Horizontal Merger Guidelines

Horizontal Merger Guidelines

For Public Comment: Released On April 20, 2010

1. Overview

These Guidelines outline the principal analytical techniques, practices, and the enforcement

policy of the Department of Justice and the Federal Trade Commission (the “Agencies”) with

respect to mergers and acquisitions involving actual or potential competitors (“horizontal

mergers”) under the federal antitrust laws. 1 The relevant statutory provisions include Section 7

of the Clayton Act, 15 U.S.C. § 18, Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 and

Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. Most particularly, Section 7 of

the Clayton Act prohibits mergers if “in any line of commerce or in any activity affecting

commerce in any section of the country, the effect of such acquisition may be substantially to

lessen competition, or to tend to create a monopoly.”

The Agencies seek to identify and challenge competitively harmful mergers while avoiding

unnecessary interference with mergers that are either competitively beneficial or neutral. Most

merger analysis is necessarily predictive, requiring an assessment of what will likely happen if a

merger proceeds as compared to what will likely happen if it does not. Given this inherent need

for prediction, these Guidelines reflect the Congressional intent that merger enforcement should

interdict competitive problems in their incipiency and that certainty about anticompetitive effect

is seldom possible and not required for a merger to be illegal.

These Guidelines describe the principal analytical techniques and the main types of evidence on

which the Agencies usually rely to predict whether a horizontal merger may substantially lessen

competition. They are not intended to describe how the Agencies analyze cases other than

horizontal mergers. These Guidelines are intended to assist the business community and antitrust

practitioners by increasing the transparency of the analytical process underlying the Agencies’

enforcement decisions. They may also assist the courts in developing an appropriate framework

for interpreting and applying the antitrust laws in the horizontal merger context.

These Guidelines should be read with the awareness that merger analysis does not consist of

uniform application of a single methodology. Rather, it is a fact-specific process through which

the Agencies, guided by their extensive experience, apply a range of analytical tools to the

reasonably available and reliable evidence to evaluate competitive concerns in a limited period

1

These Guidelines replace the Horizontal Merger Guidelines issued in 1992, revised in 1997. They reflect the

ongoing accumulation of experience at the Agencies. The Commentary on the Horizontal Merger Guidelines issued

by the Agencies in 2006 remains a valuable supplement to these Guidelines. These Guidelines may be revised from

time to time as necessary to reflect significant changes in enforcement policy, to clarify existing policy, or to reflect

new learning. These Guidelines do not cover vertical or other types of non-horizontal acquisitions.

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of time. Where these Guidelines provide examples, they are illustrative and do not exhaust the

applications of the relevant principle. 2

The unifying theme of these Guidelines is that mergers should not be permitted to create,

enhance, or entrench market power or to facilitate its exercise. For simplicity of exposition,

these Guidelines generally refer to all of these effects as enhancing market power. A merger

enhances market power if it is likely to encourage one or more firms to raise price, reduce

output, diminish innovation, or otherwise harm customers as a result of diminished competitive

constraints or incentives. In evaluating how a merger will likely change a firm’s behavior, the

Agencies focus primarily on how the merger affects conduct that would be most profitable for

the firm.

A merger can enhance market power simply by eliminating competition between the merging

parties. This effect can arise even if the merger causes no changes in the way other firms

behave. Adverse competitive effects arising in this manner are referred to as “unilateral effects.”

A merger also can enhance market power by increasing the risk of coordinated, accommodating,

or interdependent behavior among rivals. Adverse competitive effects arising in this manner are

referred to as “coordinated effects.” In any given case, either or both types of effects may be

present, and the distinction between them may be blurred.

These Guidelines describe how the Agencies analyze mergers between rival suppliers that may

enhance their market power as sellers. Enhancement of market power by sellers often elevates

the prices charged to customers. For simplicity of exposition, these Guidelines generally discuss

the analysis in terms of such price effects. Enhanced market power can also be manifested in

non-price terms and conditions that adversely affect customers, including reduced product

quality, reduced product variety, reduced service, or diminished innovation. Such non-price

effects may coexist with price effects, or can arise in their absence. When the Agencies

investigate whether a merger may lead to a substantial lessening of non-price competition, they

employ an approach analogous to that used to evaluate price competition. Enhanced market

power may also make it more likely that the merged entity can profitably and effectively engage

in exclusionary conduct. Regardless of how enhanced market power likely would be manifested,

the Agencies normally evaluate mergers based on their impact on customers. The Agencies

examine effects on either or both of the direct customers and the final consumers. The Agencies

presume, absent convincing evidence to the contrary, that adverse effects on direct customers

also cause adverse effects on final consumers.

Enhancement of market power by buyers, sometimes called “monopsony power,” has adverse

effects comparable to enhancement of market power by sellers. The Agencies employ an

analogous framework to analyze mergers between rival purchasers that may enhance their

market power as buyers. See Section 12.

2

These Guidelines are not intended to describe how the Agencies will conduct the litigation of cases they decide to

bring. Although relevant in that context, these Guidelines neither dictate nor exhaust the range of evidence the

Agencies may introduce in litigation.

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2. Evidence of Adverse Competitive Effects

The Agencies consider any reasonably available and reliable evidence to address the central

question of whether a merger may substantially lessen competition. This section discusses

several categories and sources of evidence that the Agencies, in their experience, have found

most informative in predicting the likely competitive effects of mergers. The list provided here

is not exhaustive. In any given case, reliable evidence may be available in only some categories

or from some sources. For each category of evidence, the Agencies consider evidence indicating

that the merger may enhance competition as well as evidence indicating that it may lessen

competition.

2.1 Types of Evidence

2.1.1

Actual Effects Observed in Consummated Mergers

When evaluating a consummated merger, the ultimate issue is not only whether adverse

competitive effects have already resulted from the merger, but also whether such effects are

likely to arise in the future. Evidence of observed post-merger price increases or other changes

adverse to customers is given substantial weight. The Agencies evaluate whether such changes

are anticompetitive effects resulting from the merger, in which case they can be dispositive.

However, a consummated merger may be anticompetitive even if such effects have not yet been

observed, because the merged firm may be aware of the possibility of post-merger antitrust

review and moderating its conduct. Consequently, the Agencies also consider the same types of

evidence they consider when evaluating unconsummated mergers.

2.1.2

Direct Comparisons Based on Experience

The Agencies look for historical events, or “natural experiments,” that are informative regarding

the competitive effects of the merger. For example, the Agencies may examine the impact of

recent mergers, entry, expansion, or exit in the relevant market. Effects of analogous events in

similar markets may also be informative.

The Agencies also look for reliable evidence based on variations among similar markets. For

example, if the merging firms compete in some locales but not others, comparisons of prices

charged in regions where they do and do not compete may be informative regarding post-merger

prices. In some cases, however, prices are set on such a broad geographic basis that such

comparisons are not informative. The Agencies also may examine how prices in similar markets

vary with the number of substantial competitors in those markets.

2.1.3

Market Shares and Concentration in a Relevant Market

The Agencies give weight to the merging parties’ market shares in a relevant market, the level of

concentration, and the change in concentration caused by the merger. See Sections 4 and 5.

Mergers that cause a significant increase in concentration and result in highly concentrated

markets are presumed to be likely to enhance market power, but this presumption can be rebutted

by persuasive evidence showing that the merger is unlikely to enhance market power.

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2.1.4

Substantial Head-to-Head Competition

The Agencies consider whether the merging firms have been, or likely will become absent the

merger, substantial head-to-head competitors. Such evidence can be especially relevant for

evaluating adverse unilateral effects, which result directly from the loss of that competition. See

Section 6. This evidence can also inform market definition. See Section 4.

2.1.5

Disruptive Role of a Merging Party

The Agencies consider whether a merger may lessen competition by eliminating a “maverick”

firm, i.e., a firm that has played, or likely will play absent the merger, a disruptive role in the

market to the benefit of customers. For example, if one of the merging firms has a strong

incumbency position and the other merging firm threatens to disrupt market conditions with a

new technology or business model, their merger can involve the loss of actual or potential

competition. Likewise, one of the merging firms may have the incentive to take the lead in price

cutting or other competitive conduct or to resist increases in industry prices. A firm that may

discipline prices based on its ability and incentive to expand production rapidly using available

capacity also can be a maverick, as can a firm that has often resisted otherwise prevailing

industry norms to cooperate on price setting or other terms of competition.

2.2 Sources of Evidence

The Agencies consider many sources of evidence in their merger analysis. The most common

sources of reasonably available and reliable evidence are the merging parties, customers, other

industry participants, and industry observers.

2.2.1

Merging Parties

The Agencies typically obtain substantial information from the merging parties. This

information can take the form of documents, testimony, or data, and can consist of descriptions

of competitively relevant conditions or reflect actual business conduct and decisions.

Documents created in the normal course are more probative than documents created as advocacy

materials in merger review. Documents describing industry conditions can be informative

regarding the operation of the market and how a firm identifies and assesses its rivals,

particularly when business decisions are made in reliance on the accuracy of those descriptions.

The business decisions taken by the merging firms also can be informative about industry

conditions. For example, if a firm sets price well above marginal cost, that normally indicates

either that the firm is coordinating with its rivals or that the firm believes its customers are not

highly sensitive to price.

Explicit or implicit evidence that the merging parties intend to raise prices, reduce output or

capacity, reduce product quality or variety, withdraw products or delay their introduction, or

curtail research and development efforts after the merger, or explicit or implicit evidence that the

ability to engage in such conduct motivated the merger, can be highly informative in evaluating

the likely effects of a merger. Likewise, the Agencies look for reliable evidence that the merger

is likely to result in efficiencies. The Agencies give careful consideration to the views of

individuals whose responsibilities, expertise, and experience relating to the issues in question

provide particular indicia of reliability. The financial terms of the transaction may also be

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informative regarding competitive effects. For example, a high purchase price may indicate that

the acquiring firm is paying a premium to reduce competition or that the acquired firm has assets

not easily replaced.

2.2.2

Customers

Customers can provide a variety of information to the Agencies, ranging from information about

their own purchasing behavior and choices to their views about the effects of the merger itself.

