U.S. Department of Justice (2006)

Commentary on the

Horizontal

Merger

Guidelines

U.S. Department of Justice

Federal Trade Commission

March 2006

Table of Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Governing Legal Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Overview of Guidelines Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Agencies’ Focus Is on Competitive Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Investigations Are Intensively Fact-Driven, Iterative Processes . . . . . . . . . . . . . . . . . . . . . . 3

The Same Evidence Often Is Relevant to Multiple Elements of the Analysis . . . . . . . . . . . 3

Commentary Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1. Market Definition and Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Mechanics of Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Breadth of Relevant Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Evidentiary Sources for Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Importance of Evidence from and about Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Evidence of Effects May Be the Analytical Starting Point . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Industry Usage of the Word “Market” Is Not Controlling . . . . . . . . . . . . . . . . . . . . . . . . . 11

Market Definition and Integrated Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Market Definition Is Linked to Competitive Effects Analysis . . . . . . . . . . . . . . . . . . . . . . . 12

Market Definition and Competitive Effects Analyses May Involve the Same Facts . . . . 14

Integrated Analysis Takes into Account that Defined

Market Boundaries Are Not Necessarily Precise or Rigid . . . . . . . . . . . . . . . . . . . . . . . 15

Significance of Concentration and Market Share Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2. The Potential Adverse Competitive Effects of Mergers . . . . . . . . . . . . . . . . . . . . . . . . . 17

Coordinated Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Additional Market Characteristics Relevant to Competitive Analysis . . . . . . . . . . . . . . . 20

Role of Evidence of Past Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Maverick and Capacity Factors in Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Unilateral Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Unilateral Effects from Merger to Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Unilateral Effects Relating to Capacity and Output for Homogeneous Products . . . . . . 27

Unilateral Effects Relating to Pricing of Differentiated Products . . . . . . . . . . . . . . . . . . . . 27

Unilateral Effects Relating to Auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Unilateral Effects Relating to Bargaining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

iii

3. Entry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Likelihood of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Sunk Costs and Risks Associated with Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Consumer Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Industrial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Other Significant Obstacles to Successful Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Cost Disadvantages of Entrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Timeliness of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Sufficiency of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

4. Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Efficiencies the Agencies Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Merger-Specific Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Cognizable Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Verification of Efficiency Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Sufficiency of Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

“Out-of-Market” Efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Fixed-Cost Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Supporting Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Referenced Agency Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Case Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

U.S. Department of Justice Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Federal Trade Commission Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

iv

Foreword

the Department’s and Commission’s increased use

of explanatory closing statements following

merger investigations.

Mergers between competing firms, i.e.,

“horizontal” mergers, are a significant dynamic

force in the American economy. The vast majority

of mergers pose no harm to consumers, and many

produce efficiencies that benefit consumers in the

form of lower prices, higher quality goods or

services, or investments in innovation. Efficiencies

such as these enable companies to compete more

effectively, both domestically and overseas.

The Commentary follows on the Agencies’

February 2004 Merger Enforcement Workshop.

Over three days, leading antitrust practitioners

and economists who have examined merger policy

and the Guidelines’ analytical framework

discussed in detail all sections of the Guidelines.

The Workshop focused on whether the analytical

framework set forth by the Guidelines adequately

serves the dual purposes of leading to appropriate

enforcement decisions on proposed horizontal

mergers, and providing the antitrust bar and the

business community with reasonably clear

guidance from which to assess the antitrust

enforcement risks of proposed transactions.

Fourteen years ago, to describe their

application of the antitrust laws to horizontal

mergers, the Federal Trade Commission and the

U.S. Department of Justice (collectively, the

“Agencies”)—the two federal Agencies

responsible for U.S. antitrust law enforcement—

jointly issued the 1992 Horizontal Merger

Guidelines (the “Guidelines”). In 1997, the

Agencies jointly issued revisions to the Guidelines’

section on Efficiencies. Since these publications

were issued, the Agencies have consistently

applied the Guidelines’ analytical framework to

the horizontal mergers under their review.

Workshop participants generally agreed that

the analytical framework set out in the Guidelines

is effective in yielding the right results in

individual cases and in providing advice to parties

considering a merger.

Thus, the Agencies

concluded that a revamping of the Guidelines is

neither needed nor widely desired at this time.

Rather, the Guidelines’ analytic framework has

proved both robust and sufficiently flexible to

allow the Agencies properly to account for the

particular facts presented in each merger

investigation.

Today, to provide greater transparency and

foster deeper understanding regarding antitrust

law enforcement, the Agencies jointly issue this

Commentary on the Guidelines.

The Commentary continues the Agencies’

ongoing efforts to increase the transparency of

their decision-making processes. These efforts

include the Agencies’ joint publication of Merger

Challenges Data, Fiscal Years 1999–2003 (issued

December 18, 2003), the Commission’s subsequent

publication of Horizontal Merger Investigation

Data, Fiscal Years 1996–2003 (issued February 2,

2004 and revised August 31, 2004), the

Department’s Merger Review Process Initiative

(issued October 12, 2001 and revised August 4,

2004), the Reforms to the Merger Review Process

at the Commission (issued February 16, 2006), and

The Agencies also have observed that the

antitrust bar and business community would find

useful and beneficial an explication of how the

Agencies apply the Guidelines in particular

investigations. This Commentary is intended to

respond to this important public interest by

enhancing the transparency of the analytical

process by which the Agencies apply the antitrust

laws to horizontal mergers.

Deborah Platt Majoras

Chairman

Federal Trade Commission

Thomas O. Barnett

Assistant Attorney General for Antitrust

U.S. Department of Justice

March 2006

v

Introduction

Governing Legal Principles

The principal federal antitrust laws applicable

to mergers are section 7 of the Clayton Act, section

1 of the Sherman Act, and section 5 of the Federal

Trade Commission Act. Section 7 proscribes a

merger the effects of which “may be substantially

to lessen competition.” Section 1 prohibits an

agreement that constitutes an unreasonable

“restraint of trade.” Section 5, which the Federal

Trade Commission enforces, proscribes “unfair

methods of competition.” Over many decades, the

federal courts have provided an expansive body of

case law interpreting these statutes within the

factual and economic context of individual cases.

The core concern of the antitrust laws,

including as they pertain to mergers between

rivals, is the creation or enhancement of market

power. In the context of sellers of goods or

services, “market power” may be defined as the

ability profitably to maintain prices above

competitive levels for a significant period of time.

Market power may be exercised, however, not

only by raising price, but also, for example, by

reducing quality or slowing innovation. In

addition, mergers also can create market power on

the buying side of a market. Most mergers

between rivals do not create or enhance market

power. Many mergers, moreover, enable the

merged firm to reduce its costs and become more

efficient, which, in turn, may lead to lower prices,

higher quality products, or investments in

innovation. However, the Agencies challenge

mergers that are likely to create or enhance the

merged firm’s ability—either unilaterally or

through coordination with rivals—to exercise

market power.

Following their mandate under the antitrust

statutory and case law, the Agencies focus their

horizontal merger analysis on whether the

transactions under review are likely to create or

enhance market power. The Guidelines set forth

the analytical framework and standards,

consistent with the law and with economic

learning, that the Agencies use to assess whether

an anticompetitive outcome is likely. The unifying

theme of that assessment is “that mergers should

not be permitted to create or enhance market

power or to facilitate its exercise.” Guidelines

§ 0.1. The Guidelines are flexible, allowing the

Agencies’ analysis to adapt as business practices

and economic learning evolve.

In applying the Guidelines to the transactions

that each separately reviews, the Agencies strive

to allow transactions unlikely substantially to

lessen competition to proceed as expeditiously as

possible. The Agencies focus their attention on

quickly identifying those transactions that could

violate the antitrust laws, subjecting those mergers

to greater scrutiny. Most mergers that pose

significant risk to competition come to the

Agencies’ attention before they are consummated

under the premerger notification and reporting

requirements of the Hart-Scott-Rodino Antitrust

Improvements Act of 1976, 15 U.S.C. § 18a

(“HSR”). HSR requires that the parties to a

transaction above a certain size notify the

Agencies before consummation and prohibits

consummation of the transaction until expiration

of one or more waiting periods during which one

of the Agencies reviews the transaction. The

waiting periods provide the Agencies time to

review a transaction before consummation.

For more than 95% of the transactions reported

under HSR, the Agencies promptly determine—

i.e., within the initial fifteen- or thirty-day waiting

period that immediately follows HSR filings—that

a substantial lessening of competition is unlikely.

The Agencies base such expeditious

determinations on material provided as part of the

HSR notification, experience from prior

investigations, and other market information. For

many industries, a wealth of information is

available from government reports, trade

directories and publications, and Internet

resources. For some transactions, the parties

volunteer additional information, and for some,

the Agencies obtain information from non-public

sources. The most important non-public sources

are market participants, especially the parties’

customers, who typically provide information

voluntarily when the Agencies solicit their

cooperation.

market definition and concentration; (2) potential

adverse competitive effects; (3) entry analysis; (4)

efficiencies; and (5) failing and exiting assets.

Each of the Guidelines’ sections identifies a

distinct analytical element that the Agencies apply

in an integrated approach to merger review. The

ordering of these elements in the Guidelines,

however, is not itself analytically significant,

because the Agencies do not apply the Guidelines

as a linear, step-by-step progression that

invariably starts with market definition and ends

with efficiencies or failing assets. Analysis of

efficiencies, for example, does not occur “after”

competitive effects or market definition in the

Agencies’ analysis of proposed mergers, but rather

is part of an integrated approach. If the conditions

necessary for an anticompetitive effect are not

present—for example, because entry would

reverse that effect before significant time

elapsed—the Agencies terminate their review

because it would be unnecessary to address all of

the analytical elements.

Evidence that the merged firm would have a

relatively high share of sales (or of capacity, or of

units, or of another relevant basis for

measurement) or that the market is relatively

highly concentrated may be particularly

significant to a decision by either of the Agencies

to extend a pre-merger investigation pursuant to

HSR by issuing a request for additional

information (commonly referred to as a “second

request”). A decision to issue a second request

must be made within the initial HSR thirty-day

waiting period (fifteen days for cash tender

offers), or the parties will no longer be prevented

under HSR from consummating their merger. A

second request may be necessary when it is not

possible within thirty days to gather and analyze

the facts necessary to address appropriately the

competitive concerns that may arise at the

threshold of the investigation, such as when

parties to a merger appear to have relatively high

shares in the market or markets in which they

compete. Although the ultimate decision of

whether a merger likely will be anticompetitive is

based heavily on evidence of potential

anticompetitive effects, the Agencies find that only

in extraordinary circumstances can they conduct

an extensive competitive effects analysis within

thirty days. That is why market shares and

concentration levels, which have some predictive

value, frequently are used as at least a starting

point during the initial waiting period.

The chapters that follow, in the context of

specific analytical elements such as market

definition or entry, describe many principles of

Guidelines analysis that the Agencies apply in the

course of investigating mergers. Three significant

principles are generally applicable throughout.

The Agencies’ Focus Is on

Competitive Effects

The Guidelines’ integrated process is “a tool

that allows the Agency to answer the ultimate

inquiry in merger analysis: whether the merger is

likely to create or enhance market power or

facilitate its exercise.” Guidelines § 0.2. At the

center of the Agencies’ application of the

Guidelines, therefore, is competitive effects

analysis. That inquiry directly addresses the key

question that the Agencies must answer: Is the

merger under review likely substantially to lessen

competition? To this end, the Agencies examine

whether the merger of two particular rivals

matters, that is, whether the merger is likely to

affect adversely the competitive process, resulting

in higher prices, lower quality, or reduced

innovation.

Sometimes the Agencies also investigate

consummated mergers, especially when evidence

suggests that anticompetitive effects may have

resulted from them.

The Agencies apply

Guidelines analysis to consummated mergers as

well as to mergers under review pursuant to HSR.

Overview of Guidelines Analysis

The Guidelines identify two broad analytical

frameworks for assessing whether a merger

between competing firms may substantially lessen

competition. These frameworks require that the

The Guidelines’ five-part organizational

structure has become deeply embedded in

mainstream merger analysis. These parts are: (1)

2

using data, documents, and other information

obtained from the parties, their competitors, their

customers, databases of various sorts, and

academic literature or private industry studies.

The Agencies carefully consider the views of

informed customers on market structure, the

competitive process, and anticipated effects from

the merger. The Agencies further consider any

information voluntarily provided by the parties,

which may include extensive analyses prepared

by economists or in consultation with economists.

The Agencies also carefully consider prospects for

efficiencies that the proposed transaction may

generate and evaluate the effects of any

efficiencies on the outcome of the competitive

process.

Agencies ask whether the merger may increase

market power by facilitating coordinated

interaction among rival firms and whether the

merger may enable the merged firm unilaterally to

raise price or otherwise exercise market power.

Together, these two frameworks are intended to

embrace every competitive effect of any form of

horizontal merger. The Guidelines were never

intended to detail how the Agencies would assess

every set of circumstances that a proposed merger

may present. As the Guidelines themselves note,

the specific standards set forth therein must be

applied to a broad range of possible factual

circumstances.

Investigations Are Intensively

Fact-Driven, Iterative Processes

The Same Evidence Often Is Relevant

to Multiple Elements of the Analysis

Merger analysis depends heavily on the

specific facts of each case. At the outset of an

investigation, when Agency staff may know

relatively little about the merging firms, their

products, their rivals, or the applicable relevant

markets, staff typically contemplates several broad

hypotheses of possible harm.

A single piece of evidence often is relevant to

several issues in the assessment of a proposed

merger. For example, mergers frequently occur in

markets that have experienced prior mergers.

Sometimes evidence exists concerning the effects

of prior mergers on various attributes of

competition. Such evidence may be probative, for

example, of the scope of the relevant product and

geographic markets, of the likely competitive

effects of the proposed merger, and of the

likelihood that entry would deter or counteract

any attempted exercise of market power following

the merger under review. Similarly, evidence of

actual or likely anticompetitive effects from a

merger could be used in addressing the scope of

the market or entry conditions.

For example, based on initial information, staff

may hypothesize that a merger would reduce the

number of competitors from four to three and, in

so doing, may foster or enhance coordination by

enabling the remaining firms profitably to allocate

customers based on prior sales. Staff also might

hypothesize that the products of the merging firms

are particularly close substitutes with respect to

product characteristics or geographic location such

that unilateral anticompetitive effects are likely.

Staff evaluates potential competitive factors of

this sort by gathering additional information and

conducting intensive factual analysis to assess

both the applicability of individual analytical

frameworks and their implications for the likely

competitive effects of the merger. As it learns

more about the merging firms and the market

environment in which they compete, staff rejects

or refines its hypotheses of probable relevant

markets and competitive effects, ultimately

resulting in a conclusion about likelihood of harm.

If the facts do not point to such a likelihood, the

merger investigation is closed.

An investigation involving potential

coordinated effects may uncover evidence of past

collusion and sustained supra-competitive prices

in the market. This information can be relevant to

several elements of the analysis. The product and

geographic markets that were subject to collusion

in the past may be probative of the relevant

product and geographic markets today. That

entry failed to undermine collusion in the past

may be probative of whether entry is likely today.

Of course, during its investigation, the Agency

may discover facts that tend to negate these

possibilities.

For example, since collusion

occurred, new production technologies may have

emerged that have altered the ability or incentives

of firms to coordinate their actions. Similarly,

innovation may have led to the introduction of

In testing a particular postulated risk of

competitive harm arising from a merger, the

Agencies take into account pertinent

characteristics of the market’s competitive process

3

new products that compete with the incumbent

products and constrain the ability of the merging

firms and their rivals to coordinate successfully in

the future.

