This paper, available here, argues that, not only does the current consensus favour structural over behavioural remedies, but that the reasons supporting such a trend are stronger than we may have anticipated. Behavioural remedies may be even more complex and raise more complicated economic issues than has been previously appreciated. As such, competition agencies would do well to approach behavioural remedies with great care.

The paper begins by outlining the consensus on merger remedies.

There is by now a substantial literature examining US and EU experience in imposing merger remedies. A number of “lessons” seem to have become broadly accepted in recent years: (i) structural remedies are generally to be preferred over behavioural remedies; (ii) structural remedies should where possible include the divestiture of complete existing “business units”; (iii) structural remedies may sometimes need to be supported by behavioural measures, if only as a transition mechanism; (iv) the merging firms have clear incentives to seek buyers and/or to package assets in such a way as to create a weak competitor going forward, so agencies must take care to ensure that buyers have both the experience and the financial capability to manage the divested assets successfully, as well as ensuring that the assets are not allowed (or encouraged) to deteriorate in quality during the process of negotiation and divestiture.

The paper then distinguishes between structural and behavioural remedies.

Structural remedies – the divestiture of particular assets of one or (less often) both of the merging parties – are generally favoured because they rely on the profit-maximising incentives of the firms in the post-merger market to maintain competition. Behavioural remedies – also called “conduct remedies” – on the other hand, seek to force the merged firm to behave in ways that it may not find profit-maximising: most often, they force the merged firm to supply a particular good or provide access to a particular asset to competitors, when its profits might be higher if it could decline to do so.

Behavioural remedies have been sought and accepted by the U.S. (and EU) enforcement agencies in settings where it was accepted that the merger entailed overall benefits, but structural remedies would significantly lessen or destroy those benefits. This has been the case predominantly with proposed vertical mergers, as well as with proposed horizontal mergers in markets where intellectual property is a central concern.

Having done this, the paper identifies the limitations of behavioural remedies.

Behavioural remedies generally require continued monitoring of the behaviour of the merged firm by an agency and/or a court – an activity that neither agencies nor courts are generally well equipped to perform. Furthermore, merging firms are likely to recognise the limits of the monitoring abilities of agencies and courts, and propose and/or to agree to particular remedial arrangements that exploit such limitations accordingly.

One limitation that parties can explore is ambiguities in the wording of behavioural remedies. Consider the typical behavioural requirement of non-discrimination. What are the relevant factors to determine whether an agreement discriminates against a third-party? What set of provisions provide comparators for the new non-discriminatory arrangements? How do we account for the effects of market changes? An additional complication arises when a behavioural decree prohibits a firm from discriminating in its supply of a product to a competitor vis-à-vis the terms on which it supplies itself – its internal price. Such decree provisions raise the frequently noted difficulty of attaching meaning to the prices assigned to internal firm transfers – “transfer prices” – which may be affected by tax, regulatory, international trade, and other factors that render such prices less than meaningful as proxies for actual market transactions. Further, such provisions create incentives for merged firms to set transfer prices strategically.

Another issue that is perhaps not as widely discussed in the antitrust world, but finds parallels in infrastructure regulation, concerns the level and price at which access is to be granted by a merging party subject to access duties. In industries with high levels of fixed or sunk costs, but low levels of marginal costs – for example, railroads and intellectual property –, the standard theorem that the welfare-maximizing price is set at marginal cost does not apply. On the other hand, average cost pricing (“fully allocated cost pricing” in the traditional regulatory context), while fully compensating the firm for its investments (though the basis on which the fixed costs are allocated is generally arbitrary), inefficiently denies the service to those who would be willing to pay their marginal cost of supply – a welfare loss. Economic theory teaches that in such cases some form of discriminatory pricing is actually efficient. In light of this, non-discriminatory practice may not be welfare enhancing at all.

Comment:

This paper, written by an economist at the DoJ, argues strongly in favour of structural remedies for mergers. It may be better understood in the context of recent criticisms of the remedies adopted by US agencies – such as the one below.

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