Information from customers about how they would likely respond to a price increase, and the

relative attractiveness of different products or suppliers, may be highly relevant, especially when

corroborated by other evidence such as historical purchasing patterns and practices. Customers

also can provide valuable information about the impact of historical events such as entry by a

new supplier.

The conclusions of well-informed and sophisticated customers on the likely impact of the merger

itself can also help the Agencies investigate competitive effects, because customers typically feel

the consequences of both competitively beneficial and competitively harmful mergers. In

evaluating such evidence, the Agencies are mindful that customers may oppose, or favor, a

merger for reasons unrelated to the antitrust issues raised by that merger.

When some customers express concerns about the competitive effects of a merger while others

view the merger as beneficial or neutral, the Agencies take account of this divergence in using

the information provided by customers and consider the likely reasons for such divergence of

views. For example, if for regulatory reasons some customers cannot buy imported products,

while others can, a merger between domestic suppliers may harm the former customers even if it

leaves the more flexible customers unharmed. See Section 3.

When direct customers of the merging firms compete against one another in a downstream

market, their interests may not be aligned with the interests of final consumers, especially if the

direct customers expect to pass on any anticompetitive price increase. A customer that is

protected from adverse competitive effects by a long-term contract, or otherwise relatively

immune from the merger’s harmful effects, may even welcome an anticompetitive merger that

provides that customer with a competitive advantage over its downstream rivals.

Example 1: As a result of the merger, Customer C will experience a price increase for an input

used in producing its final product, raising its costs. Customer C’s rivals use this input more

intensively than Customer C, and the same price increase applied to them will raise their costs

more than it raises Customer C’s costs. On balance, Customer C may benefit from the merger

even though the merger involves a substantial lessening of competition.

2.2.3

Other Industry Participants and Observers

Suppliers, indirect customers, distributors, other industry participants, and industry analysts can

also provide information helpful to a merger inquiry. The interests of firms selling products

complementary to those offered by the merging firms often are well aligned with those of

customers, making their informed views valuable.

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Information from firms that are rivals to the merging parties can help illuminate how the market

operates. The interests of rival firms often diverge from the interests of customers, since

customers normally lose, but rival firms gain, if the merged entity raises its prices. For that

reason, the Agencies do not routinely rely on the overall views of rival firms regarding the

competitive effects of the merger. However, rival firms may provide relevant facts, and even

their overall views may be instructive, especially in cases where the Agencies are concerned that

the merged entity may engage in exclusionary conduct.

Example 2: Merging Firms A and B operate in a market in which network effects are significant,

implying that any firm’s product is significantly more valuable if it commands a large market

share or if it is interconnected with others that in aggregate command such a share. Prior to the

merger, they and their rivals voluntarily interconnect with one another. The merger would create

an entity with a large enough share that a strategy of ending voluntary interconnection would have

a dangerous probability of creating monopoly power in this market. The interests of rivals and of

consumers would be broadly aligned in preventing such a merger.

3. Targeted Customers and Price Discrimination

When examining possible adverse competitive effects from a merger, the Agencies consider

whether those effects vary significantly for different customers purchasing the same or similar

products. Such differential impacts are possible when sellers can discriminate, e.g., by profitably

raising price to certain targeted customers but not to others. The possibility of price

discrimination influences market definition (see Section 4), the measurement of market shares

(see Section 5), and the evaluation of competitive effects (see Sections 6 and 7).

When price discrimination is feasible, adverse competitive effects on targeted customers can

arise, even if such effects will not arise for other customers. A price increase for targeted

customers may be profitable even if a price increase for all customers would not be profitable

because too many other customers would substitute away. When discrimination is reasonably

likely, the Agencies may evaluate competitive effects separately by type of customer. The

Agencies may have access to information unavailable to customers that is relevant to evaluating

whether discrimination is reasonably likely.

For price discrimination to be feasible, two conditions typically must be met: differential pricing

and limited arbitrage.

First, the suppliers engaging in price discrimination must be able to price differently to targeted

customers than to other customers. This may involve identification of individual customers to

which different prices are offered, or offering different prices to different types of customers

based on observable characteristics.

Example 3: Suppliers can distinguish large buyers from small buyers. Large buyers are more

likely than small buyers to self-supply in response to a significant price increase. The merger may

lead to price discrimination against small buyers, harming them, even if large buyers are not

harmed. Such discrimination can occur even if there is no discrete gap in size between the classes

of large and small buyers.

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In other cases, suppliers may be unable to distinguish among different types of customers but can

offer multiple products that sort customers based on their purchase decisions.

Second, the targeted customers must not be able to defeat the price increase of concern by

arbitrage, e.g., by purchasing indirectly from or through other customers. Arbitrage may be

difficult if it would void warranties or make service more difficult or costly for customers.

Arbitrage is inherently impossible for many services. Arbitrage between customers at different

geographic locations may be impractical due to transportation costs. Arbitrage on a modest scale

may be possible but sufficiently costly or limited that it would not deter or defeat a

discriminatory pricing strategy.

4. Market Definition

The Agencies define relevant markets to help analyze the competitive effects of a horizontal

merger. Market definition is not an end in itself: it is one of the tools the Agencies use to assess

whether a merger is likely to lessen competition. Market definition identifies an arena of

competition and enables the identification of market participants and the measurement of market

shares and market concentration. This exercise is useful to the extent it illuminates the merger’s

likely competitive effects. The Agencies’ analysis need not start with market definition. Some of

the analytical tools used by the Agencies to assess competitive effects do not rely on market

definition, although evaluation of competitive alternatives available to customers is always

necessary at some point in the analysis.

Evidence of competitive effects can inform market definition, just as market definition can be

informative regarding competitive effects. For example, evidence that a reduction in the number

of significant rivals offering a group of products causes prices for those products to rise

significantly can itself establish that those products form a relevant market. Such evidence also

may more directly predict the competitive effects of a merger, reducing the role of inferences

from market definition and market shares.

Where analysis suggests alternative and reasonably plausible candidate markets, and where the

resulting market shares lead to very different inferences regarding competitive effects, it is

particularly valuable to examine more direct forms of evidence concerning those effects.

Market definition focuses solely on demand substitution factors, i.e., on customers’ ability and

willingness to substitute away from one product to another in response to a price increase or a

corresponding non-price change such as a reduction in product quality or service. The

responsive actions of suppliers are also important in competitive analysis. They are considered

in these Guidelines in the sections addressing the identification of market participants, the

measurement of market shares, the analysis of competitive effects, and entry.

Customers often confront a range of possible substitutes for the products of the merging firms.

Some substitutes may be closer, and others more distant, either geographically or in terms of

product attributes and perceptions. Additionally, customers may assess the proximity of

different products differently. When products or suppliers in different geographic areas are

substitutes for one another to varying degrees, defining a market to include some substitutes and

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exclude others is inevitably a simplification that cannot capture the full variation in the extent to

which different products compete against each other. The principles of market definition

outlined below seek to make this inevitable simplification as useful and informative as is

practically possible. Relevant markets need not have precise metes and bounds.

Defining a market broadly to include relatively distant product or geographic substitutes can lead

to misleading market shares. This is because the competitive significance of distant substitutes is

unlikely to be commensurate with their shares in a broad market. Although excluding more

distant substitutes from the market inevitably understates their competitive significance to some

degree, doing so often provides a more accurate indicator of the competitive effects of the

merger than would the alternative of including them and overstating their competitive

significance as proportional to their shares in an expanded market.

Example 4: Firms A and B, sellers of two leading brands of motorcycles, propose to merge. If

Brand A motorcycle prices were to rise, some buyers would substitute to Brand B, and some

others would substitute to cars. However, motorcycle buyers see Brand B motorcycles as much

more similar to Brand A motorcycles than are cars. Far more cars are sold than motorcycles.

Evaluating shares in a market that includes cars would greatly underestimate the competitive

significance of Brand B motorcycles in constraining Brand A’s prices and greatly overestimate the

significance of cars.

Market shares of different products in narrowly defined markets are more likely to capture the

relative competitive significance of these products, and often more accurately reflect competition

between close substitutes. As a result, properly defined antitrust markets often exclude some

substitutes to which some customers might turn in the face of a price increase even if such

substitutes provide alternatives for those customers. However, a group of products is too narrow

to constitute a relevant market if competition from products outside that group is so ample that

even the complete elimination of competition within the group would not significantly harm

either direct customers or downstream consumers. The hypothetical monopolist test (see Section

4.1.1) is designed to ensure that candidate markets are not overly narrow in this respect.

The Agencies implement these principles of market definition flexibly when evaluating different

possible candidate markets. Relevant antitrust markets defined according to the hypothetical

monopolist test are not always intuitive and may not align with how industry members use the

term “market.”

Section 4.1 describes the principles that apply to product market definition, and gives guidance

on how the Agencies most often apply those principles. Section 4.2 describes how the same

principles apply to geographic market definition. Although discussed separately for simplicity of

exposition, the principles described in Sections 4.1 and 4.2 are combined to define a relevant

market, which has both a product and a geographic dimension. In particular, the hypothetical

monopolist test is applied to a group of products together with a geographic region to determine

a relevant market.

4.1 Product Market Definition

When a product sold by one merging firm (Product A) competes against one or more products

sold by the other merging firm, the Agencies define a relevant product market around Product A

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to evaluate the importance of that competition. Such a relevant product market consists of a

group of substitute products including Product A. Multiple relevant product markets may thus

be identified.

4.1.1

The Hypothetical Monopolist Test

The Agencies employ the hypothetical monopolist test to evaluate whether groups of products in

candidate markets are sufficiently broad to constitute relevant antitrust markets.

The hypothetical monopolist test requires that a product market contain enough substitute

products so that it could be subject to post-merger exercise of market power significantly

exceeding that existing absent the merger. Specifically, the test requires that a hypothetical

profit-maximizing firm, not subject to price regulation, that was the only present and future seller

of those products (“hypothetical monopolist”) likely would impose at least a small but significant

and non-transitory increase in price (“SSNIP”) on at least one product in the market, including at

least one product sold by one of the merging firms. 3 For the purpose of analyzing this issue, the

terms of sale of products outside the candidate market are held constant. The SSNIP is

employed solely as a methodological tool for performing the hypothetical monopolist test; it is

not a tolerance level for price increases resulting from a merger.

