This paper, which can be found here, deals with the ‘structural presumption’ for merger control set out in US law by the Philadelphia National Bank case in 1963. In this case, the Supreme Court stated: “That ‘competition is likely to be greatest when there are many sellers, none of which has any significant market share,’ is common ground among most economists, and was undoubtedly a premise of congressional reasoning about the antimerger statute.’ The Supreme Court held that a merger producing a firm that controls an “undue percentage share” of the market and that “results in a significant increase in the concentration of firms in that market” is “inherently likely to lessen competition substantially.” As a result, the merger should be prohibited, at least “in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects”
The merging parties can then rebut this structural presumption by showing that the market shares do not accurately predict competitive effects. Most generally, merging parties do this by showing that the proposed market is poorly defined, that market shares exaggerate the merger’s anticompetitive potential, that entry into the market will discipline any price increase, or that the merger produces offsetting efficiencies sufficient to keep prices at premerger levels or otherwise offset the anticompetitive effects.
The goal of the article is to defend ‘the structural presumption for very practical reasons, notwithstanding difficulties associated with defining the relevant market, as well as certain valid criticisms that have been made regarding market definition. Ultimately, we argue that market shares are often highly informative, despite the fact that one can only measure market shares after defining the relevant market, which can be messy. Plus, importantly, the structural presumption is rebuttable.’ The paper is structured as follows:
A first section describes the structural presumption and its underpinnings. While competition has been found to be compatible with large market concentration, the structural presumption is nonetheless said to be supported by two important economic ideas. The first one is that the loss of a significant competitor in a concentrated market is likely to lead to the creation or enhancement of market power. The second idea is that entry barriers in concentrated markets are often significant.
Both of these economic ideas have been challenged over the past half-century, most notably by the Chicago School. However, the authors think that the Chicago School’s position that ‘small firms are just as effective competitors as large firms, or that entry will typically and promptly occur in response to prices modestly above competitive levels’ lacks empirical support. Further, if those conditions do apply in particular markets, the structural presumption can be rebutted with industry-specific evidence.
A second section looks at how the structural presumption has been applied in the case law (in decisions such as General Dynamics, Baker Hughes and Heinz) and in the post-1992 U.S. Merger Guidelines. This section is very-US centric, so I’ll merely suggest that those most interested in the details of how the structural presumption is applied in practice have a look at it.
A third section looks at the relationship between market structure, competition and consumer welfare. It begins by pointing out that throughout most of antitrust’s history – and even for the creators of the SCP paradigm (i.e. Joe Bain) – market structure was merely a proxy for improved consumer welfare. The authors conclude that from this it follows that the goal of the structural presumption should be to operate as a proxy for situations which risk lowering consumer welfare.
A fourth section then advances a proposal to strengthen merger control enforcement which would ‘embrace the overall framework that the Supreme Court established in Philadelphia National Bank, updated to reflect the experience gained from merger enforcement and advances in industrial organization economics since that decision.’
The paper then concludes that: ‘The structural presumption – that a merger is anticompetitive if it leads to a significant increase in market concentration – has therefore proven essential to effective merger enforcement. In our view, this presumption is strongly supported by economic theory and evidence, and by the experience gained in merger enforcement over the past 50 years.’
Comment; This paper is rather straightforward – it seems to be concerned with political developments regarding merger control, and with defending the status quo. I think it is particularly interesting for those familiar but not intimate with US merger control, for whom the idea that the law creates a presumption that a merger that significantly increases market concentration can be prohibited may come as a bit of a surprise. It is also another example of how, in accusatorial systems, economic analysis tends to framed as matters of burden and standard of proof (whereas in administrative systems they are very often framed in terms of intensity of judicial review).