Today the Obama administration announced with great pride that its economic stimulus plan created or saved about 650,000 jobs.  “Thank goodness!” reads the subtext.  If not for all those new and protected jobs, the unemployment numbers would be really bad!

It appears no one in the administration’s economic advisory team has heard of Frédéric Bastiat.  He wrote an essay titled Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen).  In his essay, for which he has received some notoriety, he explained the parable of the broken window :

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Is this some new economic insight? Some innovative wisdom that is too fresh to have influenced our federal policies? Sadly, no. Bastiat published his essay in 1850.

Economists of any merit have long rejected the sort of cheap “analysis” fronted by the White House. Opportunity cost (that which is hidden) is one of the most fundamental concepts in economics. Unfortunately, our national leaders and their economic advisers have little care for (or benefit from) taking that most fundamental concept into account when attempting to justify their broken policies.

But if you’re not convinced and wish to further stimulate the economy, follow the Obama administration’s lead (and Bastiat’s foil): Take a brick and throw it through your front window.  Pay someone to fix the window.  You just created a new job!

President Barack Obama, June 1, 2009:

What we are not doing, what I have no interest in doing, is running GM. GM will be run by a private board of directors and management team with a track record in American manufacturing that reflects a commitment to innovation and quality. They, and not the government, will call the shots and make the decisions about how to turn this company around. The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions. When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the United States government, will make that decision.

Reality, October 29, 2009:

Since the financial crisis broke, Congress has been acting like the board of USA Inc., invoking the infusion of taxpayer money to get banks to modify loans to constituents and to give more help to those in danger of foreclosure. Members have berated CEOs for their business practices and pushed for caps on executive pay. They have also pushed GM and Chrysler to reverse core decisions designed to cut costs, such as closing facilities and shuttering dealerships.

Democratic Sen. Amy Klobuchar of Minnesota persuaded GM to rescind a closure order for a large dealership in Bloomington, Minn. In Tucson, Arizona Democratic Rep. Gabrielle Giffords did the same for Don Mackey, owner of a longstanding Cadillac dealership with 80 employees. Rep. Giffords argues it made sense, even for GM, to keep the Mackey dealership, which sold 750 cars last year. “All I did was to help get GM to focus on his case,” she says.

Lawmakers say it’s their obligation to guard the government’s investments, ensure that bailed-out firms are working in the country’s interests and protect their constituents.

Who would have predicted this?

Last week Josh discussed the American Booksellers’ Association’s effort to get the Justice Department to pursue antitrust charges against Walmart, Target, and Amazon for engaging in a vigorous, consumer-benefiting price war. In today’s Boston Globe, Jeff Jacoby has a nice piece highlighting a bit more of the Association’s tortured logic. (HT: Don Boudreaux.) Apparently, these low prices are “devaluing the very concept of the book” and may actually discourage reading and the “sharing of ideas in the culture.” Go figure.

Here’s the Association’s letter to the DOJ in all its glory.

The Economist seems to think so, relying on evidence from this new paper by Joel Waldfogel and Ben Shiller.  Waldfogel and Shiller find that, relative to uniform pricing at $.99, alternative pricing schemes including two part tariffs and various bundling schemes could raise producer surplus by somewhere between 17 and 30 percent.  Those are large numbers, which raises the obvious question: why is Apple leaving so much money on the table? Or are they? I doubt it.

Reading the Economist article reminded me of something that I heard from both Armen Alchian and Ben Klein at different points during my UCLA days.  If your model is not predicting the behavior of real world agents you have a choice — blame the model for not predicting the actions of the agents or blame the economic agents for not acting like the predictions of the model.  The right answer is very, very rarely to blame the economic agents.

To be fair, Waldfogel and Shiller themselves explicitly note that they aren’t passing judgment on the uniform pricing scheme (though its a bit unclear exactly what else readers are supposed to do with the results).