Groups of products may satisfy the hypothetical monopolist test without including the full range

of substitutes from which customers choose. The hypothetical monopolist test may identify a

group of products as a relevant market even if customers would substitute significantly to

products outside that group in response to a price increase.

Example 5: Product A and B are being tested as a candidate market. Each sells for $100, has an

incremental cost of $60, and sells 1200 units. For every dollar increase in its price, Product A

loses thirty units of sales, ten of which are diverted to Product B, and likewise for Product B.

Under these conditions, economic analysis shows that a hypothetical profit-maximizing

monopolist controlling Products A and B would raise both of their prices by 10%, to $110.

Therefore, Products A and B satisfy the hypothetical monopolist test using a 5% SSNIP, and

indeed for any SSNIP size up to 10%. This is true even though two-thirds of the sales lost by one

product when it raises its price are diverted to products outside the relevant market.

When applying the hypothetical monopolist test to define a market around a product offered by

one of the merging firms, if the market includes a second product, the Agencies will normally

also include a third product if that third product is a closer substitute for the first product than is

the second product. The third product is a closer substitute if, in response to a SSNIP on the first

product, greater revenues are diverted to the third product than to the second product.

3

If the pricing incentives of the firms supplying the products in the candidate market differ substantially from those

of the hypothetical monopolist, for reasons other than the latter’s control over a larger group of substitutes, the

Agencies may instead employ the concept of a hypothetical profit-maximizing cartel comprised of the firms (with

all their products) that sell the products in the candidate market. This approach is most likely to be appropriate if the

merging firms sell products outside the candidate market that significantly affect their pricing incentives for

products in the candidate market. This could occur, for example, if the candidate market is one for durable

equipment and the firms selling that equipment derive substantial net revenues from selling spare parts and service

for that equipment.

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Example 6: In Example 5, suppose that half of the unit sales lost by Product A when it raises its

price are diverted to Product C, which also has a price of $100, while one-third are diverted to

Product B. Product C is a closer substitute for Product A than is Product B. Thus Product C will

normally be included in the relevant market, even though Products A and B together satisfy the

hypothetical monopolist test.

The hypothetical monopolist test ensures that markets are not defined too narrowly, but it does

not lead to a single relevant market. The Agencies may evaluate a merger in any relevant market

satisfying the test, guided by the overarching principle that the purpose of defining the market

and measuring market shares is to illuminate the evaluation of competitive effects. Because the

relative competitive significance of more distant substitutes is apt to be overrepresented by their

share of sales, the Agencies usually evaluate mergers in the smallest relevant market satisfying

the hypothetical monopolist test.

Example 7: In Example 4, including cars in the market will lead to misleadingly small market

shares for motorcycle producers. Unless motorcycles fail the hypothetical monopolist test, the

Agencies would not include cars in the market in analyzing this motorcycle merger.

4.1.2

Benchmark Prices and SSNIP Size

The Agencies apply the SSNIP starting from prices that would likely prevail absent the merger.

If prices are not likely to change absent the merger, these benchmark prices can reasonably be

taken to be the prices prevailing prior to the merger.4 If prices are likely to change absent the

merger, e.g., because of innovation or entry, the Agencies may use anticipated future prices as

the benchmark for the test. If prices might fall absent the merger due to the breakdown of premerger coordination, the Agencies may use those lower prices as the benchmark for the test. In

some cases, the techniques employed by the Agencies to implement the hypothetical monopolist

test focus on the difference in incentives between pre-merger firms and the hypothetical

monopolist and do not require specifying the benchmark prices.

The SSNIP is intended to represent a “small but significant” increase in the prices charged by

firms in the candidate market for the value they contribute to the products or services used by

customers. This properly directs attention to the effects of price changes commensurate with

those that might result from a significant lessening of competition caused by the merger.

In some cases, no explicit price is charged for the firms’ specific contribution, but an implicit

price can be derived.

Example 8: In a merger between two oil pipelines, the SSNIP would be based on the price charged

for transporting the oil, not on the price of the oil itself. If pipelines buy the oil at one end and sell

it at the other, the price charged for transporting the oil is implicit, equal to the difference between

the price paid for oil at the input end and the price charged for oil at the output end. The relevant

product sold by the pipelines is better described as “pipeline transportation of oil from point A to

point B” than as “oil at point B.”

4

Market definition for the evaluation of non-merger antitrust concerns such as monopolization or facilitating

practices will differ in this respect if the effects resulting from the conduct of concern are already occurring at the

time of evaluation.

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Example 9: In a merger between two firms that install computers purchased from third parties, the

SSNIP would be based on their fees, not on the price of installed computers. If these firms

purchase the computers and charge their customers one package price, the implicit installation fee

is equal to the package charge to customers less the price of the computers.

Where explicit or implicit prices for the firms’ specific contribution to value can be identified,

the Agencies typically use a SSNIP of ten percent of those prices. Where such implicit prices

cannot be identified with reasonable clarity, the Agencies instead base the SSNIP on the price

paid by customers for the products or services to which the merging firms contribute. In such

cases, because the base prices will be larger, a lower SSNIP will normally be used, typically five

percent but possibly lower.

Example 10: In Example 9, suppose that the prices paid by the merging firms for computers are

opaque, but account for at least 95 percent of the firms’ revenues, with profits or implicit fees

making up five percent of revenues at most. A five percent SSNIP on the total price paid by

clients would at least double those fees or profits. Even if that would be unprofitable for a

hypothetical monopolist, significant competitive effects might well be profitable. If the SSNIP is

defined as a percentage of the total price paid, a lower percentage will be used.

4.1.3

Implementing the Hypothetical Monopolist Test

The hypothetical monopolist’s incentive to raise prices depends both on the extent to which

customers would likely substitute away from the products in the candidate market in response to

such a price increase, and on the profit margins earned on those products. The profit margin on

incremental units is the difference between price and incremental cost on those units. The

Agencies often estimate incremental costs, for example using merging parties’ documents or data

the merging parties use to make business decisions.

In considering customers’ likely responses to higher prices, the Agencies take into account any

reasonably available and reliable evidence, including, but not limited to:



how customers have shifted purchases in the past in response to relative changes in price

or other terms and conditions;



information from buyers, including surveys, concerning how they would respond to price

changes;



the conduct of industry participants, notably:

o sellers’ business decisions or business documents indicating sellers’ informed

beliefs concerning how customers would substitute among products in response to

relative changes in price;

o industry participants’ behavior in tracking and responding to price changes by

some or all rivals;



objective information about product characteristics and the costs and delays of switching

products, especially switching from products in the candidate market to products outside

the candidate market;

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

the percentage of sales lost by one product in the candidate market when its price alone

rises, that is recaptured by other products in the candidate market, with a higher

percentage making a price increase more profitable for the hypothetical monopolist;



evidence from other industry participants, such as sellers of complementary products;



legal or regulatory requirements; and



the influence of downstream competition faced by customers in their output markets.

When the necessary data are available, the Agencies also may consider a “critical loss analysis”

to assess the extent to which it corroborates inferences drawn from the evidence noted above.

Critical loss analysis asks whether imposing at least a SSNIP on one or more products in a

candidate market would raise or lower the hypothetical monopolist’s profits. While this

“breakeven” analysis differs from the profit-maximizing analysis called for by the hypothetical

monopolist test in Section 4.1.1, merging parties sometimes present this type of analysis to the

Agencies. A price increase raises profits on sales made at the higher price, but this will be offset

to the extent customers substitute away from products in the candidate market. Critical loss

analysis compares the magnitude of these two offsetting effects resulting from the price increase.

The “critical loss” is defined as the number of lost unit sales that would leave profits unchanged.

The “predicted loss” is defined as the number of lost unit sales that the hypothetical monopolist

is predicted to lose due to the price increase. The price increase raises the hypothetical

monopolist’s profits if the predicted loss is less than the critical loss.

The Agencies consider all of the evidence of customer substitution noted above in assessing the

predicted loss. The Agencies require that estimates of the predicted loss be consistent with that

evidence, including the pre-merger margins of products in the candidate market. Unless the

firms are engaging in coordinated interaction (see Section 7), high pre-merger margins normally

indicate that each firm’s product individually faces demand that is not highly sensitive to price.

Higher pre-merger margins thus indicate a smaller predicted loss and make it more likely that the

predicted loss is less than the critical loss and that the candidate market satisfies the hypothetical

monopolist test.

Even when the evidence necessary to perform the hypothetical monopolist test quantitatively is

not available, the conceptual framework of the test provides a useful methodological tool for

gathering and analyzing evidence pertinent to customer substitution and to market definition.

The Agencies follow the hypothetical monopolist test to the extent possible given the available

evidence, bearing in mind that the ultimate goal of market definition is to help determine whether

the merger may substantially lessen competition.

4.1.4

Product Market Definition with Targeted Customers

If a hypothetical monopolist could profitably target a subset of customers for price increases, the

Agencies may identify relevant markets defined around those targeted customers, to whom a

hypothetical monopolist would profitably and separately impose at least a SSNIP. Markets to

serve targeted customers are also known as price discrimination markets. In practice the

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Agencies identify price discrimination markets only where they believe there is a realistic

prospect of an adverse competitive effect on a group of targeted customers.

Example 11: Glass containers have many uses. In response to a price increase for glass

containers, some users would substitute substantially to plastic or metal containers, but baby food

manufacturers would not. If a hypothetical monopolist could price separately and limit arbitrage,

baby food manufacturers would be vulnerable to targeted increase in the price of glass containers.

The Agencies could define a distinct market for glass containers used to package baby food.

The Agencies also often consider markets for targeted customers when prices are individually

negotiated and suppliers have information about customers that would allow a hypothetical

monopolist to identify customers that are likely to pay a higher price for the relevant product. If

prices are negotiated individually with customers, the hypothetical monopolist test may suggest

relevant markets that are as narrow as individual customers (see also Section 6.2 on bargaining

and auctions). Nonetheless, the Agencies often define markets for groups of targeted customers,

i.e., by type of customer, rather than by individual customer. By so doing, the Agencies are able

to rely on aggregated market shares that can be more helpful in predicting the competitive effects

of the merger.

