Time Warner could refuse to sell popular video programming to competitors of cable TV companies owned or affiliated with Time Warner or Turner -- or offer to sell the programming at discriminatory rates. That would allow Time Warner-Tuner affiliate cable companies to maintain monopolies against competitors like Direct Broadcast Satellite and new wireless cable technologies. What’s more, the Time Warner-Turner affiliates could hurt competition in the production of video programming by refusing to carry programming produced by competitors of both Time Warner and Turner. The FTC allowed the merger, but prohibited discriminatory access terms at both levels to prevent anticompetitive effects.

Potential competition mergers
A potential competition merger is the acquisition of a company that is planning to enter a market and compete with the acquiring company (or vice versa). It results in the elimination of a potential competitor. That can be harmful in two ways. For one thing, it can prevent the increased competition that would result from the firm’s entry. For another, a firm can have a procompetitive effect on a market simply by being recognized as a possible entrant. The reason? The firms already in the market will avoid raising prices to levels that would make the outside firm’s entry more likely. The elimination of the potential entrant through a merger would remove the threat of entry and make anticompetitive pricing a real possibility.

Several years ago, the Questar Corp., which operated the only pipeline transporting natural gas to Salt Lake city, tried to acquire a major part of a firm that was planning to begin service to the city. The potential entrant was already having a procompetitive effect on pricing. The FTC blocked the merger, preserving the price benefits for Salt Lake City consumers.

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