TOTM is extremely excited to announce the latest addition to our team, Mike Sykuta.  Readers might know Mike from his guest blogging stints at Organization and Markets.  Or perhaps making Brad DeLong’s Hall of Honor.  Mike joins J.W. Verret as the second addition to blog in the last week, and we hope to announce some other major changes in the very near future.  Mike is Director of the Contracting and Organizations Research Institute (CORI) at the University of Missouri and received his Ph.D. in economics at Washington University in St. Louis.  Mike is a productive scholar in the New Institutional Economics tradition who works on contracting, corporate governance, and the political economy of regulation.   Recent scholarship includes:

The Elgar Companion to Transaction Cost Economics. Introduced and edited by Peter G. Klein and Michael E. Sykuta. Edward Elgar Publishing (expected 2010).

“New Institutional Econometrics: The Case of Contracting and Organizations Research” Chapter 6 in E. Brousseau and J.M. Glachant (eds.), New Institutional Economics: A Textbook, Cambridge, UK: Cambridge University Press, 2008

“Farmer Trust in Producer- and Investor-Owned Firms: Evidence from Missouri Corn and Soybean Producers” (with Harvey S. James, Jr.), Agribusiness: An International Journal, 22(1) January 2006

“Property Right and Organizational Characteristics of Producer-Owned Firms and Organizational Trust” (with Harvey S. James, Jr.), Annals of Public and Cooperative Economics, 76(4) December 2005

“Market Integration: Case Studies of Structural Change” (with Jason V. Franklin, Joe Parcell, and Chris Fulcher), Agricultural and Resource Economics Review, 34(2) October 2005

“Agricultural Organization in an Era of Traceability,” Journal of Agricultural and Applied Economics, 37(2) August 2005

“Politics, Economics, and the Regulation of Direct Interstate Shipping in the Wine Industry” (with Gina M. Riekhof), American Journal of Agricultural Economics, 87(2) May 2005

“Who’s Monitoring the Monitor? Do Outside Directors Protect Shareholders’ Interests?” (with Eric Helland), Financial Review, 40(2) May 2005

Welcome Mike!

Thanks to all of our participants in the Merger Guidelines Symposium.  We hope many of you, as well as our readers, will look back over the collected posts and engage in an ongoing dialogue in the comments over the many interesting ideas raised here.  You will find all of the posts from the symposium by clicking on the “merger guidelines symposium” link to the right, under the “blog symposia” heading.  For you reference, we have also collected all of the posts below.

For our friends in the agencies, we hope this symposium gives you some food for thought and a sense of where an informed subset of the antitrust community see issues meriting attention.  It is interesting to note (we received all of the submissions before any were posted) the extent to which so many of these comments focused on the problems of the structural presumption (including market definition and market share calculations), HHI thresholds and unilateral effects–all obviously related matters, most informed by a concern for aligning the Guidelines with agency practice.

Although there was not a lot of discussion of the related matter of the recent Farrell/Shapiro proposal on unilateral effects analysis without market definition, many of the posts provide a backdrop against which discussion of the proposal is sure to arise.  For my own parting thought on the issue, I would note this:  Whatever the problems with market definition in unilateral effects analysis, I hope we will not be too quick to jettison the exercise in exchange for the Farrell/Shapiro proposal (or similar).  Although imperfect, the market definition exercise exerts some check on merger enforcement that is absent from the Farrell/Shapiro proposal.  And in the absence of extremely good empirical data (as in Staples),  I fear that the UPP analysis may permit enforcers to find competitive effects in a much wider range of cases than would be desirable.  As essential background to assessing this trade-off in the modern economy, I refer our readers to the Sidak/Teece submission to the symposium and to their forthcoming paper.

Thanks again!

