Emergence and erosion of the structural paradigm

Structural paradigm (SCP): show concentration, win the case (structure, conduct, performance)

(1) Market structure: Concentration of sellers, entry conditions, product differentiation, vertical integration

(2) Firm conduct: Pricing, advertising, investment, product variety, R&D

(3) Market performance: firm profits, consumer surplus, efficiency

• Erosion of the SCP paradigm:
• Chicago school: emphasis on efficiency (benefits to scale), entry, and factors that frustrate tacit collusion in an oligopoly (it’s hard to hold an oligopoly together)
• General concern that Du Pont and Brown Shoe gave judges too much discretion and didn’t ground opinions in a clear structure, led to a lot of variation in decisions among courts

1982 Merger Guidelines: Factors that would rebut the structural presumption

Current status: the structural presumption still plays an important role in P’s prima facie case, but the case really hinges on whether anticompetitive effects are likely (is there a loss to head-to-head competition)

Caselaw

• Emergence of the structural paradigm: show concentration, win the prima facie case

Brown Shoe v. United States (U.S. 1962) (grab bag of factors for P’s prima facie case)

Holding: merger between B and K was unlawful

• Key quote: “it is competition, not competitors, which the Act protects.”
  • But Congress wanted to promote competition by protecting small business (favored decentralization despite potentially higher costs and prices that might result from fragmented industries)
• Clayton Act implies mergers should be halted in their incipiency (even if they lead to lower prices due to efficiencies) if they:
  • Are part of a national trend
  • Involve industry leaders though the final concentration and increase in concentration is not that large
• Factors the court considers to evaluate anticompetitive effects of merger:
  • (1) Tendency toward concentration in the industry (regardless of reasons why)
  • (2) Aggregate effect of pressure to approve mergers of this size is to increase concentration
  • (3) Even a small share controlled by a large chain can adversely affect competition
    • Prof. Note: protecting competition included protecting small businesses, which is not as relevant today
  • (4) Manufacturer and retailer that are integrated can result in lower prices that harm small businesses
    • Prof. Note: law has moved away from favoring workers/small businesses to favoring transaction partners, like consumers

Facts: manufacturer and retailer of shoes, Brown (B), merges with another manufacturer and retailer, Kinney (K). B is the 4th largest shoe manufacturer and 3rd largest retailer with 4% of U.S. production and 6% of wholesale shoe sales. K is the 12th largest manufacturer and 8th largest retailer with 0.5% U.S. production and 1.2% sales. B and K merged.

Prof. Note:

• The key quote is often taken out of context – this case protects a competitor
  • This view – stricter merger enforcement to protect small businesses – would be replaced over time
• Today, would adjust market to include online sales
• Major administrability issue with court’s approach: there are too many mergers around the size of the merger in Brown Shoe, choosing to focus on this one instead of the many others feels arbitrary and contrary to the rule of law (only becoming more salient)

U.S. v. Philadelphia National Bank (U.S. 1963) (prima facie case for mergers)

Holding: merger illegal under § 7 of the Clayton Act

• Probable effects of merger (policy): ultimate question is whether the effect of a merger “may be substantially to lessen competition” in the relevant market
  • This prediction requires an understanding of the structure of the market
  • Businesses must also be able to assess the legal consequences of a merger
  • Therefore, courts should simplify the test of illegality in the interest of sound and practical judicial administration
  • Congress’s Amendments to the Clayton Act in 1950 “warrants dispensing” in some cases with “elaborate proof” of market structure, behavior, or probable anticompetitive effects (sounds like per se)
• Probable effects of merger (test): a merger that
  • (1) Produces firm controlling “undue percentage” of relevant market and
  • (2) Results in “significant increase” to concentration in market
  • Is so “inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects”
• Court applies test to P’s prima facie case:
  • Undue percentage: combined share of 30% is enough to be undue
  • Significant increase: increase from 44% to 55% of the market is significant
• Court addresses PNB’s defenses:
  • Bank officer testimony that competition was vigorous: not credited, self-interested testimony
  • Follow customers to suburbs: just open a branch in the suburbs, a merger isn’t necessary
  • Compete with out of state banks: there are always out of state competitors, would justify basically any merger (Prof. Note: this would get more of a hearing today)
  • Stimulate economic development in Philadelphia: Court not in position to determine if this is true

Facts: 2nd largest bank in Philadelphia metro area (Philadelphia National Bank) to merge with 3rd largest bank (Girard). Together, would control 36% of bank assets, 36% of deposits, and 34% of bank loans in the Philadelphia metro area. Since 1950, PNB had acquired 9 formerly independent banks and G had acquired 6.

Prof. Note: case establishes a doctrinal test for mergers under Section 7 of the Clayton Act

• Case is the court’s attempt to take an area of law that is subject to judicial discretion and make a grounding framework
• Still good law:
  • The prima facie showing (undue percentage + significant increase)
  • Prima facie case shifts burden to D to demonstrate that the merger is unlikely to harm competition
• Not good law: rebuttal standard of proof (“clear evidence”) does not survive

U.S. v. Von’s Grocery (U.S. 1966)

Holding: merger violated § 7

Dissent: there was neither “undue percentage” nor “significant increase” under Philadelphia Bank

• Decline in single-store owners a result of social and technological change
• Sole consistency in litigation under S7 is that the government always wins

Facts: Merger of two grocery stores created a retail grocery chain in LA with 7.5% of the market (by sales). Ther was a nation-wide industry trend toward concentration in retail grocery.

