E “CON” NOMICS: The Balancing Act of Keeping Multinational (MNC's) Competition & Monopolies in Check!

 

MYTH: Monopolies are illegal versus FACT: The U.S. Supreme Court has long held that the mere possession of monopoly power, and any associated charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. 

The opportunity to charge monopoly prices at least for a short period is what attracts business acumen in the first place; it induces risk-taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power is not unlawful unless it is accompanied by anticompetitive conduct. In other words, conduct that is distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

E “CON” NOMICS: The Balancing Act of Keeping (Multinational (MNC’s) Competition & Monopolies in Check. What Can the Department of Justice and the Federal Trade Commission (FTC) Do Differently?

Enforcement of Antitrust Laws: Justice Department and

Federal Trade Commission Interaction

Both the Justice Department and the FTC share the responsibility for enforcing U.S. antitrust laws. When the Justice Department brings a suit, it is heard in federal court, whereas when the FTC initiates an action, it is heard before an administrative law judge Measuring Concentration and Defining Market Share at the FTC and the decision is reviewed by the commissioners of the FTC. If a defendant wants to appeal an FTC decision, it may bring an action in federal court. Both the Justice Department and the FTC may take steps to halt objectionable behavior by firms. The Justice Department may try to get an injunction, whereas the FTC may issue a cease and desist order. Criminal actions are reserved for the Justice Department, which may seek fines or even imprisonment for the violators as well as the costs of bringing the action. Readers should not infer that government agencies are the sole parties who may bring an antitrust action. Individuals and companies may also initiate such actions. Indeed, it is ironic that such private actions constitute a significant percentage of the total antitrust proceedings in the United States. 

KEYS TO THE KINGDOM: Properties of the HH Index

The Herfindahl--Hirschman index possesses certain properties that make it a better measure of merger-related market concentration than simple concentration ratios:

◾ The index increases with the number of firms in the industry.

◾ The index sums the squares of the firms in the industry. In doing so, it weights larger firms more heavily than smaller firms. Squaring a larger number will have a disproportionately greater impact on the index than squaring a smaller number. Moreover, a merger that increases the size differences between firms will result in a larger increase in the index than would have been rejected using simple concentration ratios.

◾ Because larger firms have greater impact on the index, the index can provide useful results even if there is incomplete information on the size of the smaller firms in the industry.

In evaluating market concentration, the following thresholds apply:

◾ Post merger HH less than 1,000: Unconcentrated market. This is unlikely to cause an antitrust challenge unless there are other anticompetitive effects.

◾ Post merger HH between 1,000 and 1,800: Moderately concentrated market. If

a merger increases the HH index by less than 100 points, this is unlikely to

be a problem, but if it raises the index by more than 100 points, there may be

concentration-related antitrust concerns.

◾ Post merger HH above 1,800: Highly concentrated market. If a merger raises the index only by less than 50 points, this is unlikely to be objectionable. Increases of greater than 50 points “raise significant antitrust concerns.”

Example of the HH Index

Consider an industry composed of eight firms, each of which has a 12.5% market

share. The Herfindahl--Hirschman index then is equal to:

HH =Σ8i=1Si2 =8(125)^2=1,250 and if two of three equal in size firms merge, the indexes are computed to be: HH 675+937.5+1,562.5

 

“ Google Was Fined $1.7 Billion for Ad Practices Violating European Antitrust Laws” 

GOVERNMENT'S RESPONSIBILITY & CAPACITY TO REGULATE MONOPOLIES OR COMPETITION: DOJ & FTC: The 1992 Merger Guidelines

The current position of the Justice Department and the FTC is set forth in the jointly issued 1992 merger guidelines, which were revised in 1997. They are similar to the 1984 guidelines in that they also recognize potential efficiency-enhancing benefits of mergers. However, these guidelines indicate that a merger will be challenged if there are anticompetitive effects, such as through price increases, even when there are demonstrable efficiency benefits. Clearly, mergers that lead to an anticompetitive increase in market powers will be challenged.

