Coordinated competitive effects

Coordinated competitive effects: merger facilitates collusion by the remaining firms in the market (post-merger market will be conducive to coordination)

• This is the typical type of anticompetitive harm in merger cases

2023 Merger Guidelines:

Guideline 3 (coordinated effects): mergers can violate the law when they increase the risk of coordination

Particularly vulnerable markets: market that is highly concentrated OR has seen prior anticompetitive coordination – Agencies will infer, subject to D’s rebuttal, that the merger “may substantially lessen competition”

In a market that is not highly concentrated, the Agencies investigate whether facts suggest a greater risk of coordination than market structure alone would suggest

Coordination among rivals lessens competition whether it occurs explicitly or tacitly

• Motivating theory of merger law: Agencies vigorously enforce Section 7 of Clayton Act because tacit coordination often cannot be addressed under Section 1 (or 2) of the Sherman Act (no CCC/ROT with tacit coordination/oligopolist behavior)

Primary factors:

Highly concentrated market

Prior actual or attempted attempts to coordinate

Elimination of a maverick: play important role in disciplining the market

• Secondary factors: when is coordinated conduct likely to take place?

Market concentration

Market observability

Competitive responses

Aligned incentives

Profitability or other advantages from coordination

Rebuttal based on structural barriers

• Relevant factors are very similar to what was relevant under Section 1:
• Facilitating factors are analogous to Type 2 factors used to infer agreement under S1 – the FTC’s classification of primary and secondary factors provides a general hierarchy of Type 2 factors (in the eyes of the agencies)
• Interaction between S1 (agreements) and C7 (mergers):

(1) S1 can’t police oligopolistic conduct (parallel conduct often does not involve an agreement). Because of this, C7 is used to prevent mergers in their incipiency that appear likely to lead to parallel conduct.

(2) Competitors that want to make an agreement must find alternatives shaped by S1 and C7:

• (a) Joint venture: competitors can convince agencies that their joint venture is procompetitive
• (b) Merge: agreements between members of the same firm are not illegal, so S1 doesn’t apply – agencies and courts can address the behavior using C7

(3) Under C7, enforcers are more concerned with market structures with facilitating attributes

• Mavericks: firm that constrains effective collusion between other firms

Disciplines price of rivals by (1) lower price/raising output and (2) refusing to follow price rises

(1) If the merger involves a maverick:

• Mavericks as a sword for P: P can argue that the merger eliminates a vigorous competitor from the market (HRB)
• Mavericks as a shield for D: D can argue that the merger will make the company that merged with the maverick more aggressive than before (Heinz)

(2) If the merger doesn’t involve a maverick:

• D: merger could create a maverick
• D: other maverick’s that aren’t part of the transaction will continue to discipline the market, preventing the merger from being anticompetitive
• P: merger will prevent a firm from being a maverick by excluding them from distribution or supply
• Lessons from cartel enforcement: gives an idea of what companies would like to do but can’t because of the law (or may attempt to do informally)

Cartels can involve many firms

Many effective cartels are not detected

Shareholder governance isn’t guaranteed to shine a light on cartel behavior

There can be cartel behavior even if there is a fair amount of entry

Caselaw

Hospital Corp. of America v. FTC (7th Cir. 1986) (facilitating and frustrating factors in a merger case)

Holding: merger violated Clayton Act S7

• Market definition: hospitals compete with other hospitals, not difficult here
  • Here, HHI calculations would satisfy the prima facie case
• Court turns to the question of whether the merger would lead to anticompetitive effects (here, coordinated effects)
• Court identified factors that might facilitate collusion in the post-merger market:
  • Regulation: the state requires hospitals to file a certificate to show that a hospital is needed in the area, which is a barrier to entry
    • Under an oligopoly, facilities might be used less (more empty beds) because of higher prices, which the regulation misinterprets as there not being need in the area
  • Tradition of cooperation: management companies govern multiple hospitals (like if Ford appointed the manager of GM)
  • Elasticity of demand: in the short run, people get healthcare through insurance and are not price sensitive (inelastic demand)
• D identified factors that might frustrate collusion in the post-merger market:
  • Services: hospital services are complex and heterogeneous (hundreds of different services)
    • Court says this is a bad argument, both sides of the market (hospitals and insurers) understand the market and behave with the behavior of other firms in mind
  • Composition of sellers: sellers are heterogeneous (some hospitals are non-profits)
    • Court: nonprofit status has no bearing on antitrust liability
    • Prof.: non-profit hospitals do tend to behave differently (attract doctors less motivated by profit, offer less profitable services that for-profit hospitals cut) – some tend to be mavericks, which could help D’s case
  • Technological change: industry is undergoing rapid technological and economic change
    • Court: this could go either way, so it doesn’t help D (offers an incentive to collude to avoid disruption of changes)
  • Buyers are large and sophisticated
  • Competitor complaint: FTC investigation was triggered by a competitor complaint
    • Court: only reason a competitor should file a complaint is to avoid exclusion, but that’s not the alleged harm here (concerned about coordinated effect)
• These factors were not substantial enough to overturn the prima facie case of concentration and likelihood of harm

Facts: Acquisition of two large hospitals in Chattanooga area by HCA. Acquisition raises HCA’s share from 14% to 26%. Raises C4 from 79% to 91% and reduces the number of firms from 11 to 7.

Prof. Note:

• D may have had a better chance in front of a different ALJ or district court (outcome was strongly affected by the posture of the case)
• Court says demand curve is inelastic for individuals, but this is wrong: economics shows that when prices increase, people forgo the most important care
• Unclear if other judges would block this merger: they might look through the other factors (especially potential additional services enabled by the merger) and let it through

U.S. v. H&R Block (D.D.C. 2011)

Holding:

• P made a prima facie case, so the burden is on D to show that structural barriers to collusion specific to this industry defeat the ordinary presumption of collusion in a highly concentrated market (Heinz)
  • Here, the court applied the hypothetical monopolist test, so the presumption against D is stronger than it would be otherwise
• Arguments with respect to likelihood of collusion:
  • P:
    • Race to free: all of the parties are concerned about the race to free, and TA is the leader in offering free services, so the merger will make it easier for TT and HRB to coordinate and stop TA’s efforts
    • Past cooperation: firms have cooperated when it is in their interest (e.g., IRS program that allowed all three firms talk to each other without violating antitrust law led to a suppression of free services being offered)
      • Prof.: this is damning evidence – when they had a chance to collude, they did
    • Eliminating TA: TA is a maverick that disciplines the market
  • D:
    • TT incentives: TT doesn’t have incentive to not compete aggressively (TT’s own documents suggest the merger will intensify competition)
    • Differentiated product/low price transparency: the products are so complex that prices can’t be determined, so coordination would be very difficult
      • Court: ignores this
    • Maverick: by acquiring TA, HRB can become more of a maverick that can challenge TT (like Heinz)
  • Court: this does not rebut the presumption of anticompetitive effects, there is no argument that the industry is fundamentally different in a way that undermines P’s PF case

Facts: same as before – HRB proposes merger with TA in DDIY tax software market.