4.2 Geographic Market Definition

The arena of competition affected by the merger may be geographically bounded if geography

limits some customers’ willingness or ability to substitute to some products, or some suppliers’

willingness or ability to serve some customers. Both supplier and customer locations can affect

this. The Agencies apply the principles of market definition described here and in Section 4.1 to

define a relevant market with a geographic dimension as well as a product dimension.

The scope of geographic markets often depends on transportation costs. Other factors such as

language, regulation, tariff and non-tariff trade barriers, custom and familiarity, reputation, and

service availability may impede long-distance or international transactions. The competitive

significance of foreign firms may be assessed at various exchange rates, especially if exchange

rates have fluctuated in the recent past.

In the absence of price discrimination based on customer location, the Agencies normally define

geographic markets based on the locations of suppliers, as explained in subsection 4.2.1. In

other cases, notably if price discrimination based on customer location is feasible as is often the

case when delivered pricing is commonly used in the industry, the Agencies may define

geographic markets based on the locations of customers, as explained in subsection 4.2.2.

4.2.1

Geographic Markets Based on the Locations of Suppliers

Geographic markets based on the locations of suppliers encompass the region from which sales

are made. Geographic markets of this type often apply when customers receive goods or

services at suppliers’ locations. Competitors in the market are firms with relevant production,

sales, or service facilities in that region. Some customers who buy from these firms may be

located outside the boundaries of the geographic market.

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The hypothetical monopolist test requires that a hypothetical profit-maximizing firm that was the

only present or future producer of the relevant product(s) located in the region would impose at

least a SSNIP from at least one location, including at least one location of one of the merging

firms. In this exercise the terms of sale for all products produced elsewhere are held constant. A

single firm may operate in a number of different geographic markets, even for a single product.

Example 12: The merging parties both have manufacturing plants in City X. The relevant product

is expensive to transport and suppliers price their products for pickup at their locations . Rival

plants are some distance away in City Y. A hypothetical monopolist controlling all plants in City

X could profitably impose a SSNIP at these plants. Competition from more distant plants would

not defeat the price increase because supplies coming from more distant plants require expensive

transportation. The relevant geographic market is defined around the plants in City X.

When the geographic market is defined based on supplier locations, sales made by suppliers

located in the geographic market are counted, regardless of the location of the customer making

the purchase.

In considering likely reactions of customers to price increases for the relevant product(s)

imposed in a candidate geographic market, the Agencies consider any reasonably available and

reliable evidence, including:



how customers have shifted purchases in the past between different geographic locations

in response to relative changes in price or other terms and conditions;



the cost and difficulty of transporting the product (or the cost and difficulty of a customer

traveling to a seller’s location), in relation to its price;



whether suppliers need a presence near customers to provide service or support;



evidence on whether sellers base business decisions on the prospect of customers

switching between geographic locations in response to relative changes in price or other

competitive variables;



the costs and delays of switching from suppliers in the candidate geographic market to

suppliers outside the candidate geographic market; and



the influence of downstream competition faced by customers in their output markets.

4.2.2

Geographic Markets Based on the Locations of Customers

When the hypothetical monopolist could discriminate based on customer location, the Agencies

may define geographic markets based on the locations of targeted customers. 5 Geographic

markets of this type often apply when suppliers deliver their products or services to customers’

locations. Geographic markets of this type encompass the region into which sales are made.

5

For customers operating in multiple locations, only those customer locations within the targeted zone are included

in the market.

Page 14

Competitors in the market are firms that sell to customers in the specified region. Some

suppliers that sell into the relevant market may be located outside the boundaries of the

geographic market.

Example 13: Customers require local sales and support. Suppliers have sales and service

operations in many geographic areas and can discriminate based on customer location. The

geographic market can be defined around the locations of customers.

Example 14: The merging parties both have manufacturing plants in City X. The relevant product

is expensive to transport, and producers deliver the product to customers. Rival plants are some

distance away in City Y. Customers are located in both City X and City Y. The merger will allow

the merged firm to profitably elevate the price to customers in City X, where the merging firms are

the two suppliers with the lowest delivered cost. Customers in City X are the targeted customers.

But the merger will not allow the merged firm to elevate the price to customers in City Y, where it

will continue to face effective competition from the suppliers located there. The relevant

geographic market is defined around customers in City X. This can be a well-defined market even

if a uniform SSNIP imposed by all plants in City X would be not be profitable due to the loss of

sales to customers in City Y.

When the geographic market is defined based on customer locations, sales made to those

customers are counted, regardless of the location of the supplier making those sales.

Example 15: Customers in the United States must use products approved by U.S. regulators.

Foreign customers use products not approved by U.S. regulators. The relevant product market

consists of products approved by U.S. regulators. The geographic market is defined around U.S.

customers. Any sales made to U.S. customers by foreign suppliers are included in the market, and

those foreign suppliers are participants in the U.S. market even though located outside it.

5. Market Participants, Market Shares, and Market Concentration

The Agencies normally consider measures of market shares and market concentration as part of

their evaluation of competitive effects. The Agencies evaluate market shares and concentration

in conjunction with other reasonably available and reliable evidence for the ultimate purpose of

determining whether a merger may substantially lessen competition.

Market shares can directly influence firms’ competitive incentives. For example, if a price

reduction to gain new customers would also apply to a firm’s existing customers, a firm with a

large market share may be more reluctant to implement a price reduction than one with a small

share. Likewise, a firm with a large market share may not feel pressure to reduce price even if a

smaller rival does. Market shares also can reflect firms’ capabilities. For example, a firm with a

large market share may be able to expand output rapidly by a larger absolute amount than can a

small firm. Similarly, a large market share tends to indicate low costs, an attractive product, or

both.

5.1 Market Participants

All firms that currently earn revenues in the relevant market are considered market participants.

Vertically integrated firms are also included to the extent that their inclusion accurately reflects

their competitive significance. Firms not currently earning revenues in the relevant market, but

Page 15

that have committed to entering the market in the near future, are also considered market

participants.

Firms that are not current producers in a relevant market, but that would very likely provide

rapid supply responses with direct competitive impact in the event of a SSNIP, are also

considered market participants. These firms are termed “rapid entrants.” Entry that would take

place more slowly in response to adverse competitive effects is considered in Section 9.

Firms that produce the relevant product but do not sell it in the relevant geographic market may

be rapid entrants. Other things equal, such firms are most likely to be rapid entrants if they are

close to the geographic market.

Example 16: Farm A grows tomatoes half-way between Cities X and Y. Currently, it ships its

tomatoes to City X because prices there are 2% higher. Previously it has varied the destination of

its shipments in response to small price variations. Farm A would likely be a rapid entrant

participant in a market for tomatoes in City Y.

Example 17: Firm B has bid multiple times to supply milk to School District S, and actually

supplies milk to schools in some adjacent areas. It has never won a bid in School District S, but is

well qualified to serve that district and has often nearly won. Firm B would be counted as a rapid

entrant in a market for school milk in School District S.

More generally, if the relevant market is defined around targeted customers, firms that produce

relevant products but do not sell them to those customers may be rapid entrants if they can easily

and rapidly begin selling to the targeted customers.

Firms that clearly possess the necessary assets to supply into the relevant market rapidly may

also be rapid entrants. In markets for relatively homogeneous goods where a supplier’s ability to

compete depends predominantly on its costs and its capacity, and not on other factors such as

experience or reputation in the relevant market, a supplier with efficient idle capacity, or readily

available “swing” capacity currently used in adjacent markets that can easily and profitably be

shifted to serve the relevant market, may be a rapid entrant. 6 However, idle capacity may be

inefficient, and capacity used in adjacent markets may not be available, so a firm’s possession of

swing capacity alone does not make that firm a rapid entrant.

5.2 Market Shares

The Agencies normally calculate market shares for all firms that currently produce products in

the relevant market, subject to the availability of data. The Agencies also calculate market

shares for other market participants if this can be done to reliably reflect their competitive

significance.

Market concentration and market share data are normally based on historical evidence. However,

recent or ongoing changes in market conditions may indicate that the current market share of a

6

If this type of supply side substitution is nearly universal among the firms selling one or more of a group of

products, the Agencies may use an aggregate description of markets for those products as a matter of convenience.

Page 16

particular firm either understates or overstates the firm’s future competitive significance. The

Agencies consider reasonably predictable effects of recent or ongoing changes in market

conditions when calculating and interpreting market share data. For example, if a new

technology that is important to long-term competitive viability is available to other firms in the

market, but is not available to a particular firm, the Agencies may conclude that that firm’s

historical market share overstates its future competitive significance. The Agencies may project

historical market shares into the foreseeable future when this can be done reliably.

The Agencies measure market shares based on the best available indicator of firms’ future

competitive significance in the relevant market. This may depend upon the type of competitive

effect being considered, and on the availability of data. Typically, annual data are used, but

where individual transactions are large and infrequent so annual data may be unrepresentative,

the Agencies may measure market shares over a longer period of time.

In most contexts, the Agencies measure each firm’s market share based on its actual or projected

revenues in the relevant market. Revenues in the relevant market tend to be the best measure of

attractiveness to customers, since they reflect the real-world ability of firms to surmount all of

the obstacles necessary to offer products on terms and conditions that are attractive to customers.

In cases where one unit of a low-priced product can substitute for one unit of a higher-priced

product, unit sales may measure competitive significance better than revenues. For example, a

new, much less expensive product may have great competitive significance if it substantially

erodes the revenues earned by older, higher-priced products, even if it earns relatively few

revenues. In cases where customers sign long-term contracts, face switching costs, or tend to reevaluate their suppliers only occasionally, revenues earned from recently acquired customers

may better reflect the competitive significance of suppliers than do total revenues.

In markets for homogeneous products, a firm’s competitive significance may derive principally

from its ability and incentive to rapidly expand production in the relevant market in response to a

price increase or output reduction by others in that market. As a result, a firm’s competitive

significance may depend upon its level of readily available capacity to serve the relevant market

if that capacity is efficient enough to make such expansion profitable. In such markets,

capacities or reserves may better reflect the future competitive significance of suppliers than

revenues, and the Agencies may calculate market shares using those measures. Market

participants that are not current producers may then be assigned positive market shares, but only

if a measure of their competitive significance properly comparable to that of current producers is

available. When market shares are measured based on firms’ readily available capacities, the

Agencies do not include capacity that is committed or so profitably employed outside the

relevant market, or so high-cost, that it would not likely be used to respond to a SSNIP in the

relevant market.