The 1992 guidelines provide a clarification of the definition of the relevant market, which often is a crucial issue of an antitrust lawsuit. They state that a market is the smallest group of products or geographic area where a monopoly could raise prices by a certain amount, such as by 5%. Like the 1984 guidelines, they also use the HH index to measure the competitive effects of a merger. 

The 1992 guidelines set forth a five-step process that the enforcement authorities follow:

1.      Market Dentition and Concentration: Assess whether the merger significantly increases concentration. This involves a definition of the relevant market, which may be an issue of dispute.

2.  Competitive Effects: Assess any potential anticompetitive effects of the deal.

3.  Entry: Assess whether the potential anticompetitive effects could be mitigated by entry into the market by competitors. The existence of barriers to entry needs to be determined.

4.  Efficiencies: Determine if there could be certain offsetting efficiency gains that may result from the deal and that could offset the negative impact of the anticompetitive effects.

5.  Failing Firm Defense: Determine whether either party would fail or exit the market but for the merger. These possible negative effects are then weighed against the potential anticompetitive effects. The 1997 revisions highlight the antitrust authorities’ willingness to consider the net antitrust effects of a merger.

 

Adverse anticompetitive effects may be offset by positive efficiency benefits. The merger participants need to be able to demonstrate that the benefits are directly related to the merger. It is recognized that such benefits may be difficult to quantify in advance of the deal, but their demonstration may not be vague or speculative. Practically, the merger-specific efficiencies offset only minor anticompetitive effects, not major ones. 

The 1997 revision of the 1992 guidelines emphasized how merger-specific efficiencies might allow companies to better compete and could possibly be translated into lower prices for consumers. These efficiencies can be achieved only through the merger and are measurable or cognizable. One of the major contributions of the 2010 merger guidelines was that the Justice Department made clear what was generally known by participants in this marketplace—that the Justice Department did not really follow the mechanistic,

step-by-step process implied by the 1992 guidelines. Rather, it focused more broadly on competitive effects and the analysis and research that would need to be done to make these effects clear. Thus, these guidelines brought closer together actual practice with the letter of the prior guidelines. 

In 2011 the Antitrust Division of the Justice Department issued a Guide to Merger Remedies, which emphasized that proposed remedies for mergers must ensure that competition will be preserved, and the deal participants must make sure that the remedies have a beneficial impact on consumers and not market participants.

MYTH: Antitrust is a law enforcement tool, not a regulatory tool.

FACT: It is rooted in the idea that competitive markets are self-policing and that consumers benefits when there is vigorous, even ruthless, competition. Where competition in the market is damaged by certain competitor’s action, antitrust steps in on fact specific grounds and corrects the action of a particular company or group of companies. Antitrust is designed to restore the self-policing power of competition in the market. Regulation on the other hand

 

Sources (References & Research)

“1992 Merger Guidelines.” The United States Department of Justice, 4 Aug. 2015, www.justice.gov/archives/atr/1992-merger-guidelines.

“Challenges in Merger Analysis: The 1992 Merger Guidelines and Beyond.” Federal Trade Commission, 14 Aug. 2015, www.ftc.gov/public-statements/1992/12/challenges-merger-analysis-1992-merger-guidelines-beyond.

“Library Guides: Antitrust Law: Enforcement Statistics.” Enforcement Statistics - Antitrust Law - Library Guides at UChicago, guides.lib.uchicago.edu/c.php?g=297756&p=1992493

“Merger Enforcement.” The United States Department of Justice, 30 July 2019, www.justice.gov/atr/merger-enforcement.

Works Cited

Kanter, Jake. “Google Was Fined $1.7 Billion for Ad Practices Violating European Antitrust Laws.” Inc.com, Inc., 20 Mar. 2019, www.inc.com/business-insider/google-fined-for-ad-practices-violating-european-antitrust-laws.html.