• Joe Farrell, Welcome from the Agencies
• Dennis Carlton, Revising the Guidelines
• Luke Froeb, Merger Enforcement without Market Definition
• Robert Gertner, Revising the Guidelines
• Steve Salop, Comments on Updating the Merger Guidelines
• David Teece and J. Gregory Sidak, Dynamic Competition and Antitrust Law
• Einer Elhauge, Do the Merger Guidelines Need Revision?
• Joshua Wright, The Guidelines Should be Revised to Reject the PNB Presumption
• Andrew Gavil, Andrew Gavil on Revising the Merger Guidelines
• Daniel Crane, Let Sleeping Dogs . . .
• Herbert Hovenkamp, Herbert Hovenkamp on Revising the Merger Guidelines
• Thom Lambert, “Standardizing” The Horizontal Merger Guidelines
• Geoffrey Manne, Fix the Supply Side
• Danny Sokol, Small Changes
• Joseph Simons, Revisions to the Merger Guidelines: Above All, Do No Harm

My sense is that there is no need to revise the DOJ/FTC Horizontal Merger Guidelines, with one exception.  As Greg Werden points out, “a thorough revision would take up to three years and occupy some of the agencies’ best people for a total of more than two thousand hours.” The current guidelines lay out the general framework quite well and any change in language relative to that framework are likely to create more confusion rather than less.  Based on my own experience, the business community has had a good sense of how the agencies conduct merger analysis.  The only exception is the Guideline’s concentration thresholds, which have been obsolete in practice since at least the mid 1990s.  Those thresholds should probably be changed to reflect actual practice.  If, however, the current administration intends to materially change the way merger analysis is conducted at the agencies, then perhaps greater revision makes more sense.  But even then, perhaps the best approach is to try out some of the contemplated changes (i.e. in actual investigations) and publicize them in speeches and the like before memorializing them in a document that is likely to have some substantial permanence to it.

Chairman Leibowitz in his Fordham speech last month stated “From my perspective, the current Guidelines do not explain clearly enough to businesses how the agencies review transactions.” Won’t that always be the case? In a specialized area of complex regulatory law, there is whatever guidelines an agency (or in our case agencies) will promulgate and then small group of insider lawyers who will have enough repeat business to really understand the meaning of the guidelines via their agency contacts. For others, the guidelines will remain unclear unless you create a 600 page set of merger guidelines – not a good idea.

Maybe the lack of clarity is a problem, particularly with judges. After all, judges play a role in enforcing the law. The Guidelines cover this aspect fairly early on in Section .01. However, who is the end user of the Guidelines? Is it the firms practicing before the agencies or for judges to use? If the Guidelines have a purpose for judges, there is an important institutional issue at play as we have not had a merger case before the Supreme Court for many years. This leads to a meta-question — Is the law Section 7 or is it the Guidelines as defined by the agencies at any given time?

I do have three points as to the substance of the Guidelines:

1. The Guidelines have only a brief mention of R&D (Section 4), in which they state that even if synergies are substantial, they “are generally less susceptible to verification and may be the result of anticompetitive output reductions.” This treatment seems incomplete. After all, the rise of the new economy and of a greater role for IP suggests that there should be more guidance with regard to R&D efficiencies.

2. Let us start using HHIs that have some remote relationship to actual enforcement decisions. Although HHIs are only rough preliminary screens, and other factors make the real difference, the agencies ignore the HHI thresholds in the Guidelines in making enforcement decisions. The rub is that the agencies then cite the HHIs in district court to show how bad the violation is.

3. The treatment of unilateral effects needs to be revisited. The concept as used in practice needs to be better reflected in the Guidelines.

Do the Merger Guidelines need revision? No.  Thanks for having me.

OK. Yes–and market definition/market shares, and in particular the effective incorporation of supply-side effects, seem to me like the most pressing issues in need of attention.

Judge Posner, in the first edition of his justly celebrated Antitrust Law, noted that market definition was an unfortunate means to an end, a necessity given the inability of our analytical tools effectively to assess the effects of mergers beyond a circumscribed boundary.  As Posner noted,

The importance attached to defining a market in which to appraise the competitive effects of a challenged merger is on more example of the law’s failure to have developed a genuinely economic approach to the problem of monopoly.  If we knew the elasticity of demand facing a group of sellers, it would be redundant to ask whether the group constituted an economically meaningful market. . . . It is only because we lack confidence in our ability to measure elasticities, or perhaps because we do not think of adopting so explicitly economic an approach, that we have to define markets instead.