When the Agencies define markets serving targeted customers, these same principles are used to

measure market shares, as they apply to those customers. In most contexts, each firm’s market

share is based on its actual or projected revenues from the targeted customers. However, the

Agencies may instead measure market shares based on revenues from a broader group of

customers if doing so would more accurately reflect the competitive significance of different

suppliers in the relevant market. Revenues earned from a broader group of customers may also

be used when better data are thereby available.

Page 17

5.3 Market Concentration

Market concentration is often one useful indicator of the likely competitive effects of a merger.

In evaluating market concentration, the Agencies consider both the post-merger level of market

concentration and the change in concentration resulting from a merger. Market shares may not

fully reflect the competitive significance of firms in the market or the impact of a merger. They

are used in conjunction with other evidence of competitive effects. See Sections 6 and 7.

In analyzing mergers between an incumbent and a recent or potential entrant, to the extent the

Agencies use the change in concentration to evaluate competitive effects, they will do so using

projected market shares. A merger between an incumbent and a potential entrant can raise

significant competitive concerns. The lessening of competition resulting from such a merger is

more likely to be substantial, the larger is the market share of the incumbent, the greater is the

competitive significance of the potential entrant, and the greater is the competitive threat posed

by this potential entrant relative to others.

The Agencies give more weight to market concentration when market shares have been stable

over time, especially in the face of historical changes in relative prices or costs. If a firm has

retained its market share even after its price has increased relative to those of its rivals, that firm

already faces limited competitive constraints, making it less likely that its remaining rivals will

replace the competition lost if one of that firm’s important rivals is eliminated due to a merger.

By contrast, even a highly concentrated market can be very competitive if market shares

fluctuate substantially over short periods of time in response to changes in competitive offerings.

However, if competition by one of the merging firms has significantly contributed to these

fluctuations, perhaps because it has acted as a maverick, the Agencies will consider whether the

merger will enhance market power by combining that firm with one of its significant rivals.

The Agencies may measure market concentration using the number of significant competitors in

the market. This measure is most useful when there is a gap in market share between significant

competitors and smaller rivals or when it is difficult to measure revenues in the relevant market.

The Agencies also may consider the combined market share of the merging firms as an indicator

of the extent to which others in the market may not be able readily to replace competition

between the merging firms that is lost through the merger.

The Agencies often calculate the Herfindahl-Hirschman Index (“HHI”) of market concentration.

The HHI is calculated by summing the squares of the individual firms’ market shares, 7 and thus

gives proportionately greater weight to the larger market shares. When using the HHI, the

Agencies consider both the post-merger level of the HHI and the increase in the HHI resulting

7

For example, a market consisting of four firms with market shares of 30 percent, 30 percent, 20 percent and 20

percent has an HHI of 2600 (302 + 302 + 202 + 202 = 2600). The HHI ranges from 10,000 (in the case of a pure

monopoly) to a number approaching zero (in the case of an atomistic market). Although it is desirable to include all

firms in the calculation, lack of information about firms with small shares is not critical because such firms do not

affect the HHI significantly.

Page 18

from the merger. The increase in the HHI is equal to twice the product of the market shares of

the merging firms. 8

Based on their experience, the Agencies generally classify markets into three types:



Unconcentrated Markets: HHI below 1500



Moderately Concentrated Markets: HHI between 1500 and 2500



Highly Concentrated Markets: HHI above 2500

When using HHI measures, the Agencies employ the following general standards for the relevant

markets they have defined:



Small Change in Concentration: Mergers involving an increase in the HHI of less than

100 points are unlikely to have adverse competitive effects and ordinarily require no

further analysis.



Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to

have adverse competitive effects and ordinarily require no further analysis.



Moderately Concentrated Markets: Mergers resulting in moderately concentrated

markets that involve an increase in the HHI of more than 100 points potentially raise

significant competitive concerns and often warrant scrutiny.



Highly Concentrated Markets. Mergers resulting in highly concentrated markets that

involve an increase in the HHI of between 100 points and 200 points potentially raise

significant competitive concerns and often warrant scrutiny. Mergers resulting in highly

concentrated markets that involve an increase in the HHI of more than 200 points will be

presumed to be likely to enhance market power. The presumption may be rebutted by

persuasive evidence showing that the merger is unlikely to enhance market power.

The purpose of these thresholds is not to provide a rigid screen to separate acceptable mergers

from anticompetitive transactions, although high levels of concentration do raise concerns.

Rather, they provide one way to identify those mergers for which it is particularly important to

examine whether other competitive factors confirm, reinforce, or would counteract the

potentially harmful effects of increased concentration. The higher the post-merger HHI and the

increase in the HHI, the greater is the likelihood that the Agencies will request additional

information to conduct their analysis.

8

For example, the merger of firms with shares of 5 percent and 10 percent of the market would increase the HHI by

100 (5 x 10 x 2 = 100).

Page 19

6. Unilateral Effects

The elimination of competition between two firms that results from their merger may alone

constitute a substantial lessening of competition. Such unilateral effects are most apparent in a

merger to monopoly in a relevant market, but are by no means limited to that case.

Several common types of unilateral effects are discussed in this section. Section 6.1 discusses

unilateral price effects in markets with differentiated products. Section 6.2 discusses unilateral

effects in markets where sellers negotiate with buyers or prices are determined through auctions.

Section 6.3 discusses unilateral effects relating to reductions in output or capacity in markets for

relatively homogeneous products. Section 6.4 discusses unilateral effects arising from

diminished innovation or reduced product variety. These effects do not exhaust the types of

possible unilateral effects; for example, exclusionary unilateral effects also can arise.

A merger may result in different unilateral effects along different dimensions of competition.

For example, a merger may increase prices in the short term but not raise longer-term concerns

about innovation, either because rivals will provide sufficient innovation competition or because

the merger will generate cognizable research and development efficiencies. See Section 10.

6.1 Pricing of Differentiated Products

In differentiated product industries, some products can be very close substitutes and compete

strongly with each other, while other products are more distant substitutes and compete less

strongly. For example, one high-end product may compete much more directly with another

high-end product than with any low-end product.

A merger between firms selling differentiated products may diminish competition by enabling

the merged firm to profit by unilaterally raising the price of one or both products above the premerger level. Some of the sales lost due to the price rise will merely be diverted to the product

of the merger partner and, depending on relative margins, capturing such sales loss through

merger may make the price increase profitable even though it would not have been profitable

prior to the merger.

The extent of direct competition between the products sold by the merging parties is central to

the evaluation of unilateral price effects. Unilateral price effects are greater, the more the buyers

of products sold by one merging firm consider products sold by the other merging firm to be

their next choice. The Agencies consider any reasonably available and reliable information to

evaluate the extent of direct competition between the products sold by the merging firms. This

includes documentary and testimonial evidence, win/loss reports and evidence from discount

approval processes, customer switching patterns, and customer surveys. The types of evidence

relied on often overlap substantially with the types of evidence of customer substitution relevant

to the hypothetical monopolist test. See Section 4.1.1.

Substantial unilateral price elevation post-merger for a product formerly sold by one of the

merging firms normally requires that a significant fraction of the customers purchasing that

product view products formerly sold by the other merging firm as their next choice. However,

unless pre-merger margins between price and incremental cost are low, that significant fraction

Page 20

need not approach a majority. A merger may produce significant unilateral effects for a given

product even though many more sales are diverted to products sold by non-merging firms than to

products previously sold by the merger partner.

Example 18: In Example 6, the merged entity controlling Products A and B would raise prices

10%, given the product offerings and prices of other firms. In that example, one-third of the sales

lost by Product A when its price alone is raised are diverted to Product B.

In some cases, the Agencies may seek to quantify the extent of direct competition between a

product sold by one merging firm and a second product sold by the other merging firm by

estimating the diversion ratio from the first product to the second product. The diversion ratio is

the fraction of unit sales lost by the first product due to an increase in its price that would be

diverted to the second product. Diversion ratios between products sold by one merging firm and

products sold by the other merging firm can be very informative for assessing unilateral price

effects, with higher diversion ratios indicating a greater likelihood of such effects. Diversion

ratios between products sold by merging firms and those sold by non-merging firms have at most

secondary predictive value.

Adverse unilateral price effects can arise when the merger gives the merged entity an incentive

to raise the price of a product previously sold by one merging firm and thereby divert sales to

products previously sold by the other merging firm, boosting the profits on the latter products.

Taking as given other prices and product offerings, that boost to profits is equal to the value to

the merged firm of the sales diverted to those products. The value of sales diverted to a product

is equal to the number of units diverted to that product multiplied by the margin between price

and incremental cost on that product. In some cases, where sufficient information is available,

the Agencies assess the value of diverted sales, which can serve as an indicator of the upward

pricing pressure on the first product resulting from the merger. Diagnosing unilateral price

effects based on the value of diverted sales need not rely on market definition or the calculation

of market shares and concentration. The Agencies rely much more on the value of diverted sales

than on the level of the HHI for diagnosing unilateral price effects in markets with differentiated

products.

Where sufficient data are available, the Agencies may construct economic models designed to

quantify the unilateral price effects resulting from the merger. These models often include

independent price responses by non-merging firms. These merger simulation methods need not

rely on market definition. The Agencies do not treat merger simulation evidence as conclusive

in itself, and they place more weight on whether their merger simulations consistently predict

substantial price increases than on the precise prediction of any single simulation.

A merger is unlikely to generate substantial unilateral price increases if non-merging parties

offer very close substitutes for the products offered by the merging firms. In some cases, nonmerging firms may be able to reposition their products to offer close substitutes for the products

offered by the merging firms. Repositioning is a supply side response that is evaluated much

like entry, with consideration given to timeliness, likelihood, and sufficiency. See Section 9.

The Agencies consider whether repositioning would be sufficient to deter or counteract what

otherwise would be significant anticompetitive unilateral effects from a differentiated products

merger.