Commentary Outline

In the chapters that follow, the Commentary

explains how the Agencies have applied particular

Guidelines’ provisions relating to market

definition and concentration, competitive effects

(including coordinated interaction and unilateral

effects analysis), entry conditions, and efficiencies.

Application of the Guidelines’ provisions relating

to failure and exiting assets is not discussed in the

Commentary because those provisions are very

infrequently applied. For convenience, the order

of these chapters follows the order of the issues set

forth in the Guidelines.

Included throughout the Commentary are

short summaries of matters that the Agencies have

investigated. They have been included to further

understanding of the principles under discussion

at that point in the narrative. None of the

summaries exhaustively addresses all the

pertinent facts or issues that arose in the

investigation. No other significance should be

attributed to the selection of the matters used as

examples. (In some instances in the Efficiencies

chapter, names and other key facts of actual

matters are changed to protect the confidentiality

of business and proprietary information. Each is

noted as a “Disguised Example.”) An Index at the

end of the Commentary lists all of the mergers

discussed in these case examples and provides

citations to additional public information.

For the reader’s convenience, the case

examples briefly state how each investigation

ended, i.e., whether it was closed because the

Agency determined not to challenge the merger or

because the parties abandoned the merger in

response to imminent Agency challenge, or

whether the investigation proceeded to a consent

agreement or to litigation. The discussion within

each case example pertains solely to the relevant

Agency’s analysis of the merger, and does not

elaborate on any subsequent judicial or

administrative proceedings.

4

1. Market Definition and

Concentration

area likely would impose at least a ‘small but

significant and nontransitory’ increase in price,

assuming the terms of sale of all other products

are held constant.” Guidelines § 1.0.

The Agencies evaluate a merger’s likely

competitive effects “within the context of

economically significant markets—i.e., markets

that could be subject to the exercise of market

power.” Guidelines § 1.0. The purpose of merger

analysis under the Guidelines is to identify those

mergers that are likely to create or enhance market

power in any market. The Agencies therefore

examine all plausible markets to determine

whether an adverse competitive effect is likely to

occur in any of them. The market definition

process is not isolated from the other analytic

components in the Guidelines. The Agencies do

not settle on a relevant market definition before

proceeding to address other issues. Rather,

market definition is part of the integrated process

by which the Agencies apply Guidelines

principles, iterated as new facts are learned, to

reach an understanding of the merger’s likely

effect on competition.

This approach to market definition is referred

to as the “hypothetical monopolist” test. To

determine the effects of this “‘small but significant

and nontransitory’ increase in price” (commonly

referred to as a “SSNIP”), the Agencies generally

use a price increase of five percent. This test

identifies which product(s) in which geographic

locations significantly constrain the price of the

merging firms’ products.

The Guidelines’ method for implementing the

hypothetical monopolist test starts by identifying

each product produced or sold by each of the

merging firms. Then, for each product, it

iteratively broadens the candidate market by

adding the next-best substitute. A relevant

product market emerges as the smallest group of

products that satisfies the hypothetical monopolist

test. Product market definition depends critically

upon demand-side substitution—i.e., consumers’

willingness to switch from one product to another

in reaction to price changes. The Guidelines’

approach to market definition reflects the

separation of demand substitutability from supply

substitutability—i.e., the ability and willingness,

given existing capacity, of firms to substitute from

making one product to producing another in

reaction to a price change. Under this approach,

demand substitutability is the concern of market

delineation, while supply substitutability and

entry are concerned with current and future

market participants.

The mechanics of how the Agencies define

markets using the Guidelines method has been the

subject of extensive discussion in legal and

economic literature and appears to be well

understood in the antitrust community. This

Commentary, accordingly, provides only a brief

overview of the mechanics. The remainder of this

chapter addresses a number of discrete topics

concerning market definition issues that

frequently arise in merger investigations.

Mechanics of Market Definition

The Guidelines define a market as “a product

or group of products and a geographic area in

which it is produced or sold such that a

hypothetical profit-maximizing firm, not subject to

price regulation, that was the only present and

future producer or seller of those products in that

Definition of the relevant geographic market is

undertaken in much the same way as product

market definition—by identifying the narrowest

possible market and then broadening it by

5

boundaries many distinct areas over which a

hypothetical monopolist would exercise

market power. The Commission entered into

a consent agreement with the parties to resolve

the concern that the transaction would likely

lead to anticompetitive effects in 35 local

markets. In an order issued with the consent

agreement, the Commission required, among

other things, the divestiture of dialysis clinics

in the 35 markets at issue.

iteratively adding the next-best substitutes. Thus,

for geographic market definition, the Agencies

begin with the area(s) in which the merging firms

compete respecting each relevant product, and

extend the boundaries of those areas until an area

is determined within which a hypothetical

monopolist would raise prices by at least a small

but significant and non-transitory amount.

DaVita–Gambro (FTC 2005) DaVita Inc.,

proposed to acquire Gambro Healthcare, Inc.

The firms competed across the United States in

the provision of outpatient dialysis services for

persons with end stage renal disease (“ESRD”).

Commission staff found that the relevant

geographic markets within which to analyze

the transaction’s likely competitive effects were

local. Most ESRD patients receive treatments

about 3 times per week, in sessions lasting 3–5

hours, and in general either are unwilling or

unable to travel more than 30 miles or 30

minutes to receive kidney dialysis treatment.

In the process of defining the geographic

market, staff identified the Metropolitan

Statistical Areas (“MSAs”) within which both

firms had outpatient dialysis clinics, then

examined each area to determine if geographic

factors such as mountains, rivers, and bays,

and travel conditions, were such that the scope

of the relevant market differed from the MSA’s

boundaries.

The Breadth of Relevant Markets

Defining markets under the Guidelines’

method does not necessarily result in markets that

include the full range of functional substitutes

from which customers choose. That is because, as

the Guidelines provide, a “relevant market is a

group of products and a geographic area that is no

bigger than necessary to satisfy [the hypothetical

monopolist] test.” Guidelines § 1.0. This is one of

several points at which the Guidelines articulate

what is referred to in section 1.21 as the “‘smallest

market’ principle” for determining the relevant

market. The Agencies frequently conclude that a

relatively narrow range of products or geographic

space within a larger group describes the

competitive arena within which significant

anticompetitive effects are possible.

Nestle–Dreyer’s (FTC 2003) Nestle Holdings,

Inc., proposed to merge with Dreyer’s Grand

Ice Cream, Inc. The firms were rivals in the

sale of superpremium ice cream. Ice cream is

differentiated on the basis of the quality of

ingredients. Compared to premium and nonpremium ice cream, superpremium ice cream

contains more butterfat, less air, and more

costly ingredients. Superpremium ice cream

sells at a substantially higher price than

premium ice cream. Using scanner data,

Commission staff estimated demand

elasticities for the superpremium, premium,

and economy ice cream segments. Staff’s

analysis showed that a hypothetical

monopolist of superpremium ice cream would

increase prices significantly. This, together

with other documentary and testimonial

evidence, indicated that the relevant market in

which to analyze the transaction was

superpremium ice cream. The Commission

entered into a consent agreement with the

merging firms, requiring divestiture of two

Within each such MSA, staff isolated the

area immediately surrounding each dialysis

clinic of both merging parties, and assessed

whether a hypothetical monopolist within that

area would impose a significant price increase.

Staff expanded the boundaries of each area

until the evidence showed that such a

hypothetical monopolist would impose a

significant price increase. From interviews

with industry participants and analysis of

documents, staff found that, in general,

dialysis patients tend to travel greater

distances in rural and suburban areas than in

dense urban areas, where travel distances as

small as 5–10 miles may take significantly more

than 30 minutes, due to congestion, road

conditions, reliance on public transportation,

and other factors.

Maps indicating the

locations from which each clinic drew its

patients were particularly useful. Thus, some

MSAs included within their respective

6

two Slidell hospitals in their private health

insurance plans.

The Slidell hospitals

competed against each other for inclusion in

health plan networks. After merging, the

combined hospital would have had no rival

with “must have” network status among

Slidell residents and employers.

A

hypothetical monopolist of the Slidell hospitals

likely would have imposed a small but

significant and non-transitory price increase on

health plans selling coverage in Slidell, because

neighboring hospitals outside of Slidell were

not effective substitutes for network inclusion.

The relevant geographic market, therefore, was

limited to hospitals located in Slidell. Under

Louisiana law, proposed acquisitions of notfor-profit hospitals must be approved by the

Louisiana Attorney General. By invitation of

the state Attorney General, Commission staff,

in a public letter authorized by the

Commission, advised the Attorney General of

the staff’s view that, based on the facts

gathered in its then-ongoing investigation, the

proposed acquisition raised serious

competitive concerns. In a vote authorized by

local law, parish residents subsequently

rejected the proposed transaction, which never

was consummated.

brands and of key distribution assets.

UPM–MACtac (DOJ 2003) UPM-Kymmene

Oyj sought to acquire (from Bemis Co.)

Morgan Adhesives Co. (“MACtac”). They

were two of the three largest producers of

paper pressure-sensitive labelstock, from

which “converters” make pressure-sensitive

labels. End users peel pressure-sensitive labels

off a silicon-coated base material and directly

apply them to items being labeled. The

Department challenged the acquisition on the

basis of likely anticompetitive effects in two

relevant product markets. One was paper

labelstock used to make pressure sensitive

labels for “variable information printing”

(“VIP”). Some or all of the printing on VIP

labels is done by end users as the label is

applied. A familiar example is the price

labeling of fresh meat sold in supermarkets.

Although paper labelstock for VIP labels

competes with plastic film labelstock, the

Department found that film labels are of

sufficiently higher cost that a hypothetical

monopolist of paper labelstock for VIP labels

would raise price significantly. The other

relevant product market was paper labelstock

used for “prime” labels. Prime labels are used

for product identification and are printed in

advance of application. Paper labelstock for

prime labels, competes not just with film

labelstock, but also with pre-printed packaging

and other means of product identification.

Nevertheless, the Department found that a

hypothetical monopolist of paper labelstock for

prime labels would raise price significantly

because users of pressure-sensitive paper

labels find them the least-cost alternative for

their particular applications and because they

would have to incur significant switching costs

if they adopted an alternative means of

product identification. After trial, the court

enjoined the consummation of the acquisition.

In sections 1.12 and 1.22, the Guidelines

explain that the Agencies may define relevant

markets on the basis of price discrimination if a

hypothetical monopolist likely would exercise

market power only, or especially, in sales to

particular customers or in particular geographic

areas. The Agencies address the same basic issues

for any form of discrimination: Would price

discrimination, if feasible, permit a significantly

greater exercise of market power?

Could

competitors successfully identify the transactions

to be discriminated against? Would customers or

third parties be able to undermine substantially

the discrimination through some form of arbitrage

in which a product sold at lower prices to some

customer groups is resold to customer groups

intended by the firms to pay higher prices? In

cases in which a hypothetical monopolist is likely

to target only a subset of customers for

anticompetitive price increases, the Agencies are

likely to identify relevant markets based on the

ability of sellers to price discriminate.

Tenet–Slidell (FTC 2003) Tenet Health Care

Systems owned a hospital in Slidell, Louisiana

(near New Orleans), and proposed to acquire

Slidell’s only other full-service hospital. There

were many other full-service hospitals in the

New Orleans area but all were outside of

Slidell.

Commission staff found that a

significant number of Slidell residents and

their employers required access to either of the

7

merger was resolved by consent decree.

Quest–Unilab (FTC 2003) Quest Diagnostics,

Inc. and Unilab Corp., the two leading

providers of clinical laboratory testing services

to physician groups in Northern California,

proposed to merge. Their combined market

share would have exceeded 70%; the next

largest rival had a market share of 4%. Clinical

laboratory testing services are marketed and

sold to various groups of customers, including

physicians, health insurers, and hospitals.

Commission staff determined that purchasers

of these services cannot economically resell

them to other customers, and that suppliers of

the services can potentially identify the

competitive alternatives available to physician

group customers according to the group’s base

of physicians and geographic coverage. This

information indicated that a hypothetical

monopolist could discriminate on price among

customer types. Suppliers’ ability to price

discriminate, combined with the fact that some

types of customers had few competitive

alternatives to contracting with suppliers that

had a network of locations, led staff to define

markets based on customer categories. The

Commission issued a complaint alleging that

the transaction would lessen competition

substantially in one of the customer categories:

the provision of clinical laboratory testing

services to physician groups in Northern

California. An accompanying consent order

required divestiture of assets used to provide

clinical laboratory testing services to physician

groups in Northern California.

Interstate Bakeries–Continental (DOJ 1995)

The Department challenged Interstate Bakeries

Corp.’s purchase of Continental Baking Co.

from Ralston Purina Co. The challenge

focused on white pan bread, and the

Department found that the purchase likely

would have produced significant price

increases in five metropolitan areas—Chicago,

Milwaukee, Central Illinois, Los Angeles, and

San Diego.

Among the reasons the

Department concluded that competition was

localized to these metropolitan areas were that

bakers charged different prices for the same

brands produced in the same bakeries,

depending on where the bread was sold, and

that arbitrage was infeasible. Arbitrage was

exceptionally costly because the bakers

themselves placed their bread on the

supermarket shelves, so arbitrage required

removing bread from the shelves, reshipping

it, and reshelving it. This process also would

consume a significant portion of the brief

period during which the bread is fresh. The

Department settled its challenge to the

proposed merger by a consent decree requiring

divestiture of brands and related assets in the

five metropolitan areas.

The Guidelines indicate that the relevant

market is the smallest collection of products and

geographic areas within which a hypothetical

monopolist would raise price significantly. At

times, the Agencies may act conservatively and

focus on a market definition that might not be the

smallest possible relevant market. For example,

the Agencies may focus initially on a bright line

identifying a group of products or areas within

which it is clear that a hypothetical monopolist

would raise price significantly and seek to

determine whether anticompetitive effects are—or

are not—likely to result from the transaction in

such a candidate market. If the answer for the

broader market is likely to be the same as for any

plausible smaller relevant market, there is no need

to pinpoint the smallest market as the precise line

drawn does not affect the determination of

whether a merger is anticompetitive. Also, when

the analysis is identical across products or

geographic areas that could each be defined as

separate relevant markets using the smallest

market principle, the Agencies may elect to

Ingersoll-Dresser–Flowserve (DOJ 2000)

Flowserve Corp. agreed to acquire IngersollDresser Pump Co. Both firms produced a

broad array of pumps used in industrial

processes. The Department challenged the

proposed acquisition on the basis of likely

anticompetitive effects in “API 610” pumps,

which are used by oil refineries, and pumps

used in electric power plants. Both sorts of

pumps are customized according to the

specifications of the particular buyer and are

sold through bidding mechanisms.

Customization of the pumps made arbitrage

infeasible. The Department concluded that the

competition in each procurement was entirely

distinct and therefore that each procurement

took place in a separate and distinct relevant

market. The Department’s challenge to the

8

evidence, derived from data collected from

supermarkets, on the elasticity of demand for

branded butter in Philadelphia and New York.

The Department’s complaint was resolved by

a consent decree transferring the SODIAAL

assets to a new company not wholly owned by

DFA and containing additional injunctive

provisions.

employ a broader market definition that

encompasses many products or geographic areas

to avoid redundancy in presentation.

The

Guidelines describe this practice of aggregation

“as a matter of convenience.” Guidelines § 1.321

n.14.

Evidentiary Sources for

Market Definition

In the vast majority of cases, the Agencies

largely rely on non-econometric evidence,

obtained primarily from customers and from

business documents.

