In the US, the Democrats are gradually starting to make some noise regarding the direction in which they would take the US were they to regain power at some point. As part of this they have released a short note setting out their views on the form that competition (or “antitrust”) policy should take.
Some of those views seem fairly reasonable, up to a point. In particular, US antitrust enforcement probably has been a little bit too lax over the past decade or so, such that some tweaks could be entirely justified. It is also likely to be very useful for a competition authority to determine how accurate its own assessment of the merger was by seeing what actually happens a few years after the merger. This ex-post evaluation of mergers (i.e. waiting a few years, analysing data that cover those few years to see what actually happened after the merger and comparing it to what the competition authority originally thought would happen) can be a useful tool to examine the effectiveness of the approach used when assessing a particular merger. This is something that should probably be conducted more often (note that such ex-post reviews are undertaken fairly regularly by the UK and EU competition authorities, but this seems to be a less regular thing for the US), but it is important to note that it does not require the constant monitoring of the merged entity post-merger, but instead only requires the collection and analysis of data at a point in time a few years after the merger.
One somewhat novel aspect of the Democrats’ proposal is that the merger review process should also take into account the impact said merger would have on the merging firms’ suppliers. Currently, the merger review process focuses almost entirely on the impact of the merger on consumers (in some vertical mergers, the impact on suppliers is considered, but only really insofar as an immediate impact on those suppliers could eventually feed through to an impact on consumers) – this focus on consumers mean that competition authorities focus on “consumer surplus”.
This consumer surplus is just one component of societal welfare, with the other being “producer welfare” – this also takes into account the profits obtained by producers. In the context of mergers, producer surplus usually refers to that of the merging firm, but can also be extended to the merging firms producers as well. Whether or not one focuses solely on consumer welfare or also cares about the welfare of producers is a subjective matter, but seeing as the vast majority of mergers do not lead to the merged firm having substantially higher bargaining power with its suppliers then incorporating producer surplus into the merger review process seems unlikely to have a substantial impact. (Note that a merged firm obtaining increased bargaining power over its suppliers is one of the potentially beneficial aspects of a merger – if the merged entity can negotiate for lower prices from its suppliers, it could then decide to pass on those lower input costs to its own customers in the form of charging those customers lower prices.)
Other aspects of the Democrats’ proposals are less welcome - indeed, a number of them certainly appear to go much too far and seem to be driven (at least in part) by a reactive media that holds the simple view that “big is always bad”. (As an aside, it is interesting to note that the same commentators railing against large firms do not realise that any individual can submit a complaint to a competition authority themselves – it would be nice if one or two of these commentators actually acted on their convictions rather than just complaining all of the time. Of course, this would require said commentators to provide a coherent explanation regarding how consumers are harmed - something I suspect that they would struggle to do).
For example, and rather bizarrely, the policy appears to be aimed at conglomerate firms/mergers – i.e. at firms that operate in many different distinct markets. (This factor is probably part of the reason for some commentators’ objections to the Amazon / Whole Foods merger – namely, they claimed that it was “bad” that Amazon was getting bigger by acquiring a firm that operated in an industry in which Amazon was not already present.) However, the Democrats’ proposal in this regard is unnecessary - most merger review guidelines already incorporate an assessment of the “conglomerate effects” that could arise from such mergers, such that these factors are already taken into account (and given appropriate weight) during the merger review process.
Despite this, the Democrats’ proposals actually suggest putting the burden of proof on the merging firms in some cases – i.e. the merging firms would need to prove that the merger would not be harmful, rather than the other way around. This would mean that the merging parties would need to provide even more evidence to the competition authorities, incurring even higher costs, and further enriching the lawyers and consultants that are hired on behalf of the merging firms. Even worse: given that firms deciding to merge will take into account the costs they would need to incur in obtaining approval of their merger, if those costs prove too high and outweigh the firms’ benefits of merging, then mergers that could have benefitted consumers would be less likely to happen. To add to this, it is notoriously difficult to prove that pro-competitive effects are likely to result from a merger – doing so requires satisfying a number of strict criteria for which evidence is generally not readily available and even if the data are available, it requires a lot of work (and, hence, costs) in order to make a strong case. It is rather incongruous that the Democrats would be in favour of reversing the presumption of innocence just because a firm is already large; presumably they would not do the same for individuals just because of the characteristics of those individuals, so it is very disconcerting that they wish to do the same for certain firms.
Furthermore, in addition to ex-post reviews of the effectiveness of the merger review process, the Democrats have actually proposed continued monitoring of merged firms (and the industry in which they operate) to try to ensure that a market remains competitive after a merger. This is akin to proposing a behavioural remedy along the lines of “make sure you compete how we want you to or we might unwind the merger”. There is a very good reason that competition authorities tend to eschew behavioural remedies – they are extremely costly to enforce.
Specifically, they require a well-defined (but potentially over-prescriptive) set of goals that the merged firm needs to meet, people to monitor constantly the merged entity’s activities (or someone to whom customers can report any concerns) thereby incurring substantial costs, and are not guaranteed to work in any event since the monitors might not be able to view the merged firm’s actions with perfect transparency. For example, the competition authority might say that the merged entity cannot charge a price more than 20% above its costs – this is a restriction on the behaviour of the firm that would require the competition authority to:
- define exactly which price(s) and cost(s) should be taken into account;
- be able to view with near-perfect accuracy the prices and costs of the merged entity; and
- monitor continuously the prices and costs of the merged entity for an indeterminate (or set) period of time.
Depending on the industry, one, two, or all three of those criteria might not be feasible. Hence, it is unrealistic to suggest that the correct approach to competition policy should involve greater use of behavioural remedies.
As such, although an argument can be made that the merger review process in the US could do with some improvement, and the Democrats’ proposals do have some interesting and worthwhile aspects, the fact that much of their proposal goes too far and contains a number of unjustified suggestions indicates that implementing these proposals would probably be a bad idea.