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6.2 Bargaining and Auctions

In many industries, especially those involving intermediate goods and services, buyers and

sellers negotiate to determine prices and other terms of trade. In that process, buyers commonly

negotiate with more than one seller, and may play sellers off against one another. Some highly

structured forms of such competition are known as auctions. Negotiations often combine aspects

of an auction with aspects of one-on-one negotiation, although pure auctions are sometimes used

in government procurement and elsewhere.

A merger between two competing sellers prevents buyers from playing those sellers off against

each other in negotiations. This alone can significantly enhance the ability and incentive of the

merged entity to obtain a result more favorable to it, and less favorable to the buyer, than the

merging firms would have offered separately absent the merger. The Agencies analyze unilateral

effects of this type using similar approaches to those described in Section 6.1.

Anticompetitive unilateral effects in these settings are likely in proportion to the frequency or

probability with which, prior to the merger, one of the merging sellers had been the runner-up

when the other won the business. These effects also are likely to be greater, the greater

advantage the runner-up merging firm has over other suppliers in meeting customers’ needs.

These effects also tend to be greater, the more profitable were the pre-merger winning bids. All

of these factors are likely to be small if there are many equally placed bidders.

The mechanisms of these anticompetitive unilateral effects, and the indicia of their likelihood,

differ somewhat according to the bargaining practices used, the auction format, and the sellers’

information about one another’s costs and about buyers’ preferences. For example, when the

merging sellers are likely to know which buyers they are best and second best placed to serve,

any anticompetitive unilateral effects are apt to be targeted at those buyers; when sellers are less

well informed, such effects are more apt to be spread over a broader class of buyers.

6.3 Capacity and Output for Homogeneous Products

In markets involving relatively undifferentiated products, the Agencies may evaluate whether the

merged firm will find it profitable unilaterally to suppress output and elevate the market price. A

firm may leave capacity idle, refrain from building or obtaining capacity that would have been

obtained absent the merger, or eliminate pre-existing production capabilities. A firm may also

divert the use of capacity away from one relevant market and into another so as to raise the price

in the former market. The competitive analyses of these alternative modes of output suppression

may differ.

A unilateral output suppression strategy is more likely to be profitable when: (1) the merged

firm’s market share is relatively high; (2) the share of the merged firm’s output already

committed for sale at prices unaffected by the output suppression is relatively low; (3) the

margin on the suppressed output is relatively low; (4) the supply responses of rivals are relatively

small; and (5) the market elasticity of demand is relatively low.

Page 22

A merger may provide the merged firm a larger base of sales on which to benefit from the

resulting price rise, or it may eliminate a competitor that otherwise could have expanded its

output in response to the price rise.

Example 19: Firms A and B both produce an industrial commodity and propose to merge. The

demand for this commodity is insensitive to price. Firm A is the market leader. Firm B produces

substantial output, but its operating margins are low because it operates high-cost plants. The

other suppliers are operating very near capacity. The merged firm has an incentive to reduce

output at the high-cost plants, perhaps shutting down some of that capacity, thus driving up the

price it receives on the remainder of its output. The merger harms customers, notwithstanding that

the merged firm shifts some output from high-cost plants to low-cost plants.

In some cases, a merger between a firm with a substantial share of the sales in the market and a

firm with significant excess capacity to serve that market can make an output suppression

strategy profitable. 9 This can occur even if the firm with the excess capacity has a relatively

small share of sales, if that firm’s ability to expand, and thus keep price from rising, has been

making an output suppression strategy unprofitable for the firm with the larger market share.

6.4 Innovation and Product Variety

Competition often spurs firms to innovate. The Agencies may consider whether a merger is

likely to diminish innovation competition by encouraging the merged firm to curtail its

innovative efforts below the level that would prevail in the absence of the merger. That

curtailment of innovation could take the form of reduced incentive to continue with an existing

product-development effort or reduced incentive to initiate development of new products.

The first of these effects is most likely to occur if at least one of the merging firms is engaging in

efforts to introduce new products that would capture substantial revenues from the other merging

firm. The second, longer-run effect is most likely to occur if at least one of the merging firms

has capabilities that are likely to lead it to develop new products in the future that would capture

substantial revenues from the other merging firm. The Agencies therefore also consider whether

a merger will diminish innovation competition by combining two of a very small number of

firms with the strongest capabilities to successfully innovate in a specific direction.

The Agencies evaluate the extent to which successful innovation by one merging firm is likely to

take sales from the other, and the extent to which post-merger incentives for future innovation

will be lower than those that would prevail in absence of the merger. The Agencies also consider

whether the merger is likely to enable innovation that would not otherwise take place, by

bringing together complementary capabilities that cannot be otherwise combined or for some

other merger-specific reason. See Section 10.

The Agencies also consider whether a merger is likely to give the merged firm an incentive to

cease offering one of the relevant products sold by the merging parties. Not all reductions in

variety following a merger are anticompetitive; some may reflect efficient consolidation of

9

Such a merger also can cause adverse coordinated effects, especially if the acquired firm with excess capacity was

disrupting effective coordination.

Page 23

products when variety offers little in value to customers. In other cases, a merger may increase

variety by encouraging the merged firm to reposition its products to be more differentiated from

one another.

If a material reduction in variety appears likely following a merger, the Agencies may inquire

whether the reduction in variety is largely due to a loss of competitive incentives attributable to

the merger, and whether it leads to a demonstrable loss of significant value to consumers over

and above any price effects. Where a merger substantially reduces competition by bringing two

close substitute products under common ownership, and one of those products is eliminated, the

merger may also lead to a price increase on the remaining product. An anticompetitive incentive

to reduce product variety as a result of the merger is greater and more likely, the larger is the

share of the profits from one product that come at the expense of the profits from the other

product.

7. Coordinated Effects

A merger may diminish competition by enabling or encouraging post-merger coordinated

interaction among firms in the relevant market that harms customers. Coordinated interaction

involves conduct by multiple firms that is profitable for each of them only as a result of the

accommodating reactions of the others. These reactions can blunt a firm’s incentive to offer

customers better deals, by undercutting the extent to which such a move would win business

away from rivals. They also can enhance a firm’s incentive to raise prices, by assuaging the fear

that such a move would lose customers to rivals.

Coordinated interaction includes a range of conduct. Coordinated interaction can involve the

explicit negotiation of a common understanding of how firms will compete or refrain from

competing. Such conduct typically would itself violate the antitrust laws. Coordinated

interaction also can involve a similar common understanding that is not explicitly negotiated, as

well as parallel accommodating conduct not pursuant to a prior understanding. Coordinated

interaction includes situations in which each rival’s response to competitive moves made by

others is individually rational, and not motivated by retaliation or deterrence, but nevertheless

emboldens price increases and weakens competitive incentives to reduce prices or offer

customers better terms. Coordinated interaction includes conduct not otherwise condemned by

the antitrust laws.

The ability of rival firms to engage in coordinated conduct depends on the strength and

predictability of rivals’ responses to a price change or other competitive initiative. Under some

circumstances, a merger can result in market concentration sufficient to enable multiple firms in

the market to predict more confidently how their rivals will respond to a price change, thereby

affecting the competitive incentives of multiple firms in the market, not just the merged firm.

Whereas unilateral effects analysis focuses on the enhanced incentive of the merged firm to raise

its prices, coordinated effects analysis focuses on whether the merger affects the ability of

multiple firms in the market to raise their prices.

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7.1 Impact of Merger on Coordinated Interaction

The Agencies examine whether a merger is likely to change the manner in which market

participants interact, inducing substantially more coordinated interaction. The Agencies seek to

identify how a merger might significantly weaken competitive incentives through an increase in

the strength, extent, or likelihood of coordinated conduct. There are, however, numerous forms

of coordination, and the risk that a merger will induce adverse coordinated effects typically is not

susceptible to quantification or detailed proof. Therefore, the Agencies evaluate the risk of

coordinated effects using measures of market concentration (see Section 5) in conjunction with

an assessment of whether a market is vulnerable to coordinated conduct. See Section 7.2. The

analysis in Section 7.2 applies to moderately and highly concentrated markets, as unconcentrated

markets are unlikely to be vulnerable to coordinated conduct.

Pursuant to the Clayton Act’s incipiency standard, the Agencies may challenge mergers that in

their judgment pose a real danger of harm through coordinated effects, even without specific

evidence showing precisely how this will happen. The Agencies are likely to challenge a merger

that would significantly increase concentration and lead to a moderately or highly concentrated

market if that market shows signs of vulnerability to coordinated conduct and the Agencies have

a theory they deem plausible of how the merger may cause adverse coordinated effects.

7.2 Evidence a Market is Vulnerable to Coordinated Conduct

The Agencies presume that market conditions are conducive to coordinated interaction if firms

representing a substantial share in the relevant market appear to have previously engaged in

express collusion affecting the relevant market, unless competitive conditions in the market have

since changed significantly. Previous express collusion in another geographic market will have

the same weight if the salient characteristics of that other market at the time of the collusion are

comparable to those in the relevant market. Failed previous attempts at collusion in the relevant

market suggest that successful collusion was difficult pre-merger but not so difficult as to deter

attempts, and a merger may tend to make success more likely. Previous collusion or attempted

collusion in another product market may also be given substantial weight if the salient

characteristics of that other market at the time of the collusion are closely comparable to those in

the relevant market.

A market typically is more vulnerable to coordinated conduct if each competitively important

firm’s significant competitive initiatives can be promptly and confidently observed by that firm’s

rivals. This is more likely to be the case if the terms offered to customers are relatively

transparent. Price transparency can be greater for relatively homogeneous products. Even if

terms of dealing are not transparent, transparency regarding the identities of the firms serving

particular customers can give rise to coordination, e.g., through customer or territorial allocation.

Regular monitoring by suppliers of one another’s prices or customers can indicate that the terms

offered to customers are relatively transparent.

A market typically is more vulnerable to coordinated conduct if a firm’s prospective competitive

reward from attracting customers away from its rivals will be significantly diminished by likely

responses of those rivals. This is more likely to be the case, the stronger and faster are the

responses the firm anticipates from its rivals. The firm is more likely to anticipate strong

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responses if products in the relevant market are relatively homogeneous, if customers find it

relatively easy to switch between suppliers, or if suppliers use meeting-competition clauses.