The Importance of Evidence

from and about Customers

Customers typically are the best source, and in

some cases they may be the only source, of critical

information on the factors that govern their ability

and willingness to substitute in the event of a price

increase.

The Agencies routinely solicit

information from customers regarding their

product and supplier selections. In selecting their

suppliers, customers typically evaluate the

alternatives available to them and can often

provide the Agencies with information on their

functional needs as well as on the cost and

availability of substitutes. Customers also provide

relevant information that they uniquely possess on

how they choose products and suppliers. In some

investigations, customers provide useful

information on how they have responded to

previous significant changes in circumstances. In

some investigations, the Agencies are able to

explore consumer preferences with the aid of price

and quantity data that allow econometric

estimation of the relevant elasticities of demand.

Cemex–RMC (FTC 2005)

The proposed

acquisition of RMC Group PLC by Cemex, S.A.

de C.V. would have combined two of the three

independent ready-mix concrete suppliers in

Tucson, Arizona. Ready-mix concrete is a

precise mixture of cement, aggregates, and

water. It is produced at local plants and

delivered as a slurry in trucks with revolving

drums to construction sites, where it is poured

and formed into its final shape. Commission

staff determined from information received

from customers that a hypothetical monopolist

over ready-mix concrete would raise price

significantly in the relevant area. Asphalt and

other building materials were found not to be

good substitutes for ready-mix concrete, due in

significant part to concrete’s pliability when

freshly mixed and strength and permanence

when hardened.

Concerned that the

transaction likely would result in coordinated

interaction in the Tucson area, the

Commission, pursuant to a consent agreement,

ordered Cemex, among other things, to divest

RMC’s Tucson-area ready-mix concrete assets.

Dairy Farmers–SODIAAL (DOJ 2000) The

Department challenged the proposed

acquisition by Dairy Farmers of America, Inc.

of SODIAAL North America Corp. on the basis

of likely anticompetitive effects in the sale of

“branded stick and whipped butter in the

Philadelphia and New York metropolitan

areas.” DFA sold the Breakstone brand, and

SODIAAL sold the Keller’s and Hotel Bar

brands. The Department concluded that

consumers of branded butter in these

metropolitan areas so preferred it over privatelabel butter, as well as margarine and other

substitutes, that a hypothetical monopolist

over just branded butter in each of those areas

would raise price significantly.

This

conclusion was supported by econometric

Swedish Match–National (FTC 2000) Swedish

Match North America, Inc. proposed to acquire

National Tobacco Company, L.P.

The

acquisition would have combined the first- and

third-largest producers of loose leaf chewing

tobacco in the United States. Commission staff

evaluated whether, as the merging firms

contended, moist snuff should be included in

the relevant market for loose leaf chewing

tobacco.

Swedish Match’s own market

research revealed that consumers would

substitute less expensive loose leaf, but not

more expensive snuff, if loose leaf prices

increased slightly. Additional evidence from

9

market did not.

the firms’ own business documents, and

customer testimony from distributors that

purchase and resell the products to retailers,

demonstrated that loose leaf chewing tobacco

constitutes a distinct product market that does

not include moist snuff. The acquisition would

therefore have resulted in a merged firm with

a high share of the relevant market for loose

leaf chewing tobacco.

The Commission

successfully challenged the merger in federal

district court.

To be probative, of course, such data analyses

must be based on accepted economic principles,

valid statistical techniques, and reliable data.

Moreover, the Agencies accord weight to such

analyses only within the context of the full

investigatory record, including information and

testimony received from customers and other

industry participants and from business

documents.

Evidence pertaining more directly to a

merger’s actual or likely competitive effects also

may be useful in determining the relevant market

in which effects are likely. Such evidence may

identify potential relevant markets and

significantly reinforce or undermine other

evidence relating to market definition.

In determining whether to challenge a

transaction, the Agencies do not simply tally the

number of customers that oppose a transaction

and the number of customers that support it. The

Agencies take into account that all customers in a

relevant market are not necessarily situated

similarly in terms of their incentives. For example,

intermediate resellers’ views about a proposed

merger between two suppliers may be influenced

by the resellers’ ability profitably to pass along a

price increase. If resellers can profitably pass

along a price increase, they may have no objection

to the merger. End-users, by contrast, generally

lack such an incentive because they must absorb

higher prices. In all cases, the Agencies credit

customer testimony only to the extent the

Agencies conclude that there is a sound

foundation for the testimony.

Staples–Office Depot (FTC 1997) Staples, Inc.

proposed to acquire Office Depot, Inc., a

merger that would have combined two of the

three national retail chains of office supply

superstores. The Commission found that in

metropolitan areas where Staples faced no

office superstore rival, it charged significantly

higher prices than in metropolitan areas where

it faced competition from Office Depot or the

other office supply superstore chain,

OfficeMax. Office Depot data showed a

similar pattern: its prices were lowest where

Staples and OfficeMax also operated, and

highest where they did not. These patterns

held regardless of how many non-superstore

sellers of office supplies operated in the

metropolitan area under review.

Evidence of Effects May Be the

Analytical Starting Point

In some investigations, before having

determined the relevant market boundaries, the

Agencies may have evidence that more directly

answers the “ultimate inquiry in merger analysis,”

i.e., “whether the merger is likely to create or

enhance market power or facilitate its exercise.”

Guidelines § 0.2. Evidence pointing directly

toward competitive effects may arise from

statistical analysis of price and quantity data

related to, among other things, incumbent

responses to prior events (sometimes called

“natural experiments”) such as entry or exit by

rivals. For example, it may be that one of the

merging parties recently entered and that

econometric tools applied to pricing data show

that the other merging party responded to that

entry by reducing price by a significant amount

and on a nontransitory basis while the prices of

some other sellers that might be in the relevant

The Commission also found that evidence

relating to entry showed that local rivalry from

office supply superstores acted as the principal

competitive constraint on Staples and Office

Depot. Each firm regularly dropped prices in

areas where they confronted entry by another

office supply superstore, but did not do so in

response to entry by other sellers of office

supplies, such as Wal-Mart. Newspaper

advertising and other promotional materials

likewise reflected greater price competition in

those areas in which Staples and Office Depot

faced local rivalry from one another or from

OfficeMax. Such evidence provided direct

support for the conclusion that the acquisition

would cause anticompetitive effects in the

relevant product market defined as the sale of

10

conventional department stores in malls or

metropolitan areas.

consumable office supplies through office

supply superstores, in those metropolitan areas

where Staples and Office Depot competed

prior to the merger.

The Commission

successfully challenged the merger in federal

district court.

This evidence provided support for the

conclusion that the acquisition likely would not

create anticompetitive effects. Staff also found

no evidence that competitive constraints, e.g.,

rivalry from retailers other than department

stores, in New York–New Jersey were not

representative of other markets in which

Federated and May competed.

Further,

evidence pertaining both to which firms the

parties monitored for pricing and to consumer

purchasing behavior also supported the

conclusion that the relevant market was

sufficiently broad that the merger was not

likely to cause anticompetitive effects. The

Commission closed the investigation.

In some cases, competitive effects analysis may

eliminate the need to identify with specificity the

appropriate relevant market definition, because,

for example, the analysis shows that

anticompetitive effects are unlikely in any

plausibly defined market.

Federated–May (FTC 2005)

Federated

Department Stores, Inc. proposed to acquire

The May Department Stores Co., thereby

combining the two largest chains in the United

States of so-called “traditional” or

“ c o n v e n t i o n a l” d e p a r t m e n t s t o r e s .

Conventional department stores typically

anchor enclosed shopping malls, feature

products in the mid-range of price and quality,

and sell a wide range of products. The

transaction would create high levels of

concentration among conventional department

stores in many metropolitan areas of the

United States, and the merged firm would

become the only conventional department

store at certain of the 1,200 malls in the United

States.

Industry Usage of the Word

“Market” Is Not Controlling

Relevant market definition is, in the antitrust

context, a technical exercise involving analysis of

customer substitution in response to price

increases; the “markets” resulting from this

definition process are specifically designed to

analyze market power issues. References to a

“market” in business documents may provide

important insights into the identity of firms,

products, or regions that key industry participants

consider to be sources of rivalry, which in turn

may be highly probative evidence upon which to

define the “relevant market” for antitrust

purposes. The Agencies are careful, however, not

to assume that a “market” identified for business

purposes is the same as a relevant market defined

in the context of a merger analysis. When

businesses and their customers use the word

“market,” they generally are not referring to a

product or geographic market in the precise sense

used in the Guidelines, although what they term

a “market” may be congruent with a Guidelines’

market.

If the relevant product market included

only conventional department stores, then

before the merger Federated had a market

share greater than 90% in the New York–New

Jersey metropolitan area. If the relevant

product market also included, for example,

specialty stores, then Federated’s share in that

geographic area was much smaller. The

evidence that Commission staff obtained

indicated that the relevant product market was

broader than conventional department stores.

For example, in the New York–New Jersey

metropolitan area, Federated charged

consumers the same prices that it charged

throughout much of the eastern region of the

United States, including where Federated

faced larger numbers of traditional department

store rivals. May and other department store

chains, like Federated, also set prices to

consumers that were uniform over very broad

geographic areas and did not appear to vary

local prices based on the number or identity of

Staples–Office Depot (FTC 1997) In the

blocked Staples–Office Depot transaction

described above in this Chapter, the

Commission alleged, and the district court

found, that the relevant product market was

“the sale of consumable office supplies

through office supply superstores,” with

“consumable” meaning products that

11

larger containers used by commercial

customers and uneconomical for commercial

customers using large “roll-off” containers to

switch to small commercial containers. The

Department’s challenge to the merger was

resolved by a consent decree requiring

divestiture of specified collection routes and

the assets used on them.

consumers buy recurrently, like pens, paper,

and file folders. Industry members in the

ordinary course of business did not describe

the “market” using this phrase. The facts

showed that a hypothetical monopolist office

supply superstore would raise price

significantly on consumable office supplies.

Many retail firms that are not office supply

superstores—such as discount and general

merchandise stores—sold consumable office

supplies in areas near the merging firms.

Despite the existence of such other sellers,

evidence, including the facts identified above,

justified definition of the relevant product

market as one limited to the sale of consumable

office products solely through office supply

superstores.

Pacific Enterprises–Enova (DOJ 1998) Pacific

Enterprises (which owned Southern California

Gas Co.) and Enova Corp. (which owned San

Diego Gas & Electric Co.) agreed to combine

the companies under a common holding

company. The Department challenged the

combination on the basis of likely

anticompetitive effects arising from the ability

of the combined companies to raise electricity

prices by restricting the supply of natural gas.

The Department concluded that the relevant

market was the sale of electricity in California

during periods of high demand. In highdemand periods, limitations on transmission

capacity cause prices in California to be

determined by power plants in California.

Inter-temporal arbitrage was infeasible because

there is only a very limited opportunity to

store electric power. Thus, the Department

concluded that a hypothetical electricity

monopolist during just periods of high

demand would raise prices significantly. The

Department’s complaint was resolved by a

consent decree requiring divestiture of

generating facilities and associated assets.

It is unremarkable that “markets” in common

business usage do not always coincide with

“markets” in an antitrust context, inasmuch as the

terms are used for different purposes. The

description of an “antitrust market” sometimes

requires several qualifying words and as such

does not reflect common business usage of the

word “market.” Antitrust markets are entirely

appropriate to the extent that they realistically

describe the range of products and geographic

areas within which a hypothetical monopolist

would raise price significantly and in which a

merger’s likely competitive effects would be felt.

Waste Management–Allied (DOJ 2003) Waste

Management, Inc. agreed to acquire assets

from Allied Waste Industries, Inc. that were

used in its municipal solid waste collection

operations in Broward County, Florida. The

Department challenged the proposed

acquisition on the basis of anticompetitive

effects in “small container commercial

hauling.” Commercial haulers serve customers

such as office buildings, apartment buildings,

and retail establishments. Small containers

have capacities of 1–10 cubic yards, and waste

from them is collected using specialized, frontend loading vehicles. The Department found

that this market was separate and distinct from

markets for other municipal solid waste

collection services. The Department concluded

that a hypothetical monopolist in just small

container commercial hauling would have

raised prices significantly because it was

uneconomical for homeowners to use the much

Market Definition and

Integrated Analysis

Market Definition Is Linked to

Competitive Effects Analysis

The process of defining the relevant market is

directly linked to competitive effects analysis. In

analyzing mergers, the Agencies identify specific

risks of potential anticompetitive harm, and

delineate the appropriate markets within which to

evaluate the likelihood of such potential harm.

This process could lead to different conclusions

about the relevant markets likely to experience

competitive harm for two similar mergers within

the same industry.

12

plan enrollees.

Thrifty–PayLess (FTC 1994) A proposed

merger of Thrifty Drug Stores and PayLess

Drug Stores would have combined retail drug

store chains with store locations near one

another in towns in California, Oregon, and

Washington. Commission staff identified two

potential anticompetitive effects from the

merger:

(1) that “cash” customers, i.e.,

individual consumers who pay out of pocket

for prescription drugs, likely would pay higher

prices; and (2) that third-party payers, such as

health plans and pharmacy benefit managers

(“PBMs”), likely would pay higher dispensing

fees to chain pharmacy firms to obtain their

participation in provider networks.

Rite Aid and Revco constrained one

another’s pricing leverage with PBMs in

bargaining for inclusion in PBM networks.

Each merging firm offered rival broad local

coverage of pharmacy locations, such that

PBMs could assemble marketable networks

with just one of the firms included. A high

proportion of PBM plan enrollees would have

considered the merged entity to be their

preferred pharmacy chain, leaving PBMs with

less attractive options for assembling networks

that did not include the merged firm. This

would have empowered the merged firm

successfully to charge higher dispensing fees as

a condition of participating in a network.

Cash customers tend to shop close to home

or place of employment, suggesting small

geographic markets for those customers.

Third-party payers need network participation

from chains having wide territorial coverage.

The staff assessed different relevant markets

for the two risks of competitive harm. In its

complaint accompanying a consent agreement,

the Commission alleged that the sale of

prescription drugs in retail stores (i.e., sales to

cash customers) was a relevant product market

and that anticompetitive effects from the

merger were likely in this market. The

Commission did not allege a diminution in

competition regarding the process by which

pharmacies negotiate for inclusion in health

plan provider networks and sought no relief in

that market. The Commission ordered Thrifty,

among other things, to divest retail pharmacies

in the geographic markets of concern.

Commission staff determined that the

merger was likely substantially to lessen

competition in the relevant market of sales to

PBMs and similar customers who needed a

network of pharmacies. The Commission

voted to challenge the merger, stating that “the

proposed Rite Aid-Revco merger is the first

drug store merger where the focus has been on

anticompetitive price increases to the growing

numbers of employees covered by these

pharmacy benefit plans, rather than

exclusively focusing on the cash paying

customer.”

The parties subsequently

abandoned the deal.

Many mergers, in a wide variety of industries,

potentially have effects in more than one relevant

geographic market or product market and require

independent competitive assessments for each

market.

Rite Aid–Revco (FTC 1996) The nation’s two

largest retail drug store chains, Rite Aid Corp.

and Revco D.S., Inc., proposed to merge. They

competed in many local markets, including in

15 metropolitan areas in which the merged

firm would have had more than 35% of the

retail pharmacies.

As in the foregoing

Thrifty–PayLess matter, Commission staff

defined two markets in which harm potentially

may have resulted: retail sales made to cash

customers, and sales through PBMs, which

contract with multiple pharmacy firms to form

networks offering pharmacy benefits as part of

health insurance coverage.