Erosion of the structural paradigm

U.S. v. General Dynamics (U.S. 1974) (alternative measures of market share)

Holding: merger permitted

• Distinguished prior cases:
  • PNB: government evidence would support finding of “undue concentration,” but the question is whether “other pertinent factors” mandate a conclusion that no substantial lessening of competition occurred
  • Brown Shoe: market shares are not “conclusive indicators of anticompetitive effect”
• Relationship between past (annual) coal sales and competitive conditions:
  • Long-term contracts: seller has already committed reserves to a seller and better reflect sales made years ago, not the current competitive prospects of the company
  • Uncommitted reserves: if one of the companies doesn’t have reserves, then it isn’t a viable competitor, the merger won’t result in a reduction in competition

Facts: Merger of 2 coal manufacturers. From 1957-67, the share of coal sales of the top 4 firms went from 43% to 53% (geographic market of the Eastern Interior Coal Province).

Prof. Note: case can be read narrowly or broadly

• Narrow: correct market definition in coal is capacity, not sales
• Broad (this is how courts read the opinion, see Baker Hughes): shows that D can rebut P’s prima facie case when the prima facie case doesn’t accurately predict likely anticompetitive effects

U.S. v. Baker Hughes (D.C. Cir. 1990) (clear prima facie case rebutted by D)

Holding: D successfully rebutted P’s prima facie case under § 7, merger upheld

• Court rejects government’s proposed standard: D must make a “clear showing that entry into the market by competitors would be quick and effective”
  • Showing that entry is more likely, under a preponderance standard, is enough
• Defines rebuttal standard for D (General Dynamics): D must show that the
  • Prima facie case inaccurately predicts the relevant transaction’s probable effect on future competition
  • The more compelling the prima facie case, the more evidence the D must present to rebut it successfully (sliding scale)
  • A D can make the required showing by affirmatively showing why a given transaction is unlikely to substantially lessen competition, or by discrediting the data underlying the initial presumption in the government’s favor
• Court applies the test:
  • Market shares over time: market share are high, but they’re volatile over time (indicates healthy competition over time in a market with few sales, ~50, each year)
  • Fact of high concentration: each year, a company captures a large share of sales, yet competition doesn’t appear to be damaged (prices don’t appear anticompetitive)
  • Sophisticated customers: customers get bids from all manufacturers before making a purchase, which encourages price competition
  • Entry/expansion: companies have entered the U.S. market and expanded from small shares
• Thus, the prima facie case does not predict any anticompetitive effects
• P offered no additional facts, so D wins

Facts: manufacturer of hydraulic underground drilling rigs (HHUDR) propose merger, with Tamrock to acquire Secoma (Baker Hughes). From 1986-1988, T had an average of 40.8% of U.S. HHUDR sales and Secoma averaged 17.5%. Their combined share in 1988 was 76% of the market.

Prof. Note: case establishes a standard for D’s rebuttal evidence and provides an example of successful rebuttal even with high market shares and a substantial increase in concentration (P’s prima facie case is incorrect OR doesn’t reflect the anticompetitive circumstances here)

• Case signifies shift away from Brown Shoe’s protection of small firms and to economic theory

FTC v. Heinz (D.C. Cir. 2001) (structural presumption still there; reputation as a barrier to entry)

Holding: injunction stopping merger granted

• Section 13(b) provides for grant of preliminary injunction where such an action would be in the public interest (weigh equities and likelihood of success on the merits)
  • Standard for likelihood on the merits: FTC has raised questions going to the merits so “serious, substantial, difficult, and doubtful” as to make them fair ground for thorough investigation at trial (lower standard than preponderance of evidence at trial)
  • Prof. Note: in practice, courts probably hold the FTC to a somewhat higher standard, but not higher than preponderance of the evidence
• P made out a prima facie case: undue post-merger concentration and significant increase in concentration (merger of #2 and #3) in the U.S. baby food market
  • Loss of competition at the wholesale level: wholesalers always offer all three products to retailers, reducing that to 2 products reduces competition
  • High barriers to entry: G’s reputation as a reliable, quality brand makes it difficult for other brands to gain the trust of parents and break into the market
• D’s rebuttal was inadequate:
  • H and BN don’t really compete at the retail level: not credited because of wholesale competition
  • Efficiencies from merger will enable competition with G (credited)
  • Merger will enable H to innovate (somewhat credited)
• Likelihood of post-merger collusion: lower court erred by finding that “cartel problems are greater” (i.e., cartel coordination is more difficult) in the baby food industry than others

Facts: Baby food market is dominated by Gerber (65%), Heinz (17.4%), and Beech-Nut (15.4%). H and BN enter a merger agreement. G and BN are premium brands and H is a value brand. FTC seeks a preliminary injunction (Section 13(b) of FTC Act) and the District Court denies it.

Prof. Note:

• The structural presumption can still operate when:
  • The P’s prima facie case shows a substantial increase in concentration starting from a high level; AND
  • There are high barriers to entry; AND
  • The D is unable to show that collusion is more difficult in the merger industry than in other industries
• Distinguishing Baker Hughes: many aspects of the HHUDR market sets it apart from baby food (e.g., sophisticated buyers, low sales, etc.)
• Unclear if this is an easy case: D’s argument that it needs to combine to compete with G has merit