On July 19, the U.S. Federal Trade Commission (FTC) and Department of Justice (DOJ) jointly released a new draft of Merger Guidelines, which explain how the federal agencies review, decide to further scrutinize, and in some cases attempt to block mergers and acquisitions. The 13 new guidelines in the 51-page document present resistance against prospective mergers far more aggressive than positions taken by authorities for decades. They presume that “big is bad,” using simplistic measures of the number and size of firms in a market as grounds to delay and potentially block mergers.
Officially in response to a 2021 executive order requesting revised guidelines, the release marks the Biden Administration’s full embrace of the upstart Neo-Brandeis school of antitrust championed by FTC Chair Lina Khan and DOJ Assistant Attorney General for Antitrust Jonathan Kanter. The movement bears the name of early 20th-century Supreme Court Justice and populist antitrust crusader Louis Brandeis. Those familiar with the debate and the recent stumbles of Khan’s FTC in U.S. courts will find few surprises in the 13 guidelines that are now open for a 60-day comment period.
By codifying its guidelines to agency employees for reviewing and challenging mergers, Khan and Kanter will likely create a chilling effect on merger activity overall. Many economists and legal scholars strongly oppose Khan and Kanter, fearing such a shift in antitrust enforcement would reduce efficiencies, lead to unchecked government power, and perhaps most importantly, depress the rate of innovation that is so important to the 21st-century economy.
The response of U.S. courts, not bound by the agencies’ Merger Guidelines, will likely determine how much the antitrust upstarts now leading the FTC and DOJ to succeed in changing U.S. competition policy overall. Khan and Kanter often justify their hard leftward antitrust turn with how much the world has changed since the 1980s when courts rejected “big is bad” and shifted their focus to likely outcomes of mergers for consumer welfare. In reality, seismic changes in technology and markets make Khan and Kanter’s reliance on industry concentration measures and a “big is bad” standard even more problematic.
How Federal Agencies Review Mergers
While the FTC and DOJ Merger Guidelines are not technically binding on courts or even the agencies issuing them, they have long been essential in structuring the agencies’ reviews of proposed mergers and aligning expectations between merging firms, regulators, and courts.
Parties to a prospective merger must file a notice and provide basic data to the agencies. In a process called “clearance,” the FTC and DOJ consult, and one agency is assigned the case. Within 30 days, the agency must either end its review and allow the merger or if the Merger Guidelines indicate grounds for concern about competitive harm, file a second request for more information from the parties. From there, the agency can decide whether to challenge the merger.
Challenges to mergers are often adjudicated and decided by the agencies’ internal processes, but courts provide multiple critical checks on the agencies’ authority. First, when issuing second requests after the initial 30-day period, companies may consummate the merger unless the agency obtains an injunction from a judge extending the waiting period. Denial of the injunction does not require but often causes the agencies to end their review or challenge. For example, the FTC recently ended its challenges to both the Meta-Within and Microsoft-Activision mergers after courts ruled in the companies’ favor and denied injunctions.
If internal reviews and challenges continue and the FTC or DOJ ultimately decide to block a merger, the parties may appeal the decision in court. This is the second major opportunity for courts to provide a check on the federal agencies’ power, and apply their own standards rather than those set forth in the Merger Guidelines.
What Has Changed?
The new draft Merger Guidelines are intended to replace older guidelines on horizontal and vertical mergers. Virtually everyone, from the agencies themselves to supporters like the president to the sharpest critics, agrees it represents a radical departure from previous guidelines.
The 13 guidelines and their explanations reflect a return to the “big is bad” stance of competition authorities toward mergers before the 1980s, focusing on measures of industry concentration rather than a deal’s likely impact on consumers. Like Khan’s earlier writings, such as her “Amazon’s Antitrust Paradox,” the draft guidelines provide a list of hypothetical (rather than actual) harms to consumers, workers, and competitors that appear to give the agencies grounds to at least slow down any merger of their choosing.
The many potential competitive harms cataloged in the 13 guidelines are reflective of concerns expressed by Khan, Kanter, and like-minded scholars over the past several years. Examples include:
- Vertical mergers (Guideline 6)
- Barriers to entry maintained by internet platforms through big data (Guideline 5)
- Power to lower wages for workers in labor markets (Guideline 11)
- Potential harm to future competition in nascent markets (Guideline 4)
The document provides the FTC and DOJ the ability to stall if not block outright any merger they choose. It is difficult to imagine a high-value merger that would not technically run afoul of one or more of the draft Guidelines. Agencies with limited resources will therefore need to apply judgment in which cases to pursue.
Why the Guidelines Matter
These new Guidelines, should they be implemented, may impact the competitive landscape via three important channels.
First, the guidelines set standards for decisions made by FTC and DOJ employees in extending the merger review process and ultimately challenging deals. Khan and Kanter have not fully sold some of the agency staffers they now lead on their approach, as evidenced by the highly public resignation of FTC Commissioner Christine Wilson earlier this year and other stories reflecting opposition to the new approach from longtime FTC employees. Officially codifying the Guidelines could make it easier to require and monitor that agency employees adopt and follow them.