Pharmacy

networks often include a high percentage of

local pharmacies because access to many

participating pharmacies is often important to

Suiza–Broughton (DOJ 1998) The Department

challenged the proposed acquisition of

Broughton Foods Co. by Suiza Foods Corp.

Suiza was a nationwide operator of milk

processing plants with four dairies in Kentucky

and Tennessee. Broughton operated two

dairies, including the Southern Belle Dairy in

Pulaski County, Kentucky. The two companies

competed in the sale of milk and other dairy

products to grocery stores, convenience stores,

schools, and institutions. The Department’s

investigation focused on schools, many of

which require daily, or every-other-day,

delivery. School districts procured the milk

through annual contracts, each of which the

13

likely would not raise significant antitrust

concerns in the candidate pancake mix market

should the relevant market exclude Bisquick.

Department found to be an entirely separate

competition. Thus, the Department defined 55

relevant markets, each consisting of a school

district in south central Kentucky in which the

proposed merger threatened competition. The

Department’s complaint was resolved by a

consent decree requiring divestiture of the

Southern Belle Dairy.

In addition to obtaining information from

industry documents and interviews with

industry participants on the correct contours of

the relevant product market, FTC staff

analyzed scanner data to address whether

Bisquick competed with pancake mixes.

Demand estimation revealed significant crossprice elasticities of demand between Bisquick

and most of the individual pancake mix

brands, suggesting that Bisquick competed in

the same relevant market as pancake mixes.

Merger simulation based on the elasticities

calculated from the scanner data showed that

if General Mills acquired Pillsbury it likely

would unilaterally raise prices. All of the

evidence taken together further confirmed that

Pillsbury’s Hungry Jack and Bisquick were

significant substitutes, and the staff concluded

that the relevant market included both pancake

mixes and Bisquick. The parties resolved the

competitive concerns in this market by selling

Pillsbury’s baking product line.

No

Commission action was taken.

NAT, L.C.–D.R. Partners (DOJ 1995) The

Department and private plaintiffs challenged

the consummated acquisition of the Northwest

Arkansas Times by interests owning the

competing Morning News of Northwest Arkansas.

The Department concluded that the acquisition

likely would harm subscribers of these

newspapers as well as local advertisers, and

defined separate relevant markets for readers

and local advertisers. The Department found

that both markets included only daily

newspapers because of unique characteristics

valued by readers and local advertisers, and

concluded that the acquisition likely would

harm both groups of customers. The courts

required rescission of the acquisition.

Market Definition and

Competitive Effects Analyses

May Involve the Same Facts

Interstate Bakeries–Continental (DOJ 1995)

The Department challenged Interstate Bakeries

Corp.’s purchase of Continental Baking Co.

from Ralston Purina Co. on the basis of likely

unilateral effects in the sale of white pan bread.

Econometric analysis determined that there

were substantial cross-elasticities of demand

between the Continental and Interstate brands

of white pan bread. The Department used the

estimated cross-elasticities in a merger

simulation, which predicted that the merger

was likely to result in price increases for those

brands of 5–10%. The data used to estimate

these elasticities also were used to estimate the

elasticity of demand for white pan bread in the

aggregate and for just “premium” brands of

white pan bread.

The latter estimation

indicated that the relevant market was no

broader than all white pan bread, despite some

limited competition from other bread products

and other sources of carbohydrates. The

Department’s challenge to the proposed

merger was settled by a consent decree

requiring divestiture of brands and related

assets in the five metropolitan areas.

Often the same information is relevant to

multiple aspects of the analysis. For example,

regarding mergers that raise the concern that the

merged firm would be able to exercise unilateral

market power, the Agencies often use the same

data and information both to define the relevant

market and to ascertain whether the merger is

likely to have a significant unilateral

anticompetitive effect.

General Mills–Pillsbury (FTC 2001) General

Mills, Inc. proposed to acquire The Pillsbury

Co. General Mills owned the Betty Crocker

brand of pancake mix and the Bisquick brand

of all-purpose baking mix, a product that can

be used to make pancakes as well as other

products. Pillsbury owned the Hungry Jack

pancake mix brand. An issue was whether the

relevant product market for pancake mixes

included Bisquick.

General Mills’ Betty

Crocker pancake mix had a relatively small

share of a candidate pancake mix market that

excluded Bisquick, suggesting that the merger

14

merging parties are small producers of a

homogeneous product, operating in a geographic

area where many other producers of the same

homogeneous product also are located, the

Agencies may conclude that the merger likely

raises no competition concerns without ever

determining the precise contours of the market.

By contrast, mergers occurring in industries

characterized by high shares in at least one

plausible relevant market usually require

additional analysis and consideration of factors in

addition to market share.

Integrated Analysis Takes into

Account that Defined Market

Boundaries Are Not Necessarily

Precise or Rigid

For mergers involving relatively homogeneous

products and distinct, identifiable geographic

areas, with no substitute products or locations just

outside the market boundaries, market definition

is likely to be relatively easy and uncontroversial.

The boundaries of a market are less clear-cut in

merger cases that involve products or geographic

areas for which substitutes exist along a

continuum. The simple dichotomy of “in the

market” or “out of the market” may not

adequately capture the competitive interaction

either of particularly close substitutes or of

relatively distant substitutes.

Section 1.51 of the Guidelines sets out the

general standards, based on market shares and

concentration, that the Agencies use to determine

whether a proposed merger ordinarily requires

further analysis.

The Agencies use the

Herfindahl-Hirschman Index (“HHI”), which is

the sum of the squares of the market shares of all

market participants, as the measure of market

concentration. In particular, the Agencies rely on

the “change in the HHI,” which is twice the

product of the market shares of the merging firms,

and the “post-merger HHI,” which is the HHI

before the merger plus the change in the HHI.

Section 1.51 sets out zones defined by the HHI and

the change in the HHI within which mergers

ordinarily will not require additional analysis.

Proposed mergers ordinarily require no further

analysis if (a) the post-merger HHI is under 1000;

(b) the post-merger HHI falls between 1000 and

1800, and the change in the HHI is less than 100;

or (c) the post-merger HHI is above 1800, and the

change in the HHI is less than 50.

Even when no readily apparent gap exists in

the chain of substitutes, drawing a market

boundary within the chain may be entirely

appropriate when a hypothetical monopolist over

just a segment of the chain of substitutes would

raise prices significantly. Whenever the Agencies

draw such a boundary, they recognize and

account for the fact that an increase in prices

within just that segment could cause significant

sales to be lost to products or geographic areas

outside the segment. Although these lost sales

may be insufficient to deter a hypothetical

monopolist from raising price significantly,

combined with other factors, they may be

sufficient to make anticompetitive effects an

unlikely result of the merger.

The Agencies’ joint publication of Merger

Challenges Data, Fiscal Years 1999–2003 (issued

December 18, 2003), and the Commission’s

publication of Horizontal Merger Investigation

Data, Fiscal Years 1996–2003 (issued February 2,

2004 and revised August 31, 2004), document that

the Agencies have often not challenged mergers

involving market shares and concentration that

fall outside the zones set forth in Guidelines

section 1.51. This does not mean that the zones are

not meaningful, but rather that market shares and

concentration are but a “starting point” for the

analysis, and that many mergers falling outside

these three

zones nevertheless, upon full

consideration of the factual and economic

evidence, are found unlikely substantially to

lessen competition. Application of the Guidelines

as an integrated whole to case-specific facts—not

Significance of Concentration

and Market Share Statistics

Section 2 of the Guidelines explains that

“market share and concentration data provide

only the starting point for analyzing the

competitive impact of a merger.” Indeed, the

Agencies do not make enforcement decisions

solely on the basis of market shares and

concentration, but both measures nevertheless

play an important role in the analysis. A merger

in an industry in which all participants have low

shares—especially low shares in all plausible

relevant markets—usually requires no significant

investigation, because experience shows that such

mergers normally pose no real threat to lessen

competition substantially. For example, if the

15

undue emphasis on market share and

concentration statistics—determines whether the

Agency will challenge a particular merger. As

discussed in section 1.521 of the Guidelines,

historical market shares may not reflect a firm’s

future competitive significance.

Boeing–McDonnell Douglas (FTC 1997) The

Boeing Co., the world’s largest producer of

large commercial aircraft with 60% of that

market, proposed to acquire McDonnell

Douglas Corp., which through Douglas

Aircraft had a share of nearly 5% in that

market. Airbus S.A.S. was the only other

significant rival, and obstacles to entry were

exceptionally high. Although McDonnell

Douglas was not a failing firm, staff

determined that McDonnell Douglas’

significance as an independent supplier of

commercial aircraft had deteriorated to the

point that it was no longer a competitive

constraint on the pricing of Boeing and Airbus

for large commercial aircraft.

Many

purchasers of aircraft indicated that McDonnell

Douglas’ prospects for future aircraft sales

were close to zero. McDonnell Douglas’

decline in competitive significance stemmed

from the fact that it had not made the

continuing investments in new aircraft

technology necessary to compete successfully

against Boeing and Airbus.

Staff’s

investigation failed to turn up any evidence

that this situation could be expected to be

reversed.

The Commission closed the

investigation without taking any action.

Indeed, market concentration may be

unimportant under a unilateral effects theory of

competitive harm. As discussed in more detail in

Chapter 2’s discussion of Unilateral Effects, the

question in a unilateral effects analysis is whether

the merged firm likely would exercise market

power absent any coordinated response from rival

market incumbents. The concentration of the

remainder of the market often has little impact on

the answer to that question.

16

2. The Potential Adverse

Competitive Effects of Mergers

coordinated and unilateral effects frameworks.

Section 2 of the Guidelines identifies two broad

analytical frameworks for assessing whether a

merger between rival firms may substantially

lessen competition: “coordinated interaction” and

“unilateral effects.” A horizontal merger is likely

to lessen competition substantially through

coordinated interaction if it creates a likelihood

that, after the merger, competitors would

coordinate their pricing or other competitive

actions, or would coordinate them more

completely or successfully than before the merger.

A merger is likely to lessen competition

substantially through unilateral effects if it creates

a likelihood that the merged firm, without any

coordination with non-merging rivals, would raise

its price or otherwise exercise market power to a

greater degree than before the merger.

In evaluating the likely competitive effects of a

proposed merger, the Agencies assess the full

range of qualitative and quantitative evidence

obtained from the merging parties, their

competitors, their customers, and a variety of

other sources. By carefully evaluating this

evidence, the Agencies gain an understanding of

the setting in which the proposed merger would

occur and how best to analyze competition. This

understanding draws heavily on the qualitative

evidence from documents and first-hand

observations of the industry by customers and

other market participants. In some cases, this

understanding is enhanced significantly by

quantitative analyses of various sorts. One type of

quantitative analysis is, as explained in Chapter 1,

the “natural experiment” in which variation in

market structure (e.g., from past mergers) can be

empirically related to changes in market

performance.

Normally, the likely effects of a merger within

a particular market are best characterized as either

coordinated or unilateral, but it is possible to have

both sorts of competitive effects within a single

relevant market. This possibility may be most

likely if the coordinated and unilateral effects

relate to different dimensions of competition or

would manifest themselves at different times.

The Agencies examine whatever evidence is

available and apply whatever tools of economics

would be productive in an effort to arrive at the

most reliable assessment of the likely effects of

proposed mergers. Because the facts of merger

investigations commonly are complex, some bits

of evidence may appear inconsistent with the

Agencies’ ultimate assessments. The Agencies

challenge a merger if the weight of the evidence

establishes a likelihood that the merger would be

anticompetitive. The type of evidence that is most

telling varies from one merger to the next, as do

the most productive tools of economics.

Although these two broad analytical

frameworks provide guidance on how the

Agencies analyze competitive effects, the

particular labels are not the focus. What matters

is not the label applied to a competitive effects

analysis, but rather whether the analysis is clearly

articulated and grounded in both sound

economics and the facts of the particular case.

These frameworks embrace every competitive

effect of any form of horizontal merger. The

Agencies do not recognize or apply narrow

readings of the Guidelines that could cause

anticompetitive transactions to fall outside of, or

fall within a perceived gap between, the

In assessing a merger between rival sellers, the

Agencies consider whether buyers are likely able

to defeat any attempts by sellers after the merger

to exercise market power. Large buyers rarely can

negate the likelihood that an otherwise

17

constitute a violation of the Sherman Act. As

section 2.1 of the Guidelines states, coordinated

interaction “includes tacit or express collusion,

and may or may not be lawful in and of itself.”

anticompetitive merger between sellers would

harm at least some buyers. Most markets with

large buyers also have other buyers against which

market power can be exercised even if some large

buyers could protect themselves. Moreover, even

very large buyers may be unable to thwart the

exercise of market power.

Most mergers have no material effect on the

potential for coordination. Some may even lessen

the likelihood of coordination. To identify those

mergers that enhance the likelihood or

effectiveness of coordination, the Agencies

typically evaluate whether the industry in which

the merger would occur is one that is conducive to

coordinated behavior by the market participants.

The Agencies also evaluate how the merger

changes the environment to determine whether

the merger would make it more likely that firms

successfully coordinate.

Although they generally focus on the likely

effects of proposed mergers on prices paid by

consumers, the Agencies also evaluate the effects

of mergers in other dimensions of competition.

The Agencies may find that a proposed merger

would be likely to cause significant

anticompetitive effects with respect to innovation

or some other form of non-price rivalry. Such

effects may occur in addition to, or instead of,

price effects.

In conducting this analysis, the Agencies

attempt to identify the factors that constrain rivals’

ability to coordinate their actions before the

merger. The Agencies also consider whether the

merger would sufficiently alter competitive

conditions such that the remaining rivals after the

merger would be significantly more likely to

overcome any pre-existing obstacles to

coordination. Thus, the Agencies not only assess

whether the market conditions for viable

coordination are present, but also ascertain

specifically whether and how the merger would

affect market conditions to make successful

coordination after the merger significantly more

likely. This analysis includes an assessment of

whether a merger is likely to foster a set of

common incentives among remaining rivals, as

well as to foster their ability to coordinate

successfully on price, output, or other dimensions

of competition.

The sections that follow address in greater

detail the Agencies’ application of the Guidelines’

coordinated interaction and unilateral effects

frameworks.

Coordinated Interaction

A horizontal merger changes an industry’s

structure by removing a competitor and

combining its assets with those of the acquiring

firm. Such a merger may change the competitive

environment in such a way that the remaining

firms—both the newly merged entity and its

competitors—would engage in some form of

coordination on price, output, capacity, or other

dimensions of competition. The coordinated

effects section of the Guidelines addresses this

potential competitive concern. In particular, the

Agencies seek to identify those mergers that are

likely either to increase the likelihood of

coordination among firms in the relevant market

when no coordination existed prior to the merger,

or to increase the likelihood that any existing

coordinated interaction among the remaining

firms in the relevant market would be more

successful, complete, or sustainable.

Successful coordination typically requires

rivals (1) to reach terms of coordination that are

profitable to each of the participants in the

coordinating group, (2) to have a means to detect

deviations that would undermine the coordinated

interaction, and (3) to have the ability to punish

deviating firms, so as to restore the coordinated

status quo and diminish the risk of deviations.

Guidelines § 2.1. Punishment may be possible, for

example, through strategic price-cutting to the

deviating rival’s customers, so as effectively to

erase the rival’s profits from its deviation and

make the rival less likely to “cheat” again.