I doubt we would shun the approach for being too explicitly economic today, but I think a very small number of cases permit us to identify competitive effects with sufficient confidence—Staples being the paradigmatic case.  We may be stuck with market definition, but the outdated conception enshrined in the Guidelines–of measuring concentration in a static market defined essentially by demand-side elasticities–can surely be improved upon.

In the first instance, we should remove any hint of a concentration/price presumption so intimately tied to measuring market definition and HHIs.  Although the Guidelines attempt to cabin the market definition and market share analyses as “starting points,” in practice they are the beginning and end of most merger cases.  The Merger Guidelines (and, importantly, agency practice) should be revised to limit reliance on market definition and market share, at a minimum by stating explicitly that the definition of the market and the calculation of market shares are not sufficient to indicate adverse competitive effects, and perhaps also by removing HHI threshold discussions which seem to imply the same.  Even if the agencies and the Guidelines don’t mean these tools to be used in this way, courts haven’t really gotten the message.

At the same time, the Guidelines should explicitly incorporate supply side elasticity into the market definition inquiry.  There is little defense of the Guideline’s statement that “Market definition focuses solely on demand substitution factors—i.e., possible consumer responses.”  While the Guidelines and actual practice do attempt to make some allowance for supply-side effects, these allowances seem like afterthoughts, and I think it is rare that HHIs are calculated to incorporate production capacity not currently devoted to the narrowly-demand-defined product market, especially outside of the commodity realm.  Meanwhile, even a small bias against supply substitution, entry and unforeseen competitors (and/or new products) is a particular problem in fast-shifting, innovative industries where this is precisely whence the most significant competitive threat will come.

To the extent (and it is a large extent) that market definition and market share are far-removed from competitive effects, they should be more carefully circumscribed by the Guidelines.  The economic irrelevance of much of the evidence used to define markets and the general disregard for supply-side response help to ensure that market definition, while incredibly important in litigation, is not actually all that helpful.  At the same time, the general lack of correlation between concentration and unilateral effects makes reliance on the calculation of market shares (of crabbed markets, often disregarding supply-side effects) similarly misleading and prejudicial.

I’m confident that my esteemed colleagues, who have far more expertise about the merger guidelines than I, will offer all sorts of terrific ideas for revising the substance of the guidelines. While I would certainly advocate a few specific changes (i.e., revise the HHI thresholds to reflect actual agency practice), I’ll leave the devilish details to the experts and concentrate on one “modest” (quite literally!) revision:

I would encourage the antitrust agencies to clarify, within the actual text of the guidelines (i.e., not in mere commentary like that issued in 2006), that the guidelines are not the law, should not be treated as such by the courts, do not exhaustively specify when a merger will or will not be anticompetitive, and should be flexibly implemented to account for case-specific factors that cannot be specified ex ante. In short, the guidelines should explicitly acknowledge that the ultimate question in any horizontal merger case requires the application of a standard, not a rule.

A rule is a legal mandate that entails an advance determination of what conduct is permissible and leaves only factual issues for the adjudicator (e.g., “Do not drive faster than 65 m.p.h.”). A standard, by contrast, is a mandate that leaves to the adjudicator both factual issues and some judgment about what conduct is permissible (e.g., “Do not drive at an excessive speed.”). Rules provide superior guidance to the governed and the adjudicator, but they can misfire if over- or underinclusive, and they therefore require ex ante specification of all factors that might be relevant to a sound decision. Standards provide less guidance, but they are more likely to generate a correct adjudication in any particular case, for the adjudicator is free to account for unforeseen, case-specific quirks.

The legal question at issue in a horizontal merger case — “might the business combination substantially lessen competition or tend to create a monopoly?” — requires the ultimate adjudicator to apply a standard, not a rule. It is simply impossible to specify ex ante all the considerations relevant to answering this question. Accordingly, to the extent the merger guidelines are viewed by courts as rules for separating pro- from anticompetitive mergers, they are bound to generate incorrect adjudications when they inevitably misfire.