A firm is more likely to be deterred from making competitive initiatives by whatever responses

occur if sales are small and frequent rather than via occasional large and long-term contracts or if

relatively few customers will switch to it before rivals are able to respond. A firm is less likely

to be deterred by whatever responses occur if the firm has little stake in the status quo. For

example, a firm with a small market share that can quickly and dramatically expand, constrained

neither by limits on production nor by customer reluctance to switch providers or to entrust

business to an historically small provider, is unlikely to be deterred. Firms are also less likely to

be deterred by whatever responses occur if competition in the relevant market is marked by

leapfrogging technological innovation, so that responses by competitors leave the gains from

successful innovation largely intact.

A market is more apt to be vulnerable to coordinated conduct if the firm initiating a price

increase will lose relatively few customers after rivals respond to the increase. Similarly, a

market is more apt to be vulnerable to coordinated conduct if a firm that first offers a lower price

or improved product to customers will retain relatively few customers thus attracted away from

its rivals after those rivals respond.

The Agencies regard coordinated interaction as more likely, the more the participants stand to

gain from successful coordination. Coordination generally is more profitable, the lower is the

market elasticity of demand.

Coordinated conduct can harm customers even if not all firms in the relevant market engage in

the coordination, but significant harm normally is likely only if a substantial part of the market is

subject to such conduct. The prospect of harm depends on the collective market power, in the

relevant market, of firms whose incentives to compete are substantially weakened by coordinated

conduct. This collective market power is greater, the lower is the market elasticity of demand.

This collective market power is diminished by the presence of other market participants with

small market shares and little stake in the outcome resulting from the coordinated conduct, if

these firms can rapidly expand their sales in the relevant market.

Buyer characteristics and the nature of the procurement process can affect coordination. For

example, sellers may have the incentive to bid aggressively for a large contract even if they

expect strong responses by rivals. This is especially the case for sellers with small market

shares, if they can realistically win such large contracts. In some cases, a large buyer may be

able to strategically undermine coordinated conduct, at least as it pertains to that buyer’s needs,

by choosing to put up for bid a few large contracts rather than many smaller ones, and by making

its procurement decisions opaque to suppliers.

8. Powerful Buyers

Powerful buyers are often able to negotiate favorable terms with their suppliers. Such terms may

reflect the lower costs of serving these buyers, but they also can reflect price discrimination in

their favor.

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The Agencies consider the possibility that powerful buyers may constrain the ability of the

merging parties to raise prices, but the Agencies do not presume that the presence of powerful

buyers alone forestalls adverse competitive effects flowing from the merger. Even buyers that

can negotiate favorable terms may be harmed by an increase in market power. The Agencies

examine the choices available to powerful buyers and how those choices likely would change

due to the merger. Normally, a merger that eliminates a supplier whose presence contributed

significantly to a buyer’s negotiating leverage will harm that buyer.

Example 20: Customer C has been able to negotiate lower pre-merger prices than other customers

by threatening to shift its large volume of purchases from one merging firm to the other. No other

suppliers are as well placed to meet Customer C’s needs for volume and reliability. The merger is

likely to harm Customer C. In this situation, the Agencies could identify a price discrimination

market consisting of Customer C and similarly placed customers. The merger threatens to end

previous price discrimination in their favor.

Furthermore, even if some powerful buyers could protect themselves, the Agencies also consider

whether market power can be exercised against other buyers.

Example 21: In Example 20, if Customer C instead obtained the lower pre-merger prices based on

a credible threat to supply its own needs, or to sponsor new entry, Customer C might not be

harmed. However, even in this case, other customers may still be harmed.

9. Entry

The analysis of competitive effects in Sections 6 and 7 focuses on current participants in the

relevant market. That analysis may also include some forms of entry. Firms that would rapidly

and easily enter the market in response to a SSNIP are market participants and may be assigned

market shares. See Sections 5.1 and 5.2. Firms that have, prior to the merger, committed to

entering the market also will normally be treated as market participants. See Section 5.1. This

section concerns entry or adjustments to pre-existing entry plans that are induced by the merger.

As part of their full assessment of competitive effects, the Agencies consider entry into the

relevant market. The prospect of entry into the relevant market will alleviate concerns about

adverse competitive effects only if such entry will deter or counteract any competitive effects of

concern so the merger will not substantially harm customers.

The Agencies consider the actual history of entry into the relevant market, and give substantial

weight to this evidence. Lack of successful and effective entry in the face of non-transitory

increases in the margins earned on products in the relevant market tends to suggest that

successful entry is slow or difficult.

A merger is not likely to enhance market power if entry into the market is so easy that the

merged firm and its remaining rivals in the market, either unilaterally or collectively, could not

profitably raise price or otherwise reduce competition compared to the level that would prevail in

the absence of the merger. Entry is that easy if entry would be timely, likely, and sufficient in its

magnitude, character and scope to deter or counteract the competitive effects of concern.

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The Agencies examine the timeliness, likelihood, and sufficiency of the entry efforts an entrant

might practically employ. An entry effort is defined by the actions the firm must undertake to

produce and sell in the market. Various elements of the entry effort will be considered. These

elements can include: planning, design, and management; permitting, licensing, or other

approvals; construction, debugging, and operation of production facilities; and promotion

(including necessary introductory discounts), marketing, distribution, and satisfaction of

customer testing and qualification requirements. Recent examples of entry, whether successful

or unsuccessful, generally provide the starting point for identifying the elements of practical

entry efforts. They also can be informative regarding the scale necessary for an entrant to be

successful, the presence or absence of entry barriers, the factors that influence the timing of

entry, the costs and risk associated with entry, and the sales opportunities realistically available

to entrants.

If the assets necessary for an effective and profitable entry effort are widely available, the

Agencies will not necessarily attempt to identify which firms might enter. Where an identifiable

set of firms appears to have necessary assets that others lack, or to have particularly strong

incentives to enter, the Agencies focus their entry analysis on those firms. Firms operating in

adjacent or complementary markets, or large customers themselves, may be best placed to enter.

However, the Agencies will not presume that a powerful firm in an adjacent market or a large

customer will enter the relevant market unless there is reliable evidence supporting that

conclusion.

In assessing whether entry will be timely, likely, and sufficient, the Agencies recognize that

precise and detailed information may be difficult or impossible to obtain. The Agencies consider

reasonably available and reliable evidence bearing on whether entry will satisfy the conditions of

timeliness, likelihood, and sufficiency.

9.1 Timeliness

In order to deter the competitive effects of concern, entry must be rapid enough to make

unprofitable overall the actions leading to those effects and to entry, even though those actions

would be profitable until entry takes effect.

Even if the prospect of entry does not deter the competitive effects of concern, post-merger entry

may counteract them. This requires that the impact of entrants in the relevant market be rapid

enough that customers are not significantly harmed by the merger, despite any anticompetitive

harm that occurs prior to the entry.

The Agencies will not presume that an entrant can have a significant impact on prices before that

entrant is ready to provide the relevant product to customers unless there is reliable evidence that

anticipated future entry would have such an effect on prices.

9.2 Likelihood

Entry is likely if it would be profitable, accounting for the assets, capabilities, and capital needed

and the risks involved, including the need for the entrant to incur costs that would not be

recovered if the entrant later exits. Profitability depends upon (a) the output level the entrant is

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likely to obtain, accounting for the obstacles facing new entrants; (b) the price the entrant would

likely obtain in the post-merger market, accounting for the impact of that entry itself on prices;

and (c) the cost per unit the entrant would likely incur, which may depend upon the scale at

which the entrant would operate.

9.3 Sufficiency

Even where timely and likely, entry may not be sufficient to deter or counteract the competitive

effects of concern. For example, in a differentiated product industry, entry may be insufficient

because the products offered by entrants are not close enough substitutes to the products offered

by the merged firm to render a price increase by the merged firm unprofitable. Entry may also

be insufficient due to constraints that limit entrants’ competitive effectiveness, such as

limitations on the capabilities of the firms best placed to enter or reputational barriers to rapid

expansion by new entrants. The Agencies normally look for reliable evidence that entry will be

sufficient to replicate at least the scale and strength of one of the merging firms.

10. Efficiencies

Competition usually spurs firms to achieve efficiencies internally. Nevertheless, a primary

benefit of mergers to the economy is their potential to generate significant efficiencies and thus

enhance the merged firm’s ability and incentive to compete, which may result in lower prices,

improved quality, enhanced service, or new products. For example, merger-generated

efficiencies may enhance competition by permitting two ineffective competitors to form a more

effective competitor, e.g., by combining complementary assets. In a unilateral effects context,

marginal cost reductions may reduce or reverse any increases in the merged firm’s incentive to

elevate price. Efficiencies also may lead to new or improved products, even if they do not

immediately and directly affect price. In a coordinated effects context, marginal cost reductions

may make coordination less likely or effective by enhancing the incentive of a maverick to lower

price or by creating a new maverick firm. Even when efficiencies generated through a merger

enhance a firm’s ability to compete, however, a merger may have other effects that may lessen

competition and make the merger anticompetitive.

The Agencies credit only those efficiencies likely to be accomplished with the proposed merger

and unlikely to be accomplished in the absence of either the proposed merger or another means

having comparable anticompetitive effects. These are termed merger-specific efficiencies. 10

Only alternatives that are practical in the business situation faced by the merging firms are

considered in making this determination. The Agencies do not insist upon a less restrictive

alternative that is merely theoretical.

10

The Agencies will not deem efficiencies to be merger-specific if they could be attained by practical alternatives

that mitigate competitive concerns, such as divestiture or licensing. If a merger affects not whether but only when

an efficiency would be achieved, only the timing advantage is a merger-specific efficiency.

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Efficiencies are difficult to verify and quantify, in part because much of the information relating

to efficiencies is uniquely in the possession of the merging firms. Moreover, efficiencies

projected reasonably and in good faith by the merging firms may not be realized. Therefore, it is

incumbent upon the merging firms to substantiate efficiency claims so that the Agencies can

verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and

when each would be achieved (and any costs of doing so), how each would enhance the merged

firm’s ability and incentive to compete, and why each would be merger-specific.

