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New Anti-Merger Theories: A Critique
By Edward J. López
Introduction
Does recent federal merger regulation make economic sense? Merger activity has clearly increased this decade, both in the numbers of mergers and their market value. Whether antitrust regulators have responded with a proportional increase in enforcement is up for debate. What is clear, however, is that regulators at the Department of Justice Antitrust Division and the Federal Trade Commission have begun to enforce merger laws in innovative ways. These innovations have developed not in academic literature but within government agencies themselves. "Innovation market" analysis evaluates a merger between technologically advanced firms based on the effects of the merger on research and development in the relevant market. "Unilateral effect" analysis evaluates a merger on the ability of the merged firm to singularly influence price in the relevant market. These instruments —which I explain in detail below—have been employed explicitly and implicitly in dozens of antitrust cases and investigations since 1993. They have been observed as the intellectual force supporting the current revival of antitrust enforcement (The Economist 1998b, Price 1997). And regulators have accepted them seemingly wholesale as sound guides to policy action.
The purpose of this paper is to evaluate these new anti-merger instruments on the basis of economic theory and evidence. I first discuss how the economics of antitrust has developed over the years, with the intention of characterizing the intellectual inheritance of 1990s' antitrust regulators. Within this context, I then discuss each anti-merger instrument, how it has been applied in specific cases, and how it accords with underlying economic science. On the basis of these arguments, antitrust regulators should pause and reconsider the theoretical and empirical bases of applying unilateral effects and innovation markets to merger investigations.
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