Now I realize the merger guidelines, as currently drafted, do not purport to bind courts and do state that their “mechanical application . . . may provide misleading answers” and that they should be applied “reasonably and flexibly to the particular facts and circumstances of each proposed merger.” I don’t believe this is enough. The fact is, generalist judges asked to resolve the complicated economic disputes in a horizontal merger case are reluctant to veer beyond the guidelines’ prescribed analysis and, as a practical matter, treat the guidelines as though they are, in fact, the law. In the D.C. Circuit’s Whole Foods decision, for example, the majority chided the dissent for having incorrectly applied the merger guidelines. Given that the merger guidelines simply cannot exhaustively specify all the considerations relevant to evaluating a proposed merger, courts’ treatment of them as the final word implies that relevant considerations will get left out.

Take Whole Foods for example. A key fact in that case was that the vast majority of shoppers who buy from so-called “premium natural and organic supermarkets” (PNOS) also shop regularly at conventional grocers. Thus, if a combined Whole Foods/Wild Oats were to raise prices on items available at conventional supermarkets, buyers would likely just start buying those items on their conventional grocer outings rather than on their PNOS outings. Unfortunately, nothing in the merger guidelines calls for a consideration of “cross-shopping,” and this important argument therefore got short shrift. Had the guidelines explicitly stated: “This is not the law. We can’t state up front all relevant considerations. Courts should credit plausible arguments based on factors not stated herein,” this important argument might have gotten the attention it deserved.

Or take considerations relevant to dynamic (Schumpeterian) competition. While I am sympathetic to the Sidak/Teece arguments that the merger guidelines should account for dynamic competition concerns, I simply can’t figure out how one would write a rule that would do that. How can we specify ex ante all the considerations that are relevant to whether a business merger will enhance dynamic, though not necessarily static, competition? There may be an answer to that question — and I much look forward to hearing from Sidak and Teece on this issue — but I don’t know what it is. An alternative approach would be to free up the ultimate adjudicators — the courts — to account for dynamic competition considerations by disabusing them of the notion that they must treat the merger guidelines as law. Parties could then articulate their dynamic competition arguments on a case-by-case basis, and the courts could credit those that appear to have merit.

The main objectives of the merger guidelines, I assume, are (1) to deter combination attempts that would harm competition (i.e., those that would clearly be subject to challenge); (2) to avoid deterring combinations that would not harm competition (i.e., those within a safe harbor); and (3) to assure some consistency across the regulatory agencies and across administrations. These objectives could still be attained — and greater accuracy in outcome could be achieved — if the merger guidelines specified that the ultimate inquiry involves application of a standard rather than a rule.

1. Yes, the Merger Guidelines should be revised; in particular:

a.  The discussion of concentration thresholds for collusion facilitating mergers must be aligned more closely with both recent case law and actual enforcement practices; otherwise they fail to provide guidance.  The current Guidelines indicate that concentrations greater than 1800 HHI and a post-merger increase exceeding 100HHI presumptively indicates a challenge. In fact, mergers with post-merger HHIs in excess of both these numbers are routinely permitted. While the standards in the current Guidelines are too aggressive, the George W. Bush administration policy was too lenient.  More fundamentally, the HHI creates an illusion of precision in coordinated effects analysis that is simply not warranted, particularly not when market definitions are ambiguous or when the merger market is subject to product differentiation.  Further, the “other factors” portion of the Guidelines tends to dominate the analysis.  A better approach is reduced reliance on the HHI and more on simpler observations about who the 3 or 4 largest firms in the market are, the effects of eliminating the acquired firm as an independent market entity, and the likely responses of rivals to an output reduction by the post-merger firm.