Second, the Guidelines make clear to firms considering mergers that the likelihood of scrutiny and perhaps costly legal battles is higher than it has been in recent memory. This will almost certainly have a chilling effect on merger activity. Khan and Columbia Law Professor Timothy Wu have long argued that courts in the 1980s created an unduly permissive climate for mergers and acquisitions and that the overall climate should be corrected. The draft guidelines would at least in part achieve that goal.
Finally, though courts have not been friendly to the earliest cases filed by Khan’s FTC, codifying the Guidelines may ultimately impact court rulings. Law firm Paul, Weiss writes that “although merger guidelines are not binding on the federal courts, it is often the case that courts hearing merger challenges cite the guidelines as persuasive authority under the view that they reflect the expertise of the agencies tasked by Congress with merger reviews.”
Courts, through their role providing injunctions and hearing appeals, are likely to be the battleground in determining whether the new Guidelines are a moderate nuisance in the merger review process or the beginning of a sea change in U.S. antitrust law. Virtually all of the new draft Guidelines reject the consumer welfare standard that courts have largely applied since the 1980s.
Misunderstanding Competition
The draft Guidelines’ authors repeatedly make a basic economic error by conflating more competition or more highly competitive markets with more firms providing the same product or service at the same time. This is at its core a restatement of the “big is bad” approach championed by Brandeis and reflected in legal precedent prior to the 1970s.
This has not prevented some academics from supporting Khan and Kanter’s approach. The Biden administration’s press release accompanying the draft Guidelines presents them as a response to changing technology and “recent advances” in the economic literature, citing a substantial number of 21st-century academic articles. Some of this literature (especially on labor market power) was written after Khan’s galvanizing 2017 essay and intended to support its propositions. But overall, it accurately reflects the recent shift of some academic economists toward more activist regulation of markets.
However, many economists with varying approaches to the field and across the spectrum of political views are staunchly opposed to the views of Khan, Kanter, and their allies. While the proposition that more firms lead to better market outcomes is certainly not always false, more subtle analysis reveals it often not to be true.
Correcting this economic misconception in part motivated Robert Bork’s influential 1978 book The Antitrust Paradox and led to courts adopting Bork’s consumer welfare standard. Large firms with high market share, Bork argued, could and often did imply that the firm in question had found a more efficient way to produce something at scale, or a better version of a product than that offered by competitors. The question, then, hinged on whether the merger in question was likely to raise or lower prices for consumers.
The newly aggressive FTC and DOJ face a problem if courts continue to adhere to this standard, as consumers often directly pay no price at all for the services of large online platforms. Khan and Kanter have tried to sidestep this issue by arguing consumers “pay with their data,” and therefore rule changes or new commercial uses for data devised by tech platforms are in effect price increases. Clemson University Economics Professor and former Federal Communications Chief Economist Thomas Hazlett rejects this argument and points to analogous errors made by the FTC throughout its history. Art Laffer, economist and former advisor to President Reagan, makes multiple arguments for continuing to reject “big is bad” in favor of the consumer welfare standard.
Other influential economists less commonly associated with Bork and other University of Chicago law and economics scholars do not find Khan and Kanter’s assertion that advances in the field demand a more aggressive antitrust approach convincing. Antitrust economists David Evans and Richard Schmalensee review recent work on network effects, which Khan has long argued push markets such as internet platforms toward “all or nothing” outcomes. They write that:
“Unfortunately, the simple network effects story leads to naïve armchair theories that industries with network effects are destined to be monopolies protected by insurmountable barriers to entry, and media-friendly slogans like ‘winner-take-all.’”
Both Evans and Schmalensee have extensive experience testifying as expert witnesses in antitrust cases, suggesting these rejections of Khan and Kanter’s overly simplistic view of network effects may be particularly important in court tests of the new draft guidelines.
Perhaps even more harmful than the chilling effect on mergers many expect to see, should the draft guidelines be adopted largely as they stand, is the likely chilling effect of Khan and Kanter’s approach on innovation. The highly quantitative models favored by many academic economists struggle to quantify gains from the type of large-scale innovation seen in the past several decades. These arguments are often made most compellingly by economists of the Austrian School, who see competition as a dynamic and evolutionary process unfolding over time.
This leads to another crucial role of competition beyond the disciplining impact on firms upon which Khan and Kanter focus exclusively. Competition over time and in the face of radical uncertainty is indispensable to the learning process that feeds innovation. Khan and Kanter present their approach as responding to the impact of technological change on competitive reality, but in doing so undermine their case. It is precisely these changes that push today’s competitive landscape further away from the “big is bad” standard Khan and Kanter want to reboot.
Bork’s consumer welfare standard exposed the fallacy that the benefits of competition are only reaped when many firms at once in a static context struggle for a piece of the pie. Times have indeed changed, but these changes have added many more reasons to the list of why big is not always bad, and why micromanaging competition while assuming today’s landscape will not continue to change in unpredictable ways is an exercise in futility.