Coordination on prices tends to be easier the more

transparent are rivals’ prices, and coordination

through allocation of customers tends to be easier

A merger could reduce competition

substantially through coordinated interaction and

run afoul of section 7 of the Clayton Act without

an agreement or conspiracy within the meaning of

the Sherman Act. Even if a merger is likely to

result in coordinated interaction, or more

successful coordinated interaction, and violates

section 7 of the Clayton Act, that coordination,

depending on the circumstances, may not

18

American Tobacco plc. Within the market for

all cigarettes, the merger would have increased

the HHI from 2,735 to 3,113. The Commission

assessed whether the cigarette market was

susceptible to coordinated interaction.

Concluding that “the market for cigarettes is

subject to many complexities, continual

changes, and uncertainties that would severely

complicate the tasks of reaching and

monitoring a consensus,” the Commission

closed the investigation without challenging

the merger.

The Commission’s closing

statement points to the high degree of

differentiation among cigarette brands, as well

as sizable variation in firm sizes, product

portfolios, and market positions among the

manufacturers as factors that created different

incentives for the different manufacturers to

participate in future coordination. These

factors made future coordination more difficult

to manage and therefore unlikely.

the more transparent are the identities of

particular customers’ suppliers. It may be

relatively more difficult for firms to coordinate on

multiple dimensions of competition in markets

with complex product characteristics or terms of

trade. Such complexity, however, may not affect

the ability to coordinate in particular ways, such

as through customer allocation. Under Guidelines

analysis, likely coordination need not be perfect.

To the contrary, the Agencies assess whether, for

example, it is likely that coordinated interaction

will be sufficiently successful following the merger

to result in anticompetitive effects.

LaFarge–Blue Circle (FTC 2001) A merger of

LaFarge S.A. and Blue Circle Industries PLC

raised coordinated interaction concerns in

several relevant markets, including that for

cement in the Great Lakes region. In that

market, the merger would have created a firm

with a combined market share exceeding 40%

and a market in which the top four firms

would control approximately 90% of the

supply. The post-merger HHI would have

been greater than 3,000, with a change in the

HHI of over 1,000. Cement is widely viewed

as a homogeneous, highly standardized

commodity product over which producers

compete principally on price.

Industry

practice was that suppliers informed customers

of price increases months before they were to

take effect, making prices across rival suppliers

relatively transparent.

Both RJR and Brown & Williamson had

portfolios of cigarette brands that included a

smaller proportion of strong premium brands

and a larger proportion of vulnerable and

declining discount brands than the other major

cigarette competitors. At the time of the

merger, both companies were investing in

growing a smaller number of premium equity

brands to maintain sales and market share.

There was uncertainty about the results of

these strategic changes. The Commission

concluded that uncertainties of these types

greatly increased the difficulty of engaging in

coordinated behavior. The Commission also

noted that competition in the market was

driven by discount brands and by equity

investment in select premium brands among

the four leading rivals, and there was little

evidence that Brown & Williamson’s continued

autonomy was critical to the preservation of

either form of competition.

Brown &

Williamson had been reducing, not increasing,

its commitment in the discount segment, and

was a very small factor in equity brands.

Sales transactions tended to be frequent,

regular, and relatively small. These factors

heightened concern that, after the merger,

incumbents were not only likely to coordinate

profitably on price terms, but also that the

firms would have little incentive to deviate

from the consensus price. That possibility

existed because the profit to be gained from

deviation would be less than the potential

losses that would result if rivals retaliated. The

Commission challenged the merger, resolving

it by a consent order that required, among

other things, divestiture of cement-related

assets in the Great Lakes region.

The Commission also described variations

in the marketing environment for cigarettes

from state to state and between rural and

urban areas. These variations made it more

difficult and costly for firms to monitor their

rival’s activities and added to the complexity

of coordination.

R.J. Reynolds–British American (FTC 2004) In

a merger of the second- and third-largest

marketers of cigarettes, R.J. Reynolds Tobacco

Holdings, Inc. proposed to acquire Brown &

Williamson Tobacco Corporation from British

19

remained in the market, see, e.g., LaFarge–Blue

Circle, described above, when the evidence does

not show that the merger will change the

likelihood of coordination among the market

participants or of other anticompetitive effects, the

Agencies regularly close merger investigations,

including those involving markets that would

have fewer than four firms.

Coordination that reduces competition and

consumer welfare could be accomplished using

many alternative mechanisms.

Coordinated

interaction can occur on one or more competitive

dimensions, such as price, output, capacity,

customers served, territories served, and new

product introduction. Coordination on price and

coordination on output are essentially equivalent

in their effects.

When rivals successfully

coordinate to restrict output, price rises. Similarly,

when rivals successfully coordinate on price—that

is, they maintain price above the level it would be

absent the coordination—the rate of output

declines because consumers buy fewer units.

As discussed in Chapter 1, enforcement data

released by the Agencies show that market shares

and concentration alone are not good predictors of

enforcement challenges, except at high levels.

Market shares and concentration nevertheless are

important in the Agencies’ evaluation of the likely

competitive effects of a merger. Investigations are

almost always closed when concentration levels

are below the thresholds set forth in section 1.51 of

the Guidelines. In addition, the larger the market

shares of the merging firms, and the higher the

market concentration after the merger, the more

disposed are the Agencies to concluding that

significant anticompetitive effects are likely.

Coordination on either price or output may

pose difficulties that can be avoided by

coordinating on customers or territories served.

Rivals may coordinate on the specific customers

with which each does business, or on the general

types of customers with which they seek to do

business. They also may coordinate on the

particular geographic areas in which they operate

or concentrate their efforts. Coordination also can

occur with respect to aspects of rivalry, such as

new product introduction. Rivals are likely to

adopt the form of coordination for which it is

easiest to spot deviations from the agreed terms of

coordination and easiest to punish firms that

deviate from those terms. Industry-specific factors

thus are likely to influence firms’ choices on how

to coordinate their activities.

Additional Market Characteristics

Relevant to Competitive Analysis

Section 2.1 of the Guidelines sets forth several

general market characteristics that may be

relevant to the analysis of the likelihood of

coordinated interaction following a merger: “the

availability of key information concerning market

conditions, transactions and individual

competitors; the extent of firm and product

heterogeneity; pricing or market practices

typically employed by firms in the market; the

characteristics of buyers and sellers; and the

characteristics of typical transactions.” Section

2.11 of the Guidelines states that the ability of

firms to reach terms of coordination “may be

facilitated by product or firm homogeneity and by

existing practices among firms, practices not

necessarily themselves antitrust violations, such as

standardization of pricing or product variables on

which firms could compete.” Further, “[k]ey

information about rival firms and the market may

also facilitate reaching terms of coordination.” Id.

Concentration

The number of rival firms remaining after a

merger, their market shares, and market

concentration are relevant factors in determining

the effect of a merger on the likelihood of

coordinated interaction. The presence of many

competitors tends to make it more difficult to

achieve and sustain coordination on competitive

terms and also reduces the incentive to participate

in coordination. Guidelines § 2.0. The Guidelines’

market share and concentration thresholds reflect

this reality.

The Agencies do not automatically conclude

that a merger is likely to lead to coordination

simply because the merger increases concentration

above a certain level or reduces the number of

remaining firms below a certain level. Although

the Agencies recently have challenged mergers

when four or more competitors would have

These market characteristics may illuminate

the degree of transparency and complexity in the

competitive environment.

The existence or

absence of any particular characteristic (e.g.,

product homogeneity or transparency in prices) in

a relevant market, however, is neither a necessary

20

an enhanced mutual understanding of the

production and marketing variables that each rival

faces also may result.

Better mutual

understanding can increase the ability to

coordinate successfully, thus diminishing the

benefits to consumers that the more intense

competition otherwise would have provided.

Sellers of differentiated products also may

coordinate in non-price dimensions of competition

by limiting their product portfolios, thereby

limiting the extent of competition between the

products of rival sellers.

They also may

coordinate on customers or territories rather than

on prices.

nor a sufficient basis for the Agencies to determine

whether successful coordination is likely following

a merger. In other words, these factors are not

simply put on the left or right side of a ledger and

balanced against one another.

Rather, the

Agencies identify the specific factors relevant to

the particular mechanism for coordination being

assessed and focus on how those factors affect

whether the merger would alter the likelihood of

successful coordination.

Formica–International Paper (DOJ 1999)

Formica Corp. and International Paper Co.

were two producers of high-pressure laminates

used to make durable surfaces such as

countertops, work surfaces, doors, and other

interior building products. Formica sought to

acquire the high-pressure laminates business of

International Paper Co. There were just four

competitors in the United States, and the

acquisition of International Paper Co.’s

business would have given Formica and its

largest remaining competitor almost 90% of

total sales between them.

The market

appeared to have been performing reasonably

competitively, but the Department was

concerned that two dominant competitors

would coordinate pricing and output after the

acquisition.

Diageo–Vivendi (FTC 2001) The Commission

challenged a merger between Diageo plc and

Vivendi Universal S.A., competitors in the

manufacture and sale of premium rum—a

product that is heterogeneous as to brand

name and the type of rum, e.g., light or gold,

flavored or unflavored—on the grounds,

among others, that the transaction was likely to

lead to coordinated interaction among

premium rum rivals. Diageo, which owned

the Malibu Rum brand with about an 8% share,

was seeking to acquire Seagram’s, which

marketed Captain Morgan Original Spiced

Rum and Captain Morgan Parrot Bay Rum

brands and had about a 33% share. Bacardi

USA, with its Bacardi Light and Bacardi Limon

brands, was the largest competitor with about

a 54% share. Thus, after the acquisition,

Diageo and Bacardi USA would have had a

combined share of about 95% in the U.S.

premium rum market.

One reason for this concern was that the

small competitors remaining after the merger

had relatively high costs and were unable to

expand output significantly, so they would not

have been able to undermine that coordination.

In addition, the Department concluded that

International Paper, with significant excess

capacity, had the ability to undermine

coordination and had done so.

The

Department also found that major competitors

had very good information on each others’

pricing and would be able to detect deviations

from coordinated price levels. After the

Department announced its intention to

challenge the merger, the parties abandoned

the deal.

Significant differentiation among major

brands of rum reduces the closeness of

substitution among them. Nonetheless, the

Commission had reason to believe that the

acquisition would increase the likelihood and

extent of coordinated interaction to raise

prices. Having a single owner of both the

Seagram’s rum products and the Malibu brand

created the substantial concern that coordin­

ation that was not profitable for Bacardi and

Seagram’s before the merger likely would have

become profitable after the merger. Although

a smaller rival before the merger, Diageo’s

Malibu imposed a significant competitive

constraint on Seagram’s and Bacardi. The

Commission challenged the merger and agreed

Although coordination may be less likely the

greater the extent of product heterogeneity,

mergers in markets with differentiated products

nonetheless can facilitate coordination. Although

a merger resulting in closer portfolio conformity

may prompt more intense, head-to-head

competition among rivals that benefits consumers,

21

for a wide range of industrial gases, including

bulk liquid oxygen, nitrogen, and argon.

Industrial gas technology is well-established,

market institutions in the U.S. were similar to

those in Canada, and nothing had changed

significantly during the intervening period to

suggest that coordination had become more

difficult or less likely.

to a settlement with the parties that required

Diageo to divest its worldwide Malibu rum

business to a third party.

Role of Evidence of Past Coordination

Facts showing that rivals in the relevant market

have coordinated in the past are probative of

whether a market is conducive to coordination.

Guidelines § 2.1. Such facts are probative because

they demonstrate the feasibility of coordination

under past market conditions. Other things being

equal, the removal of a firm via merger, in a

market in which incumbents already have

engaged in coordinated behavior, generally raises

the risk that future coordination would be more

successful, durable, or complete. Accordingly, the

Agencies investigate whether the relevant market

at issue has experienced such behavior and, if so,

whether market conditions that existed when the

coordination took place—and thus were

conducive to coordination—are still in place. A

past history of coordination found unlawful can

provide strong evidence of the potential for

coordination after a merger.

Other evidence also indicated that the

markets were susceptible to coordinated

behavior: firms announced price changes

publicly, and industry-wide price increases

tended to follow such announcements; a

number of joint ventures, swap agreements,

and other relationships among the suppliers

provided opportunities for information

sharing; and incumbents tended not to bid

aggressively for rivals’ current customers.

Neither fringe expansion nor new entry was

likely to defeat future coordination. Staff

concluded that the proposed asset split would

likely enable the remaining firms to engage in

coordination more effectively. The parties

abandoned the proposed transactions.

Air Products–L’Air Liquide (FTC 2000) Two of

the four largest industrial gas suppliers, Air

Products and Chemicals, Inc. and L’Air

Liquide S.A., proposed acquisitions that would

result in splitting between them the assets of a

third large rival, The BOC Group plc. The

proposed asset split would have resulted in

three remaining industrial gas suppliers that

were nearly the same in size, cost structure,

and geographic service areas.

Products

involved in the asset split included bulk liquid

oxygen, bulk liquid nitrogen, and bulk liquid

argon (together referred to as atmospheric

gases), various electronic specialty gases, and

helium—each of which is a homogeneous

product. Bulk liquid oxygen and nitrogen

trade in regional markets, and the transactions

would have affected multiple regional areas.

In these areas, the four largest producers

accounted for between 70% and 100% of the

markets. The four suppliers also accounted for

about 90% of the national market for bulk

liquid argon.

Suiza–Broughton (DOJ 1999) Suiza Foods

Corp. and Broughton Foods Co. proposed to

merge. Broughton owned the Southern Belle

dairy in Somerset, Kentucky, and Suiza

operated several dairies in Kentucky, including

the Flav-O-Rich dairy in London, Kentucky.

Six years earlier, when Flav-O-Rich and

Southern Belle were independently owned,

both pleaded guilty to criminal charges of

rigging bids in the sale of milk to schools. The

Department found that the proposed merger

would have reduced from three to two the

number of dairies competing to supply milk to

thirty-two school districts in South Central

Kentucky, including many that had been

victimized by the prior bid rigging. The

Department challenged the merger on the

basis that it likely would lead to coordinated

anticompetitive effects, and the demonstrated

ability of these particular dairies to coordinate

was a significant factor in the Department’s

decision. The Department’s complaint was

resolved by a consent decree requiring

divestiture of the Southern Belle Dairy.

The staff found evidence of past

coordination. In 1991, the four major industrial

air gas suppliers pled guilty in Canada to a

charge of conspiring to eliminate competition

Degussa–DuPont (FTC 1998)

Degussa

Aktiengesellschaft, a producer of hydrogen

peroxide, proposed to acquire rival E.I. du

22

producers, prices often remained relatively

stable. All of these factors established that the

relevant market—even before the proposed

merger—was performing in a manner

consistent with coordination. The Commission

entered into a consent order requiring, among

other things, divestiture of phosphoric acid

assets.

Pont de Nemours & Co.’s hydrogen peroxide

manufacturing assets. The Commission found

that the relevant U.S. market was conducive to

coordinated interaction based on evidence that

showed, among other things, high

concentration levels, product homogeneity,

and the ready availability of reliable

competitive information. Moreover, the same

firms that would have been the leading U.S.

producers after the merger had recently been

found to have engaged in market division in

Europe for several years. The Commission

identified this history of collusion as a factor

supporting its conclusion that the proposed

transaction likely would result in

anticompetitive effects from coordinated

interaction. Under the terms of a consent

agreement to resolve these competitive

concerns, the acquirer was permitted to

purchase one plant but not the entirety of the

seller’s hydrogen peroxide manufacturing

assets.