b.  The unilateral effects analysis requires elaboration that brings it into line with actual agency analysis.  Some of the economists would like to jettison a market definition approach and attempt to measure price increase potential more directly.  While I am sympathetic with that, there is too much water over the bridge; it could lead to courts’ simply rejecting the Guidelines.  A better approach is to write market definition criteria that permit narrower market definitions in situations where a unilateral price increase is likely.  This requires that some thought be given to situations where the merger is between one firm and its second closest rather than its closest rival.  Right now it is simply too easy for defendants to argue that the closer rival will steal sales and competition will not be affected.  So the government is currently losing cases that it should not be losing.  Finally,the Guidelines should quell discontent in lawyers’ perception about unilateral effects analysis that it is more speculative or less rigorous than traditional coordinated effects analysis.  The fact is that both types of analysis rely on many assumptions, some of which are no more than conjectures about future firm behavior.  If anything, the robustness edge belongs to the unilateral effects approach.

I feel no great urgency to revise the Guidelines.  True enough, they’re more of an analytical thought experiment than an accurate description of how merger review takes place in the agencies, but who’s really fooled?  Perhaps some business people think that the Guidelines are a computer program waiting for the introduction of the relevant data to spit out the answer, but most sophisticated executives contemplating a merger will understand that the Guidelines are just a beginning point for conversation.

Could the beginning point be clearer or conform more closely to agency practice?  Sure, but that doesn’t mean that revision of the Guidelines is justified.  With hindsight, the First Amendment could be a little better worded, but no one wants to tinker with it now–who knows what would result?  I’m sufficiently satisfied with current merger practice in the agencies that I don’t care that much what’s in the Guidelines and I am worried about the unpredictable results that could obtain if we started tinkering.  Let sleeping dogs . . .

But if we are going to revise, then my pet issue is the asymmetrical treatment of the probabilities on anticompetitive effects and offsetting efficiencies–a point on which Joe Simons and I are planning a fuller analysis.  The Guidelines seem to suggest that if the probability of anticompetitive effects of magnitude 100 is 50% and the probability of offsetting efficiencies of magnitude 100 is 50%, then the merger should be challenged, since a greater quantum of proof is required for efficiencies than for anticompetitive effects.  This makes no sense to me–everything else being equal, efficiencies that would be passed on to consumers and market power increases should be given equal weight and not assigned separate probability standards.

1.  Do the Merger Guidelines Need Revision?

Yes.  Conceptually, the current Guidelines incorporate multiple strands of intellectual and legal history with respect to merger analysis that have been layered one upon the other over time, but never effectively integrated.  This now encumbers the application of the Guidelines and may be inhibiting the government’s capacity to effectively and efficiently initiate merger challenges.

The current Guidelines remain strongly tethered to the “structural” school, with roots in the 1950s.  The influence of the structural school was evident in both the Philadelphia National Bank presumption and the 1968 Guidelines, and the 1982-97 Guidelines have retained the essential features of that tradition — reliance on market definition, market share calculation, and inferences about market power drawn from those shares.

The 1982 Guidelines also began the process of layering on top of that tradition, injecting elements of the “new learning,” which focused largely on expanding upon General Dynamics and the various bases for rebutting a structural case, and oligopoly theory.  As the Guidelines further evolved through 1997, various dimensions of oligopoly theory were added, especially in the sections on anticompetitive effects, reflecting the work of Stigler, Nash, Cournot, and Bertrand.  Yet additional economic thinking was inserted in the revised and expanded discussions of entry and efficiencies.  Today’s Guidelines, therefore, are an intellectual collage of various traditions in law and economics.

2. If yes, what is the most important revision that you would recommend and why?

Although it is a tall order, the agencies could undertake to clarify the overall conceptual framework of the Guidelines.  Currently, even though it does not describe actual agency practice, the Guidelines are perceived by courts as outlining a linear process, in which its five steps are mechanically undertaken in sequence, each proceeding only after the previous step is completed.  This in effect makes structural analysis a prerequisite to the evaluation of every merger and it impairs reliance on any other approach to evaluating likely anticompetitive effects or efficiencies more directly.  This approach wrongly elevates the status of market definition above competitive effects, which is the core concern of merger analysis – indeed of all antitrust analysis.

