Download This PaperCompetition and Risk
86 Antitrust Law Journal 63 (2024)
52 Pages Posted: 21 Mar 2024 Last revised: 16 Mar 2024
Date Written: March 12, 2024
Abstract
U.S. antitrust enforcement agencies have overlooked a significant competition harm: increasing risk. By risk, I mean the expected value of harm to third parties stemming from an unexpected, large supply or demand event—a “shock.” There is now powerful evidence that negative shocks to a firm can harm a firm’s trading partners, in some cases leading to national economic effects. And mergers can increase risk both directly to the merging parties’ trading partners and to society as a whole. But courts and agencies generally assess mergers without considering their effect on risk.
Mergers that increase risk by harming competition can and often should be blocked under the Clayton Act. Moreover, the Federal Trade Commission and Department of Justice have enforcement discretion to consider risk harms in merger review even when such harms are not the direct result of reduced competition. To show how the agencies should incorporate risk effects into their work, I analyze when a merger is likely to change risk, to whom, and in what direction. Important factors include pre- and post-merger market power, consumer exposure, and economic centrality.
Mergers can increase risk by harming competition in three main ways. First, mergers can reduce the number of trading partners that customers can choose from, weakening customers’ ability to diversify counterparty risks before or during a crisis. Second, mergers can make coordinated behavior more likely, reducing firms’ incentive to invest in resiliency so as to steal business from a rival struck by an idiosyncratic shock. And third, mergers can make it easier for a post-merger firm to tie its products, increasing trading partners’ exposure to the merged firm’s idiosyncratic risks across different markets.
Keywords: Risk, competition, supply chain, resilience, externality, supply shock, disruption, mergers, antitrust
JEL Classification: D4; D42; D85; H1; H12; H84
Suggested Citation: Suggested Citation