The Merger Incipiency Doctrine and the Importance of ‘Redundant’ Competitors

Posted by Social Science Research Network

The Merger Incipiency Doctrine and the Importance of ‘Redundant’ Competitors

By Peter Carstensen (University of Wisconsin Law School) & Robert H. Lande (University of Baltimore)

The enforcers and the courts have not implemented the merger incipiency doctrine in the vigorous manner Congress intended. We believe one important reason for this failure is that, until now, the logic underlying this doctrine has never been explained. The purpose of this article is to demonstrate that markets’ need for “protective redundancy” explains the incipiency policy. We are writing this article in the hope that this will cause the enforcers and courts to implement significantly more stringent merger enforcement.

To vastly oversimplify, the current enforcement approach assumes that if N significant competitors are necessary for competition, N-1 competitors could well be anticompetitive, but blocking an N-1 merger would not confer any gains. Because many enforcers and judges erroneously assume that mergers among major competitors usually result in significant gains to efficiency and innovation, they believe that blocking mergers to the N-1 level would impose significant costs on the economy.

Why should enforcement preserve apparent “redundancy”? First, the relationship between concentration and competition, and between concentration and innovation, is uncertain. Underestimating the minimum necessary number of firms needed for competition and for innovation is likely to result in harm to consumer welfare. Second, one or more of the N firms frequently can wither or implode as a result of normal competition, or from an unexpected shock to the market, often surprisingly quickly. This leaves only N-1 or N-2 remaining significant competitors. Finally, when enforcers challenge a merger that would have resulted in N-1 competitors, they often allow the merger subject to complex remedies. But if the remedy fails, as they often do, the market will have too few competitors by the enforcers’ own estimate. Taken together these scenarios often leave markets with too few firms.

The attenuation of the incipiency doctrine has allowed many mergers that have resulted in higher prices and lower levels of innovation. This has been shown by recent empirical work evaluating the consequences of major mergers. Moreover, other empirical work shows that significant mergers rarely produce significant efficiency gains and often result in losses to innovation.

A revitalized incipiency doctrine would retain the “protective redundancy” that would preserve competition, while sacrificing little or nothing in terms of efficiency or innovation. The enforcers and the courts should implement this policy much more aggressively.

Continue Reading…