When investigating mergers in industries

characterized by collusive behavior or previous

coordinated interaction, the Agencies focus on

how the mergers affect the likelihood of successful

coordination in the future. In some instances, a

simple reduction in the number of firms may

increase the likelihood of effective coordinated

interaction. Evidence of past coordination is less

probative if the conduct preceded significant

changes in the competitive environment that made

coordination more difficult or otherwise less

likely. Such changes might include, for example,

entry, changes in the manufacturing processes of

some competitors, or changes in the characteristics

in the relevant product itself. Events such as these

may have altered the incumbents’ incentives or

ability to coordinate successfully.

Even when firms have no prior record of

antitrust violations, evidence that firms have

coordinated at least partially on competitive terms

suggests that market characteristics are conducive

to coordination.

Although a history of past collusion may be

probative as to whether the market currently is

conducive to coordination, the converse is not

necessarily true, i.e., a lack of evidence of past

coordination does not imply that future

coordination is unlikely. When the Agencies

conclude that previous episodes of coordinated

interaction are not probative in the context of

current market conditions—or when they find no

evidence that rivals coordinated in the past—an

important focus of the investigation becomes

whether the merger is likely to cause the relevant

market to change from one in which coordination

did not occur to one in which such coordination is

likely.

Rhodia–Albright & Wilson (FTC 2000) Rhodia

entered into an agreement to acquire Albright

& Wilson PLC, a wholly owned subsidiary of

Donau Chemie AG. The merging firms were

industrial phosphoric acid producers. The

Commission developed evidence that the

market was highly concentrated, that the

relevant product was homogenous, and that

timely competitive intelligence was readily

available—all conditions that are generally

conducive to coordination.

Incumbent

marketing strategies suggested a tendency to

curb aggressive price competition and

suggested a lack of competition.

Premdor–Masonite (DOJ 2001) Premdor Inc.

sought to acquire (from International Paper

Co.) Masonite Corp., one of two large

producers of “interior molded doorskins,”

which form the front and back of “interior

molded doors.” Interior molded doors provide

much the same appearance as solid wood

doors but at a much lower cost, and Premdor

was the world’s largest producer. Premdor

also held a substantial equity stake in a firm

that supplied some of its doorskins. The vast

The Commission found that industrial

phosphoric acid pricing, unlike the pricing of

other similar chemical products, had not

historically responded significantly to changes

in the rate of capacity utilization among

producers. In most chemical product markets,

when capacity utilization declines, prices often

decline as well. In this market, however,

during periods of decline in capacity

utilization among industrial phosphoric acid

23

In such a case, the Agency’s investigation

examines whether the acquired firm has behaved

as a maverick and whether the incentives that are

expected to guide the merged firm’s behavior

likely would be different.

majority of doorskins, however, were

produced by Masonite and by a third party

that was also Premdor’s only large rival in the

sale of interior molded doors. The Department

concluded that the upstream and downstream

markets for interior molded doorskins and

interior molded doors were highly

concentrated and that the proposed acquisition

would have removed significant impediments

to coordination.

Similarly, a merger might lead to

anticompetitive coordination if assets that might

constrain coordination are acquired by one of a

limited number of larger incumbents.

For

example, coordination could result if, prior to the

acquisition, the capacity of fringe firms to expand

output was sufficient to defeat the larger firms’

attempts to coordinate price, but the acquisition

would shift enough of the fringe capacity to a

major firm (or otherwise eliminate it as a

competitive threat) so that insufficient fringe

capacity would remain to undermine a

coordinated price increase.

The Department found that the most

significant impediment to upstream

coordination was Premdor’s ability, in the

event of an upstream price increase, to expand

production of doorskins, both for its own use

and for sale to other door producers. The

proposed acquisition, however, would have

eliminated Premdor’s incentive to undermine

upstream coordination. The Department also

found that a significant impediment to

downstream coordination was Masonite’s

incentive and ability to support output

increases by smaller downstream competitors.

The proposed acquisition, however, would

have eliminated Masonite’s incentive to do so.

Arch Coal–Triton (FTC 2004) The Commission

challenged Arch Coal, Inc.’s acquisition of

Triton Coal Co., LLC’s North Rochelle mine in

the Southern Powder River Basin of Wyoming

(“SPRB”). Prior to the acquisition, three large

companies—Arch, Kennecott, and Peabody

(the “Big Three”)—owned a large majority of

SPRB mining capacity.

The remaining

capacity, including the North Rochelle mine,

was owned by fringe companies with smaller

market shares. The Commission’s competitive

concern was that, by transferring ownership of

the North Rochelle mine from the fringe to a

member of the Big Three, the acquisition

would significantly reduce the supply elasticity

of the fringe and increase the likelihood of

coordination to reduce Big Three output. As a

result of the reduction in fringe supply

elasticity, a given reduction in output by the

Big Three would be more profitable to each

member of that group after the acquisition than

would have been the case before the

acquisition. Mine operators had, in the past,

announced their future intentions with regard

to production and had publicly encouraged

“production discipline.” The court denied the

Commission’s preliminary injunction request

and, after further investigation, the

Commission decided not to pursue further

administrative litigation.

Finally, the Department found that the

acquisition would have facilitated coordination

by bringing the cost structures of the principal

competitors into alignment, both upstream and

downstream, and by making it easier to

monitor departures from any coordination.

The Department’s challenge of the acquisition

was resolved by a consent decree requiring,

among other things, divestiture of a Masonite

manufacturing facility.

Maverick and Capacity Factors in

Coordination

A merger may make coordination more likely

or more effective when it involves the acquisition

of a firm or asset that is competitively unique. In

this regard, section 2.12 of the Guidelines

addresses the acquisition of “maverick” firms, i.e.,

“firms that have a greater economic incentive to

deviate from the terms of coordination than do

most of their rivals (e.g., firms that are unusually

disruptive and competitive influences in the

market).” If the acquired firm is a maverick, its

acquisition may make coordination more likely

because the nature and intensity of competition

may change significantly as a result of the merger.

UPM–MACtac (DOJ 2003) UPM-Kymmene

Oyj sought to acquire (from Bemis Co.)

Morgan Adhesives Co. (“MACtac”). Three

24

issuance of the Guidelines in 1992, a substantial

proportion of the Agencies’ merger challenges

have been predicated at least in part on a

conclusion that the proposed mergers were likely

to generate anticompetitive unilateral effects.

firms—MACtac, UPM’s Raflatac, Inc.

subsidiary, and Avery Dennison Corp.—were

the only large producers of paper pressuresensitive labelstock, which is used by

“converters” to make paper self-adhesive

labels for a range of consumer and commercial

applications. The Department found that the

proposed acquisition would result in UPM and

Avery controlling over 70% of sales in the

relevant market, and in smaller rivals having

insufficient capacity to undermine a price

increase by UPM and Avery. Prior to the

announcement of its proposed acquisition of

MACtac, UPM and Avery had exchanged

communications about their mutual concerns

regarding intense price competition, and there

was evidence that they had reached an

understanding to hold the line on further price

cuts. MACtac, however, was not a party to this

understanding, and it had both substantial

excess capacity and the incentive to expand

sales by cutting price.

Section 2.2 of the Guidelines explains:

“Unilateral competitive effects can arise in a

variety of different settings. In each setting,

particular other factors describing the relevant

market affect the likelihood of unilateral

competitive effects. The settings differ by the

primary characteristics that distinguish firms and

shape the nature of their competition.” Section 2.2

does not articulate, much less detail, every

particular unilateral effects analysis the Agencies

may apply.

The Agencies’ analysis of unilateral

competitive effects draws on many models

developed by economists. The simplest is the

model of monopoly, which applies to a merger

involving the only two competitors in the relevant

market. One step removed from monopoly is the

dominant firm model. That model posits that all

competitors but one in an industry act as a

“competitive fringe,” which can economically

satisfy only part of total market demand. The

remaining competitor acts as a monopolist with

respect to the portion of total industry demand

that the competitive fringe does not elect to

supply. This model might apply, for example, in

a homogeneous product industry in which the

fringe competitors are unable to expand output

significantly.

The Department concluded that the

proposed acquisition would eliminate the

threat to coordination from MACtac and that

no other competitor posed such a threat. Also

significant was the fact that UPM was a major

input supplier for Avery both because this

relationship created opportunities for

communication between the two and because

it made possible mutual threats that could be

used to induce or enforce coordination. The

Department, therefore, concluded that Avery

and UPM would be likely to coordinate after

the acquisition and challenged the transaction

on that basis. After trial, the district court

enjoined the consummation of the acquisition.

In other models, two or more competitors

interact strategically. These models differ with

respect to how competitors interact. In the

Bertrand model, for example, competitors interact

in the choice of the prices they charge. Similar to

the Bertrand model are auction models, in which

firms interact by bidding. There are many auction

models with many different bidding procedures.

In the Cournot model, competitors interact in the

choice of the quantities they sell. And in

bargaining models, competitors interact through

their choices of terms on which they will deal with

their customers.

Unilateral Effects

Section 2.2 of the Guidelines states that

“merging firms may find it profitable to alter their

behavior unilaterally following the acquisition by

elevating price and suppressing output.” The

manner in which a horizontal merger may

generate unilateral competitive effects is

straightforward: By eliminating competition

between the merging firms, a merger gives the

merged firm incentives different from those of the

merging firms. The simplest unilateral effect

arises from merger to monopoly, which eliminates

all competition in the relevant market. Since the

Formal economic modeling can be useful in

interpreting the available data (even with natural

experiments). One type of modeling the Agencies

use is “merger simulation,” which “calibrates” a

model to match quantitative aspects (e.g., demand

25

monopoly are proposed. Some proposed mergers

affecting many markets would have resulted in

monopolies in one or more of these markets.

elasticities) of the industry in which the merger

occurs and uses the calibrated model to predict the

outcome of the competitive process after the

merger. Merger simulation can be a useful tool in

determining whether unilateral effects are likely to

constitute a substantial lessening of competition

when a particular model mentioned above fits the

facts of the industry under review and suitable

data can be found to calibrate the model. The fit

of a model is evaluated on the basis of the totality

of the evidence.

Franklin Electric–United Dominion (DOJ

2000) Subsidiaries of Franklin Electric Co. and

United Dominion Industries were the only two

domestic producers of submersible turbine

pumps used for pumping gasoline from

underground storage tanks at retail stations.

The parent companies entered into a joint

venture agreement that would have combined

those subsidiaries. The Department found that

entry was difficult and that other pumps,

including foreign-produced pumps, were not

good substitutes. Hence, the Department

concluded that the formation of the joint

venture likely would create a monopoly and

thus give rise to a significant unilateral

anticompetitive effect. After trial, the district

court granted the Department’s motion for a

permanent injunction.

Section 2.2 of the Guidelines does not establish

a special safe harbor applicable to the Agencies’

consideration of possible unilateral effects.

Section 2.2.1 provides that significant unilateral

effects are likely with differentiated products

when the combined market share of the merging

firms exceeds 35% and other market

characteristics indicate that market share is a

reasonable proxy for the relative appeal of the

merging products as second choices as well as first

choices. Section 2.2.2 provides that significant

unilateral effects are likely with undifferentiated

products when the combined market share of the

merging firms exceeds 35% and other market

characteristics indicate that non-merging firms

would not expand output sufficiently to frustrate

an effort to reduce total market output.

Glaxo Wellcome–SmithKline Beecham (FTC

2000)

When Glaxo Wellcome plc and

SmithKline Beecham plc proposed to merge,

each manufactured and marketed numerous

pharmaceutical products. For most products,

the transaction raised no significant

competition issues, but it did raise concerns in

several product lines. Among them was the

market f or research, development,

manufacture, and sale of second generation

oral and intravenous antiviral drugs used in

the treatment of herpes. Glaxo Wellcome’s

Valtrex and SmithKline Beecham’s Famvir

were the only such drugs sold in the United

States. Having concern both for the market for

currently approved drugs and the market for

new competing drugs, the Commission alleged

that the merger would have prompted a

unilateral increase in prices and reduction in

innovation in this monopolized market. The

matter was resolved by a consent order,

pursuant to which the merged firm was

required, among other things, to divest

SmithKline’s Famvir-related assets.

As an empirical matter, the unilateral effects

challenges made by the Agencies nearly always

have involved combined shares greater than 35%.

Nevertheless, the Agencies may challenge mergers

when the combined share falls below 35% if the

analysis of the mergers’ particular unilateral

competitive effects indicates that they would be

likely substantially to lessen competition.

Combined shares less than 35% may be

sufficiently high to produce a substantial

unilateral anticompetitive effect if the products are

differentiated and the merging products are

especially close substitutes or if the product is

undifferentiated and the non-merging firms are

capacity constrained.

Unilateral Effects from

Merger to Monopoly

Suiza–Broughton (DOJ 1999) Suiza Foods

Corp. and Broughton Foods Co. competed in

the sale of milk to school districts, which

procured the milk through annual contracts

entered into after taking bids. The Department

found that competition for each of the school

The Agencies are likely to challenge a

proposed merger of the only two firms in a

relevant market. The case against such a merger

would rest upon the simplest of all unilateral

effects models.

Relatively few mergers to

26

districts was entirely separate from the others,

so each constituted a separate geographic

market. The Department sought to enjoin the

proposed merger of the two companies after

finding that it threatened competition in 55

school districts in south central Kentucky and

would have created a monopoly in 23 of those

districts. The matter was resolved by a consent

order, pursuant to which the merged firm was

required to divest the dairy in Kentucky

owned by Broughton.

Unilateral Effects Relating to the

Pricing of Differentiated Products

In analyzing a merger of two producers of

differentiated consumer products, the Agencies

examine whether the merger will alter the merged

firm’s incentives in a way that leads to higher

prices. The seller of a differentiated consumer

product raises price above marginal cost to the

point at which the profit gain from higher prices is

balanced by the loss in sales. Merging two sellers

of competing differentiated products may create

an incentive for the merged firm to increase the

price of either or both products because some of

the sales lost as a result of the increase in the price

of either of the two products would be

“recaptured” by the other.

Unilateral Effects Relating to

Capacity and Output for

Homogeneous Products

In markets for homogeneous products, the

Agencies consider whether proposed mergers

would, once consummated, likely provide the

incentive to restrict capacity or output

significantly and thereby drive up prices.

As section 2.21 of the Guidelines explains, what

matters in determining the unilateral effect of a

differentiated products merger is whether “a

significant share of sales in the market [is]

accounted for by consumers who regard the

products of the merging firms as their first and

second choices.” Consumers typically differ

widely with respect to both their most preferred

products and their second choices. If a significant

share of consumers view the products combined

by the merger as their first and second choices, the

merger may result in a significant unilateral effect.

Georgia-Pacific–Fort James (DOJ 2000)

Georgia-Pacific Corp. and Fort James Corp.

were the two largest producers in the United

States of “away-from-home” tissue products

(i.e., paper napkins, towels, and toilet tissue

used in commercial establishments). These

products are produced in a two-stage process,

the first stage of which is the production of

massive parent rolls, which also are used to

make at-home tissue products. GeorgiaPacific’s proposed acquisition of Fort James

would have increased Georgia-Pacific’s share

of North American parent roll capacity to 36%.

Investigation revealed that the industry was

operating at nearly full capacity, that capacity

could not be quickly expanded, and that

demand was relatively inelastic. These factors

combined to create a danger that, after the

merger, Georgia-Pacific would act as a

dominant firm by restricting production of

parent rolls and thereby forcing up prices for

away-from-home tissue products. Merger

simulation indicated that the acquisition would

cause a significant price increase.

The

Department’s challenge to the acquisition was

settled by a consent decree requiring the

divestiture of Georgia-Pacific’s away-from­

home tissue business.