A related goal would be to harmonize the intellectual underpinnings of merger analysis with other areas of antitrust law.  This is especially important with respect to courts’ willingness to rely on direct effects evidence since the Supreme Court’s decisions in NCAA and Indiana Fed’n of Dentists.  Depending on the kind of evidence available, unilateral effects theory can be understood as an application of the direct effects approach to mergers.  In cases like Staples, for example, where natural experiments provided a basis for predicting the likely future effects of the merger, it is a sort of “predicted actual effects” doctrine.  As with NCAA and Indiana Fed’n of Dentists, in such cases defining markets and inferring market power indirectly should be understood as a surrogate that is unnecessary when more direct and more reliable indications of future market power are available.

A third and also related goal might be to more openly acknowledge that the Guidelines influence how courts assign burdens of production and proof.  It has become tradition for all government Guidelines to pronounce that they are not intended to specify burdens of proof or production; that instead, they simply outline the government’s internal processes for exercising prosecutorial discretion. But these assertions are at odds with actual practice once the government enters the courthouse.  The Merger Guidelines have been read to specify burdens: Steps 1 and 2 (market definition and anticompetitive effect) shift the burden to the defendant, who can then seek to rebut the prima facie case based on entry, efficiencies, or a failing firm defense.  And courts such as the D.C. Circuit in Baker Hughes and Heinz, have promoted the use a “sliding scale” to establish variable-strength presumptions and to evaluate burdens, often relying heavily on structural evidence as a burden shifter, a tradition rooted in Philadelphia Nat’l Bank.  Given that the Guidelines are applied this way, the agencies should consider saying a bit more about what should be sufficient to shift a burden of production in either direction and whether certain kinds and quantities of evidence shift a burden more emphatically than others.

The specification of burdens also has implications for the welfare standard being used to assess mergers.  This is most obvious in the efficiencies discussion, which currently tries to nuance the issue.  The text strongly suggests a commitment to a consumer welfare standard defined as giving greater weight to consumer surplus.  But there is a hint of equivocation in footnote 37, which contains some support for the argument that aggregate welfare may be a relevant consideration.  More clearly specifying the relative burdens of production could eliminate any remaining ambiguity regarding the welfare standard.  Although it is unlikely that very many cases would be influenced by the choice of a consumer welfare or aggregate welfare standard, the courts have generally applied the consumer welfare approach now dominant in the Guidelines and this should be more clearly acknowledged.

Finally, post-consummation merger challenges have become more common and yet the Guidelines are focused entirely on making predictions about likely future effects.  The agencies might consider either adding a section on post-consummation mergers or generating a separate guidance document that would do so.  The goal would be to explain how the post-consummation analysis of a merger might differ from those done pre-merger.  This again highlights the need to integrate thinking about the role of actual effects evidence, which becomes more central in post-consummation challenges.  Such a discussion also could include consideration of limited reliance on abbreviated or “quick look” types of analysis to shift burdens in appropriate post-consummation cases and reduce the costs of merger review.

The Day 1 posts are up and available.  But we’re not done yet.  We have seven more coming tomorrow from Dan Crane, Andy Gavil, Herbert Hovenkamp, Joseph Simons, Thom Lambert, Geoff Manne, Danny Sokol and Paul Yde.

In the meantime, please peruse the first installment of posts and feel free to comment!

• Joe Farrell, Welcome from the Agencies
• Dennis Carlton, Revising the Guidelines
• Luke Froeb, Merger Enforcement without Market Definition
• Robert Gertner, Revising the Guidelines
• Steve Salop, Comments on Updating the Merger Guidelines
• David Teece and J. Gregory Sidak, Dynamic Competition and Antitrust Law
• Einer Elhauge, Do the Merger Guidelines Need Revision?
• Joshua Wright, The Guidelines Should be Revised to Reject the PNB Presumption