Efficiency claims will not be considered if they are vague, speculative, or otherwise cannot be

verified by reasonable means. Projections of efficiencies may be viewed with skepticism,

particularly when generated outside of the usual business planning process. By contrast,

efficiency claims substantiated by analogous past experience are those most likely to be credited.

Cognizable efficiencies are merger-specific efficiencies that have been verified and do not arise

from anticompetitive reductions in output or service. Cognizable efficiencies are assessed net of

costs produced by the merger or incurred in achieving those efficiencies.

The Agencies will not challenge a merger if cognizable efficiencies are of a character and

magnitude such that the merger is not likely to be anticompetitive in any relevant market. 11 To

make the requisite determination, the Agencies consider whether cognizable efficiencies likely

would be sufficient to reverse the merger’s potential to harm customers in the relevant market,

e.g., by preventing price increases in that market. 12 In conducting this analysis, the Agencies

will not simply compare the magnitude of the cognizable efficiencies with the magnitude of the

likely harm to competition absent the efficiencies. The greater the potential adverse competitive

effect of a merger, the greater must be the cognizable efficiencies, and the more they must be

passed through to customers, for the Agencies to conclude that the merger will not have an

anticompetitive effect in the relevant market. When the potential adverse competitive effect of a

merger is likely to be particularly substantial, extraordinarily great cognizable efficiencies would

be necessary to prevent the merger from being anticompetitive. In adhering to this approach, the

Agencies are mindful that the antitrust laws give competition, not internal operational efficiency,

primacy in protecting customers.

11

The Agencies normally assess competition in each relevant market affected by a merger independently and

normally will challenge the merger if it is likely to be anticompetitive in any relevant market. In some cases,

however, the Agencies in their prosecutorial discretion will consider efficiencies not strictly in the relevant market,

but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the

anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s). Inextricably

linked efficiencies are most likely to make a difference when they are great and the likely anticompetitive effect in

the relevant market(s) is small.

12

The Agencies normally give the most weight to the results of this analysis over the short term. The Agencies also

may consider the effects of cognizable efficiencies with no short-term, direct effect on prices in the relevant market.

Delayed benefits from efficiencies (due to delay in the achievement of, or the realization of customer benefits from,

the efficiencies) will be given less weight because they are less proximate and more difficult to predict. Efficiencies

relating to costs that are fixed in the short term are unlikely to benefit customers in the short term, but can benefit

customers in the longer run, e.g., if they make new product introduction less expensive.

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In the Agencies’ experience, efficiencies are most likely to make a difference in merger analysis

when the likely adverse competitive effects, absent the efficiencies, are not great. Efficiencies

almost never justify a merger to monopoly or near-monopoly. Just as adverse competitive

effects can arise along multiple dimensions of conduct, such as pricing and new product

development, so too can efficiencies operate along multiple dimensions. Similarly, purported

efficiency claims based on lower prices can be undermined if they rest on reductions in product

quality or variety that customers value.

The Agencies have found that certain types of efficiencies are more likely to be cognizable and

substantial than others. For example, efficiencies resulting from shifting production among

facilities formerly owned separately, which enable the merging firms to reduce the marginal cost

of production, are more likely to be susceptible to verification and are less likely to result from

anticompetitive reductions in output. Other efficiencies, such as those relating to research and

development, are potentially substantial but are generally less susceptible to verification and may

be the result of anticompetitive output reductions. Yet others, such as those relating to

procurement, management, or capital cost are less likely to be merger-specific or substantial, or

may not be cognizable for other reasons.

When evaluating the effects of a merger on innovation, the Agencies consider the ability of the

merged firm to conduct research or development more effectively. Such efficiencies may spur

innovation but not affect short-term pricing. The Agencies also consider the ability of the

merged firm to appropriate a greater fraction of the benefits resulting from its innovations.

Licensing and intellectual property conditions may be important to this enquiry, as they affect

the ability of a firm to appropriate the benefits of its innovation. Research and development cost

savings may be substantial and yet not be cognizable efficiencies because they are difficult to

verify or result from anticompetitive reductions in innovative activities.

11. Failure and Exiting Assets

Notwithstanding the analysis above, a merger is not likely to enhance market power if imminent

failure, as defined below, of one of the merging firms would cause the assets of that firm to exit

the relevant market. This is an extreme instance of the more general circumstance in which the

competitive significance of one of the merging firms is declining: the projected market share and

significance of the exiting firm is zero. If the relevant assets would otherwise exit the market,

customers are not worse off after the merger than they would have been had the merger been

enjoined.

The Agencies do not normally credit claims that the assets of the failing firm would exit the

relevant market unless all of the following circumstances are met: (1) the allegedly failing firm

would be unable to meet its financial obligations in the near future; (2) it would not be able to

reorganize successfully under Chapter 11 of the Bankruptcy Act; and (3) it has made

unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible

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and intangible assets in the relevant market and pose a less severe danger to competition than

does the proposed merger. 13

Similarly, a merger is unlikely to cause competitive harm if the risks to competition arise from

the acquisition of a failing division. The Agencies do not normally credit claims that the assets

of a division would exit the relevant market in the near future unless both of the following

conditions are met: (1) applying cost allocation rules that reflect true economic costs, the

division has a persistently negative cash flow on an operating basis, and such negative cash flow

is not economically justified for the firm by benefits such as added sales in complementary

markets or enhanced customer goodwill; 14 and (2) the owner of the failing division has made

unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible

and intangible assets in the relevant market and pose a less severe danger to competition than

does the proposed acquisition.

12. Mergers of Competing Buyers

Mergers of competing buyers can enhance market power on the buying side of the market, just as

mergers of competing sellers can enhance market power on the selling side of the market. Buyer

market power is sometimes called “monopsony power.”

To evaluate whether a merger is likely to enhance market power on the buying side of the

market, the Agencies employ essentially the framework described above for evaluating whether

a merger is likely to enhance market power on the selling side of the market. Market power on

the buying side of the market is not a significant concern if suppliers have numerous attractive

outlets for their goods or services. However, when that is not the case, the Agencies may

conclude that the merger of competing buyers is likely to lessen competition in a manner harmful

to sellers.

The Agencies distinguish between effects on sellers arising from a lessening of competition and

effects arising in other ways. A merger that does not enhance market power on the buying side

of the market can nevertheless lead to a reduction in prices paid by the merged firm, for example,

by reducing transactions costs or allowing the merged firm to take advantage of volume-based

discounts. Reduction in prices paid by the merging firms not arising from the enhancement of

market power can be significant in the evaluation of efficiencies from a merger, as discussed in

Section 10.

13

Any offer to purchase the assets of the failing firm for a price above the liquidation value of those assets will be

regarded as a reasonable alternative offer. Liquidation value is the highest value the assets could command for use

outside the relevant market.

14

Because the parent firm can allocate costs, revenues, and intra-company transactions among itself and its

subsidiaries and divisions, the Agencies require evidence on these two points that is not solely based on

management plans that could have been prepared for the purpose of demonstrating negative cash flow or the

prospect of exit from the relevant market.

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The Agencies do not view a short-run reduction in the quantity purchased as the only, or best,

indicator of whether a merger enhances buyer market power. Nor do the Agencies evaluate the

competitive effects of mergers between competing buyers strictly, or even primarily, on the basis

of effects in the downstream markets in which the merging firms sell.

Example 22: Merging Firms A and B are the only two buyers in the relevant geographic market

for an agricultural product. Their merger will enhance buyer power and depress the price paid to

farmers for this product, causing a transfer of wealth from farmers to the merged firm and

inefficiently reducing supply. These effects can arise even if the merger will not lead to any

increase in the price charged by the merged firm for its output.

13. Partial Acquisitions

In most horizontal mergers, two competitors come under common ownership and control,

completely and permanently eliminating competition between them. This elimination of

competition is a basic element of merger analysis. However, the statutory provisions referenced

in Section 1 also apply to one firm’s partial acquisition of a competitor. The Agencies therefore

also review acquisitions of minority positions involving competing firms, even if such minority

positions do not necessarily or completely eliminate competition between the parties to the

transaction.

When the Agencies determine that a partial acquisition results in effective control of the target

firm, or involves substantially all of the relevant assets of the target firm, they analyze the

transaction much as they do a merger. Partial acquisitions that do not result in effective control

may nevertheless present significant competitive concerns and may require a somewhat distinct

analysis from that applied to full mergers or to acquisitions involving effective control. The

details of the post-acquisition relationship between the parties, and how those details are likely to

affect competition, can be important. While the Agencies will consider any way in which a

partial acquisition may affect competition, they generally focus on three principal effects.

First, a partial acquisition can lessen competition by giving the acquiring firm the ability to

influence the competitive conduct of the target firm. A voting interest in the target firm or

specific governance rights, such as the right to appoint members to the Board of Directors, can

permit such influence. Such influence can lessen competition because the acquiring firm can use

its influence to induce the target firm to compete less aggressively or to coordinate its conduct

with that of the acquiring firm.

Second, a partial acquisition can lessen competition by reducing the incentive of the acquiring

firm to compete. Acquiring a minority position in a rival might significantly blunt the incentive

of the acquiring firm to compete aggressively because it shares in the losses thereby inflicted on

that rival. This reduction in the incentive of the acquiring firm to compete arises even if cannot

influence the conduct of the target firm. As compared with the unilateral competitive effect of a

full merger, this effect is likely attenuated by the fact that the ownership is only partial.

Third, a partial acquisition can lessen competition by giving the acquiring firm access to nonpublic, competitively sensitive information from the target firm. Even absent any ability to

influence the conduct of the target firm, access to competitively sensitive information can lead to

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adverse unilateral or coordinated effects. For example, it can enhance the ability of the two firms

to coordinate their behavior, and make other accommodating responses faster and more targeted.

The risk of coordinated effects is greater if the transaction also facilitates the flow of

competitively sensitive information from the acquiring firm to the target firm.

Partial acquisitions, like mergers, vary greatly in their potential for anticompetitive effects.

Accordingly, the specific facts of each case must be examined to assess the likelihood of harm to

competition. While partial acquisitions usually do not enable many of the types of efficiencies

associated with mergers, the Agencies consider whether a partial acquisition is likely to create

cognizable efficiencies.

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