In all merger cases, the Agencies focus on the

particular competitive relationship between the

merging firms, and for mergers involving

differentiated products, the “diversion ratios”

between products combined by the merger are of

particular importance. An increase in the price of

a differentiated product causes a decrease in the

quantity sold for that product and an increase in

the quantities sold of products to which

consumers switch. The diversion ratio from one

product to another is the proportion of the

decrease in the quantity of the first product

purchased resulting from a small increase in its

price that is accounted for by the increase in

quantity purchased for the other product. In

general, for any two products brought under

common control by a transaction, the higher the

diversion ratios, the more likely is significant harm

to competition.

A merger may produce significant unilateral

effects even though a large majority of the

substitution away from each merging product

goes to non-merging products. The products of

27

detectors, corrosion thickness gauges, and

precision thickness gauges. In each of these

markets, the merging parties were the two

largest firms, and the combined firm would

have had a market share of greater than 70% in

each of the markets.

Documents and

testimonial evidence indicated that the rivalry

between GE and Agfa was particularly close,

and that, for a wide variety of industry

participants, the products of the two firms

were their first and second choices. The

evidence also showed that the two firms

frequently were head-to-head rivals and that

this competition benefitted consumers through

aggressive price competition and innovation.

Evidence also suggested that the remaining

fringe manufacturers would not be able to

constrain a unilateral price increase by the

merged firm. The Commission obtained a

consent order requiring divestiture of GE’s

NDT business.

the merging firms need only be sufficiently close

to each other (that is, have sufficiently high

diversion ratios) that recapturing the portion of

the lost sales indicated by the diversion ratios

provides a significant incentive to raise prices.

Significant unilateral effects are unlikely if the

diversion ratios between pairs of products brought

together by a merger are sufficiently low.

A merger may produce significant unilateral

effects even though a non-merging product is the

“closest” substitute for every merging product in

the sense that the largest diversion ratio for every

product of the merged firm is to a non-merging

firm’s product. The unilateral effects of a merger

of differentiated consumer products are largely

determined by the diversion ratios between pairs

of products combined by the merger, and the

diversion ratios between those products and the

products of non-merging firms have at most a

secondary effect.

In ascertaining the competitive relationships in

mergers involving differentiated products, the

Agencies look to both qualitative and quantitative

evidence bearing on the intensity or nature of

competition. The Agencies make use of any

available data that can shed light on diversion

ratios, and when possible estimate them using

statistical methods. Often, however, the available

data are insufficient for reliable estimation of the

diversion ratios. The absence of data suitable for

such estimation does not preclude a challenge to

a merger. The Agencies also rely on traditional

sources of evidence, including documentary and

testimonial evidence from market participants.

Even when the Agencies estimate diversion ratios,

documentary and testimonial evidence typically

are used to corroborate the estimates.

In many matters involving differentiated

consumer products, the Agencies have analyzed

price and quantity data generated at the point of

sale, particularly by scanners at supermarket

checkouts, to assess the likely effect of the merger

on prices.

Nestle–Dreyer’s (FTC 2003) Nestle Holdings,

Inc., proposed to merge with Dreyer’s Grand

Ice Cream, Inc. The firms were rivals in the

sale of “superpremium ice cream.” Compared

to premium and non-premium ice cream,

superpremium ice cream contains more

butterfat, less air, and more costly ingredients,

and sells at a substantially higher price. Nestle

sold the Haagen-Dazs brand in competition

with the Dreyer’s Dreamery, Godiva, and

Starbucks brands.

Together Nestle and

Dreyer’s accounted for about 55% of

superpremium ice cream sales, and Unilever,

through its Ben & Jerry’s brand, accounted for

nearly all of the rest. Commission staff

developed evidence showing that the merger

was likely to result in unilateral

anticompetitive effects, reflecting the close

rivalry between the merging firms. Dreyer’s

recently had expanded on a large scale into

superpremium ice cream production and

increased its share in this relatively mature

market to above 20%. Analysis suggested that,

by expanding, Dreyer’s induced increased

General Electric–Agfa NDT (FTC 2003)

General Electric Co. proposed to acquire Agfa

NDT Inc. from Agfa-Gevaert N.V. Through

their subsidiaries, the firms were the two

largest suppliers of ultrasonic non-destructive

testing (“NDT”) equipment in the United

States. NDT equipment is used to inspect the

structure and tolerance of materials without

damaging them or impairing their future

usefulness. Manufacturers and end users in a

variety of industries use ultrasonic NDT

equipment for quality control and safety

purposes. Unilateral concerns arose in three

relevant product markets: portable flaw

28

competition from incumbent superpremium

firms. Econometric analysis showed that the

diversion ratios between the Nestle and

Dreyer’s superpremium brands were sufficient

to make a significant unilateral price increase

by the merged firm likely. The diversion ratios

with Unilever’s superpremium brands also

were high. The analysis implied that the

merged firm would be likely to raise its prices

anticompetitively and that Unilever would also

likely raise its Ben & Jerry’s prices in the postmerger environment. The Commission entered

into a consent agreement with the merging

firms requiring divestiture of two brands and

key distribution assets.

the results suggested that Gold Medal and

Pillsbury were the closest substitutes in some

markets, while private label alternatives were

an equally close substitute in other markets.

Some regional brands also were found to be

relatively close substitutes for Gold Medal and

Pillsbury, while others were not. Commission

staff used the estimated elasticities to simulate

the expected price effect from the merger using

the Bertrand model. The results suggested that

the merging parties would raise their prices

more than 10% even in markets where private

label and regional brands were estimated to be

equally close substitutes for Gold Medal and

Pillsbury.

General Mills–Pillsbury (FTC 2001) General

Mills, Inc.’s proposed purchase of The

Pillsbury Co. from Diageo plc, involved the

sale of some of the most widely recognized

food products in the United States. Most of the

products involved in the transaction did not

raise antitrust concerns, but there were

overlaps of potential concern in a handful of

product lines, including flour. The Pillsbury

and General Mills (Gold Medal) brands were

the only two national flour brands, and after

the merger General Mills would account for

over half of total U.S. retail flour sales. Private

label sales comprised less than 25% of sales

nationwide, with the balance accounted for by

numerous regional firms. Evidence tended to

indicate that regional brands were not a

significant constraint on General Mills and

Pillsbury. The regional brands generally were

highly differentiated, specialty brands and

were not viewed as close substitutes for the

more commodity-like General Mills and

Pillsbury brands. The degree of constraint

provided by private label brands was mixed,

with some evidence suggesting that private

label brands were a significant constraint but

other evidence suggesting otherwise.

Commission staff also examined whether

pricing for flour varied across markets in

relation to the amount of competition from

private label or other brands. In particular,

staff compared prices in geographic markets

that were supplied predominantly by Gold

Medal and private label, with prices in markets

where Pillsbury or another brand was also

strong. The results indicated that Pillsbury

generally played an important role in

constraining Gold Medal prices. These results

were consistent with the elasticity results

discussed above, and both suggested that the

proposed merger would lead to price increases

for flour. The parties resolved the competitive

concerns in this market by selling Pillsbury’s

product line. No Commission action was

taken.

Kimberly-Clark–Scott (DOJ 1995) KimberlyClark Corp. and Scott Paper Co. were two of

the nation’s leading producers of consumer

paper products when they announced their

intention to merge. In facial tissue, KimberlyClark and Scott, together with Procter &

Gamble, accounted for nearly 90% of all sales,

and Kimberly-Clark’s Kleenex brand itself

accounted for over half of sales. By estimating

the relevant demand elasticities using scanner

data, the Department determined that Scott’s

facial tissue products, which were “value”

products (sold at relatively low prices) and

accounted for only 7% of sales, imposed a

significant constraint on Kimberly-Clark’s

prices. Likewise, in baby wipes, in which

Kimberly-Clark and Scott’s brands together

accounted for approximately 56% of sales, the

Department’s analysis indicated that each was

Commission staff used scanner data to

estimate demand elasticities. Because the

strength of private label and regional flour

brands varied across geographic regions, staff

estimated elasticities for groups of markets

defined according to the presence of regional

brands. The cross-price elasticities between

Gold Medal and Pillsbury brands and between

these brands and private label and regional

brands differed across regions. For example,

29

accurately predicted pre-merger price-cost

margins. In addition, retailers marked up

every wholesale price by the same percentage,

so estimated retail-level demand elasticities

were the same as those at the wholesale level.

The Department concluded that the proposed

acquisition likely would result in significant

price increases for premium white pan bread

in five metropolitan areas. The Department’s

challenge to the proposed merger was settled

by a consent decree requiring divestiture of

brands and related assets in the five

metropolitan areas.

the other’s most significant competitive

constraint. Hence, the Department concluded

that acquiring Scott’s facial tissue and baby

wipes businesses likely would give KimberlyClark an incentive to increase prices

significantly for the merging brands. The

Department’s challenge to the proposed

merger was settled by a consent decree

requiring the divestiture of assets relating to

facial tissue and baby wipes.

Interstate Bakeries–Continental (DOJ 1995)

The Department undertook significant analysis

of scanner data in evaluating Interstate

Bakeries Corp.’s purchase of Continental

Baking Co. from Ralston Purina Co. At the

time, Continental, with its Wonder brand, was

the largest baker of fresh bread in the United

States, and Interstate was the third-largest.

The Department’s investigation focused on

white pan bread. White pan bread is the

primary sandwich and toasting bread in the

United States, and market participants viewed

it as a highly differentiated product. Price

differences were a clear indication of consumer

preference for premium brands over

supermarket private label brands; the price of

the premium brands was at least twice the

price of the private label products.

Econometric evidence confirmed that there

was only limited competitive interaction

between premium and private label brands.

Marketing, econometric, and other evidence

also indicated that there were significant

preferences among individual premium

brands.

The Department’s investigation

focused on five metropolitan areas (Chicago,

Milwaukee, Central Illinois, Los Angeles, and

San Diego) in which Continental and Interstate

had the two largest-selling premium brands, or

two of the three largest-selling brands.

The Agencies challenge only a tiny fraction of

proposed mergers. (In fiscal years 1999–2003, over

14,000 transactions were notified to the Agencies

under HSR; the Agencies collectively challenged

fewer than 200.) The following matters illustrate,

for differentiated consumer products, the sort of

evidence that has formed the basis of decisions not

to challenge particular transactions.

Fortune Brands–Allied Domecq (FTC 2005)

Fortune Brands, Inc., owner of the Knob Creek

brand of bourbon, proposed to acquire Allied

Domecq’s Maker’s Mark brand of bourbon.

Commission staff analyzed whether the

acquisition would create or enhance unilateral

market power for premium bourbon. Staff

analysis of information discovered in the

investigation suggested that several other large

whiskey brands, including bourbons,

competed strongly with Maker’s Mark and

with Knob Creek. Econometric analysis of

retail scanner pricing data indicated

substantial cross-price elasticities among the

several whiskey brands. Using these crossprice elasticities staff estimated the diversion

ratios involving Maker’s Mark and Knob

Creek. The results showed that, in the event of

a Maker’s Mark price increase, very few of the

sales lost would go to Knob Creek. The

analysis also found no support for the

proposition that Maker’s Mark would receive

a substantial proportion of the substitution

away from Knob Creek in the event of an

increase in the price of the latter. The staff

closed the investigation.

Econometric analysis determined that there

were substantial cross-elasticities of demand

between the Continental and Interstate brands

of white pan bread, consistent with a

likelihood of significant unilateral

anticompetitive effects following the merger.

The Department used the estimated cross

elasticities in a Bertrand merger simulation,

which predicted that the merger was likely to

result in price increases of 5–10% for those

brands. The Bertrand model was considered

reliable for several reasons, including that it

Maybelline–Cosmair (DOJ

1996)

The

Department investigated and decided not to

challenge the proposed merger of Maybelline,

30

cause a significant increase in lift-ticket prices

at the acquiring firm’s resorts.

The

Department therefore challenged the merger.

The merger simulation also indicated that

divestiture of Ralston’s Arapahoe Basin resort

would substantially prevent price increases,

and that remedy was implemented through a

consent decree.

Inc., a leading U.S. cosmetics company, and

Cosmair, Inc., the U.S. subsidiary of French

cosmetics giant L’Oreal S.A. Maybelline and

L’Oreal were leading brands, and both were

sold almost exclusively through mass-market

outlets. Although the merger involved many

products, the investigation focused largely on

mascara, in which Maybelline had the leading

share among brands sold through mass-market

outlets, and L’Oreal ranked third. They

combined to account for 52% of sales. Some

evidence suggested that the images associated

with the merging brands were quite different,

and demand estimation was employed to

determine whether there was substantial direct

competition between them.

Before challenging a merger involving

differentiated consumer products, the Agencies

consider the possibility of product repositioning

by non-merging firms in accord with section 2.212

of the Guidelines. Consideration of repositioning

closely parallels the consideration of entry,

discussed below, and also focuses on timeliness,

likelihood, and sufficiency. The Agencies rarely

find evidence that repositioning would be

sufficient to prevent or reverse what otherwise

would be significant anticompetitive unilateral

effects from a differentiated products merger.

Repositioning of a differentiated product entails

altering consumers’ perceptions instead of, or in

addition to, altering its physical properties. The

former can be difficult, especially with wellestablished brands, and expensive efforts at doing

so typically pose a significant risk of failure and

thus may not be undertaken.

As in many other investigations involving

differentiated consumer products, the

Department relied on weekly data generated

by scanners at the point of retail sale.

Estimated demand elasticities were used to

simulate the effects of the proposed merger

using the Bertrand model. The analysis

indicated that a significant anticompetitive

effect was not likely, and the Department

decided not to challenge the proposed merger.

Although the Agencies commonly use scanner

data in analyzing the likely competitive effects of

mergers involving differentiated products, such

data do not exist for many such products. When

scanner data do not exist, if feasible, it may be

useful to conduct a consumer survey.

Unilateral Effects Relating to Auctions

In some markets, buyers conduct formal

auctions to select suppliers and set prices. In such

markets, the Agencies account for the fact that

competition takes place through an auction. To an

extent, the effects of a merger may depend on the

specific auction format employed, and the

Agencies also account for the specific format of the

auction. The basic effects of mergers, however,

may be quite similar in different auction formats.

Vail Resorts–Ralston Resorts (DOJ 1997) Vail

Resorts, Inc. and Ralston Resorts, Inc. were the

two largest owner-operators of ski resorts in

Colorado. In 1996, Vail proposed to acquire

three ski areas operated by Ralston, which

would have given Vail control of five ski areas

in the “front range” area west of Denver,

accounting for 38–50% of front range skierdays. Relying in part on a survey of skiers, the

Department found that the Vail and Ralston

facilities were close, premium-quality

competitors and that skiers were likely to

switch from one to the other on the basis of

small changes in price, whereas consumers

were much less likely to switch to several other

resorts considered to be of lesser quality.

Procurement through an auction tends to be

simple for a homogeneous industrial product.

Cargill–Akzo Nobel (DOJ 1997) Cargill, Inc.

proposed to acquire the western hemisphere

salt-producing assets of Akzo Nobel, N.V.

Cargill and Akzo Nobel were two of only four

competitors engaged in the production of rock

salt used for de-icing purposes in an area of the

United States centered on the eastern portion

of Lake Erie, and de-icing salt was sold

primarily to government agencies through

formal sealed bid auctions. To gauge the likely

Bertrand merger simulation based on the

survey data suggested the merger likely would

31

substantial competitive pressure on Pitt-Des

Moines, and vice-versa. The companies closely

monitored each other’s activities, and

customers frequently were able to play one

firm against the other in order to obtain lower

prices. Although other firms sometimes were

awarded bids, the Commission found that

most pre-merger competition was between

Chicago Bridge and Pitt-Des Moines.

unilateral effect of the merger, the Department

conducted an econometric analysis of data on

winning bids in the area of interest and found

that bids had been significantly lower when

there were four bids than when there were

three. Partly on the strength of that evidence,

the Department challenged the merger on the

basis of a likely unilateral price increase, and

the case was settled by a consent decree

requiring divestitures.

The bidding evidence also showed that the

markets were not characterized by easy entry

and expansion and that Chicago Bridge and

Pitt-Des Moines would have continued to

dominate the competition for years. The

Commission considered specific instances of

bidding by entrants into the relevant markets

but concluded that these instances of bidding

did not demonstrate that the entrants would be

able to gain enough market share to affect

prices and provide sufficient competition to

replace the competition that was lost through

the merger. In most instances, entrants’ bids

were rejected because the entrants lacked

requisite reputation and experience.

To

remedy the transaction’s anticompetitive

effects, the Commission ordered Chicago

Bridge, among other things, to reorganize its

business into two stand-alone divisions, and

divest one of them.

Procurement using an auction is also observed

with more complex and customized products.

With customized products, arbitrage between

customers is likely to be infeasible, and the

Agencies have sometimes found that there was a

separate competition in each auction because

vendors tailored their prices and other terms to

the particular situation of each customer.

Chicago Bridge–Pitt-Des Moines (FTC 2005)

The Commission issued an administrative

ruling that the consummated acquisition by

Chicago Bridge & Iron Co. of certain assets

from Pitt-Des Moines, Inc., violated section 7 of

the Clayton Act and section 5 of the FTC Act.

The companies designed, engineered, and built

storage tanks for liquified natural gas (“LNG”),

liquified petroleum gas (“LPG”), and liquid

atmospheric gases such as nitrogen, oxygen,

and argon (“LIN/LOX”); they also designed,

engineered, and built thermal vacuum

chambers (“TVC”). It was uncontested that

each of these “field-erected” products was a

distinct relevant market. The Commission

found that, in all four markets, respondents

were each other’s closest pre-acquisition rival

and that together they largely had dominated

sales since 1990. Field-erected tanks for LNG,

LPG, and LIN/LOX, and TVCs are custommade to suit each purchaser’s needs, and

customers place great emphasis upon a

supplier’s reputation for quality and service.

Metso Oyj–Svedala (FTC 2001) In a merger

involving producers of rock-crushing

equipment, Metso Oyj proposed acquiring

Svedala Industri AB.

Rock-crushing

equipment is used in mining and aggregate

production to make small rocks out of big

rocks. Rock-crushing equipment includes cone

crushers, jaw crushers, primary gyratory

crushers, and grinding mills. Each of these

types of equipment was determined to be a

separate relevant product market. In some of

these markets, Metso and Svedala were the

largest and second largest competitors, and the

combined firm would have had a market share

many times higher than any other competitor.

Competition in these markets was analyzed in

an auction model.

Metso and Svedala

regularly bid against each other for rockcrushing equipment sales in each of the

relevant markets. By eliminating competition

between these two leading suppliers, the

proposed acquisition would have allowed

Metso to raise prices unilaterally for certain

For each of the relevant products,

customers generally seek competitive bids

from several suppliers. Customers in the tank

markets use a second round of bidding to

negotiate price, and sometimes inform bidders

of the existence of competition to reduce the

prices that are bid. TVC customers select one

bidder with which to negotiate a best and final

offer, or they negotiate such offers from

multiple bidders. Chicago Bridge exerted

32

areas within the United States. In these areas,

the combined firm would have accounted for

a share of all pager units in service from less

than 15% to over 80%. Because many paging

customers had switched to other technologies,

such as cellular or PCS telephony, the

Department focused on the customers least

likely to switch, notably many hospitals and

emergency “first responders.”

bids and to reduce innovation.

The

Commission resolved the competitive concerns

by requiring divestitures in the relevant

markets of concern.

Ingersoll-Dresser–Flowserve (DOJ 2001)

Flowserve Corp. proposed to acquire IngersollDresser Pump Co. These companies were two

of the largest U.S. manufacturers of

specialized, highly engineered pumps used in

oil refining (“API 610 pumps”) and electrical

generation facilities (“power plant pumps”),

and only two other suppliers competed to sell

these pumps in the United States. These

pumps are procured through formal sealed-bid

auctions and then manufactured to meet the

buyers’ specifications. The Department found

that each of these auctions was an entirely

separate competition, and therefore each

constituted a distinct relevant market. The

Department also found that there were only

four competitors in these markets and

concluded that the merger likely would cause

the remaining competitors unilaterally to

increase their bids significantly.

Each

competitor would realize that eliminating a

bidder in these auctions would increase the

probability of winning the auction associated

with any given bid.

The Department’s

challenge to the acquisition was settled by a

consent decree requiring divestiture of

Flowserve brands as well as manufacturing

and repair facilities.

The Department observed that the

competition at any one hospital was separate

from the competition at any other, and that

each hospital paid a price determined by that

hospital’s particular needs and the local rivalry

among alternative technologies.

This

suggested that competition was best analyzed

as an oral auction. The Department ultimately

concluded that the merger likely would not

substantially lessen competition primarily

because most customers have sufficient

alternatives to Arch and Metrocall. These

alternatives included other paging providers,

self-provision of paging services, and emerging

technologies, such as wireless local area

networks. Although some customers may not

have sufficient alternatives, the Department

concluded that service providers competing for

their business would not be able to identify

such customers and therefore likely would act

as if they faced substantial competition.

Quest Diagnostics–Unilab (FTC 2003) Quest

Diagnostics, Inc. and Unilab Corp. were the

two leading providers of clinical laboratory

testing services to physician groups in

Northern California, with a combined market

share of approximately 70% (the next largest

competitor had approximately 4%). Delivery

of health care in California was distinguished

by high penetration by managed care

organizations, which often delegated the

financial risk for providing health care services

to physician groups. Independent physician

associations (“IPAs”) in Northern California

that assumed the financial risk for laboratory

services, generally under a capitated

arrangement, constituted a significant category

of purchasers of laboratory services. IPA

arrangements with the laboratories typically

consisted of exclusive or semi-exclusive

contracts, pursuant to which the physician

group paid the laboratory a set amount per

month for each patient affiliated with the pre­

The procurement process for many complex

products tends to be rather involved, and

competition may occur in several distinct stages

with extensive discussions between buyer and

seller at such stages. The Agencies have often

found that such competition could be understood

in terms of an auction model with the

procurement process working much like multiple

rounds of bidding in an oral auction.

Arch Wireless–Metrocall (DOJ 2004) The

Department investigated and decided not to

challenge the proposed acquisition of Metrocall

Holdings, Inc. by Arch Wireless, Inc. The two

firms were the two largest providers of paging

services in the United States. The Department

focused on possible unilateral anticompetitive

effects in the sale of one-way paging services to

businesses in many individual metropolitan

33

The firms’ software offerings were

differentiated in their respective capabilities

and in how well they met customers’ needs

and equipment.

Evidence showed that

AspenTech and Hyprotech were the two

closest competitors on price and on innovation

in each of the markets. Evidence also showed

that, prior to the merger, AspenTech and

Hyprotech discounted prices to win or

maintain customers, and that, due to the

merger, customers would no longer be able to

obtain a lower price from AspenTech by

threatening to switch to Hyprotech. The third

firm in the market was declining and

represented a less credible threat for customers

to use in price negotiations. This suggested

that competition was best analyzed in a

bargaining framework. Staff concluded that

the transaction would have allowed

AspenTech to profit by unilaterally raising

prices and reducing innovation because a

significant portion of the sales that may

otherwise have been lost to the other merging

partner as a consequence of such actions would

be retained because of the acquisition. The

Commission resolved these competitive

concerns by issuing a consent order requiring

divestiture of certain process engineering

simulation software assets.

paid health plans.

An auction model best represented

competition for these capitated contracts with

the IPAs. Quest and Unilab were the first- and

second-lowest bidders for a substantial portion

of these contracts, and thus the merger was

likely to cause prices to rise to the constraining

level of the next-lowest-price seller. The

Commission resolved by consent agreement its

concern that the merger was likely to result in

anticompetitive effects.

Pursuant to the

consent agreement, the Commission ordered,

among other things, that the merged firm

divest assets used to provide clinical laboratory

testing services to physician groups in

Northern California.

Unilateral Effects

Relating to Bargaining

In some markets, individual sellers negotiate

with individual buyers on a transaction-by­

transaction basis to determine prices and other

terms of trade. The merger of competing sellers

in such markets may enhance the ability of the

combined seller to bargain for a more favorable

result. That may be most apt to occur if, before the

merger, the buyer viewed a bargain with either of

the two merging parties as significantly better

than a bargain with any other seller. In that event,

the merger could cause the buyer to be willing to

accept worse terms from the merged seller rather

than to strike no bargain at all. That willingness

normally would cause a bargain to be struck on

terms less favorable for the buyer.

The Agencies have used bargaining theory to

analyze the effects of hospital mergers on the

prices they charge managed care organizations

(“MCOs”). MCOs market health care plans in

which subscribers’ health care costs are, in whole

or in part, paid for directly by the plan or

reimbursed after being paid by the subscriber.

MCOs negotiate with health care providers,

especially hospitals, the charges they or their

subscribers pay. A subscriber’s out-of-pocket

costs of using a particular hospital depends

significantly on whether that subscriber’s plan has

contracted with that hospital and on what terms.

Aspen Technology–Hyprotech (FTC 2004) The

Commission challenged the consummated

acquisition by Aspen Technology, Inc. of

Hyprotech, Ltd. Prior to the acquisition, they

were two of the three significant vendors of

process engineering simulation software. This

software is used in the petroleum, chemical,

and pharmaceutical industries to design new,

and model existing, processes to produce

intermediate and finished products. The

combined firm accounted for between 67% and

82% of various process engineering simulation

software markets, and a single other firm made

virtually all other sales. The Commission’s

complaint alleged that the transaction may

have allowed AspenTech unilaterally to

exercise market power in seven global markets.

To market a plan successfully in a given area,

an MCO seeks to contract on favorable terms with

a wide array of hospitals so that the hospitals

preferred by many potential subscribers are

available to them on favorable terms. Subscribers

are attracted to a plan by the ability to get care

from providers they prefer on favorable terms

resulting from the MCO having negotiated

discounts off the providers’ usual rates. The

34

NorthShore Regional as network participants,

and that a nearby small surgical hospital and

cardiac specialty hospital were inadequate

substitutes because they were not full-service

hospitals.

strength of a hospital’s bargaining position with

respect to MCOs is determined in large part by the

proximity of other hospitals offering a similar or

broader package of services with a similar or

higher perceived quality. For example, close

head-to-head competition between two hospitals

allows an MCO credibly to threaten both that it

will contract with, and steer its patients to, only

the other. The elimination of such competition

through a merger, therefore, can enable the

hospitals to negotiate higher prices.

If Tenet purchased Slidell Memorial, health

insurance companies would face the choice

either of meeting Tenet’s price terms, or,

alternatively, excluding both NorthShore

Regional and Slidell Memorial from their

provider networks. The latter action would

likely make the health plan far less marketable,

particularly to employers and their employees

who desire access to a Slidell hospital. In

addition, a health plan that did not include

these hospitals could offer services only from

physicians willing and able to treat the plan’s

patients at hospitals located outside of Slidell.

Information received from local employers,

residents, and health insurance plans

suggested to Commission staff that health

insurance companies would be unlikely to risk

losing NorthShore Regional, Slidell Memorial,

and the physician base of the hospitals, and

instead likely would agree to a price increase.

Commission staff set forth its competition

analysis in public comments to the Louisiana

Attorney General, subsequent to which local

citizens, prior to conclusion of the

Commission’s investigation, voted to reject the

proposed acquisition. The deal was never

consummated.

Carilion–Centra (FTC 2005) The Commission

investigated a consummated joint venture

between Carilion Health System, the largest

hospital system in southwest Virginia, and

Centra Health, Inc.

Carilion owns and

operates two large hospitals in Roanoke,

Virginia, while Centra owns two hospitals in

Lynchburg, Virginia. Prior to the transaction,

Carilion also was the sole owner of a small

community hospital located in Bedford

County, halfway between Roanoke and

Lynchburg, about 30 miles from each city. In

connection with the joint venture transaction,

Carilion sold half of its interest in Bedford to

Centra, so that the two hospital systems each

had a 50% interest in the Bedford facility.

The joint venture partners, Carilion and

Centra, were the two largest hospital

competitors in the Bedford area prior to the

joint venture. Staff examined whether the joint

venture would result in an increase in prices in

Bedford County as a result of reduced

competition between Carilion and Centra to

attract Bedford area patients. Staff found that,

after the creation of the joint venture, the

Bedford hospital negotiated its prices

separately from the Carilion or Centra systems

and that Bedford prices either declined

substantially or remained roughly the same.

Staff closed the investigation.

Rite Aid–Revco (FTC 1996) The nation’s two

largest retail drug store chains, Rite Aid Corp.

and Revco D.S., Inc., sought to merge. The

firms competed with each other in many local

markets, including in 15 metropolitan areas in

which the merged firm would have had more

than 35% of the retail pharmacies.

Commission staff analyzed the merger’s effect

on retail sales made through pharmacy benefit

plans. Pharmacy benefit managers (“PBMs”)

contract with multiple pharmacy firms to form

networks offering pharmacy benefits as part of

health insurance coverage.

Pharmacy

networks often include a high percentage of

local pharmacies because access to many

participating pharmacies is often important to

plan enrollees.

Slidell Memorial–Tenet (FTC 2003) Tenet

Health Care Systems, which operated

NorthShore Regional Medical Center in Slidell,

Louisiana, proposed to acquire Slidell

Memorial Hospital. The transaction would

have combined the only full-service acute care

hospitals in Slidell. Evidence suggested to

Commission staff that Slidell residents and

their employers demanded health insurance

plans that included either Slidell Memorial or

Rite Aid and Revco each offered a

significant portion of the broad local coverage

35

that payers demanded on behalf of their

enrollees. Marketable networks could be

assembled with just one of the firms

participating.

After the merger, a high

proportion of plan enrollees would have

considered the merged entity to be their most

preferred pharmacy chain, leaving PBMs with

less attractive options for assembling networks

that did not include the merged firm. The

merged firm as a result unilaterally could have

demanded higher dispensing fees as a

condition of participating in a network. The

Commission voted to challenge the transaction,

after which the parties abandoned it.

Mergers can create or enhance market power

on the part of buyers as well as on the part of

sellers. The Agencies, therefore, consider the

possibility that a merger would produce a

significant anticompetitive effect by eliminating

competition between the merging firms in a

relevant market in which they compete for an

input. By eliminating an important alternative for

input suppliers, a merger can lessen competition

for an input significantly.

Aetna–Prudential (DOJ 1999) Aetna, Inc.

proposed to acquire assets relating to health

insurance from The Prudential Insurance Co.

of America. The acquisition would have

eliminated head-to-head competition between

Aetna and Prudential in the sale of health

maintenance organization (“HMO”) and

HMO-based point-of-service health plans in

Dallas and Houston.

The Department

challenged the proposed acquisition on the

basis of likely anticompetitive effects in the

purchase of physicians services for these two

types of health plans and on the basis of likely

anticompetitive effects in the sale of those

plans. The Department concluded that the

propo

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