Efficiencies in Defense of Mergers: 18 Months after

Posted: 31 Dec 1998

See all articles by Robert Pitofsky

Robert Pitofsky

Georgetown University Law Center

Abstract

In this overview of the new role of efficiencies in merger analysis, Chairman Pitofsky reexamines early critiques of the revised efficiencies section in the Merger Guidelines in light of four recent decisions from the federal courts. These early critiques came from both ends of the antitrust spectrum. Some enforcement officials contended that the revised section would make efficiencies the touchstone of merger analysis, opening the door to efficiency claims that would be either exaggerated or unrelated to consumer welfare. Members of the defense bar suggested that the revised section on efficiencies was so circumscribed by qualifications that the introduction of the ?revised? defense would make no practical difference.

Chairman Pitofsky contends that experience over the last 18 months has revealed that both sets of critiques were mistaken. Although efficiency claims have rarely trumped a strong showing of anticompetitive effects either at the agencies or in court, the agencies have incorporated valid efficiency claims into their exercise of prosecutorial discretion and have not challenged their legitimate role in merger litigation. And although the agencies have taken efficiency claims more seriously, they have not allowed potentially efficient mergers to proceed when there is a strong likelihood of serious anticompetitive effects. Thus, the revised efficiencies section of the Merger Guidelines has accomplished its four primary objectives -- incorporating efficiencies directly into the assessment of likely competitive effects; testing efficiency claims against realistic and practical alternatives, not against hypothetical or improbable scenarios; requiring a stronger showing of greater efficiencies for mergers that could produce significant anticompetitive effects; and defining more clearly which efficiencies can be balanced against potential anticompetitive effects.

Chairman Pitofsky then examines how courts and the agencies have addressed efficiency claims in four recent district court decisions. He cites FTC v. Staples, Inc. as a case where the court rejected efficiency claims that were exaggerated when measured against internal documents. Chairman Pitofsky also points to Staples as a case where leading firms in rapidly expanding markets will have difficulty showing that efficiencies such as improved advertising and greater geographic coverage could not be achieved through internal growth. Chairman Pitofsky then examines the assessment of efficiencies in United States v. Long Island Jewish Medical Center, where the court credited efficiency arguments advanced by merging hospitals. Special circumstances, including the hospitals? not-for-profit status and their agreement with the New York Attorney General to pass post-merger efficiencies on to consumers, made the hospitals? arguments more credible. Next, Chairman Pitofsky turns to the analysis of efficiencies in FTC v. Tenet Healthcare Corp., where the court rejected efficiencies that two merging hospitals could have achieved unilaterally and efficiencies that would have arisen only in separate relevant markets. The final opinion that Chairman Pitofsky discusses is FTC v. Cardinal Health, Inc., where the court acknowledged that two drug wholesaler mergers could produce efficiencies, but ultimately determined that continued competition among the four firms would continue to produce consumer benefits without risking anticompetitive effects. Chairman Pitofsky contends that Cardinal Health is a useful and proper reminder that although entry and efficiencies have assumed a greater role in merger analysis, courts and agencies will continue to examine them in light of market shares and potential anticompetitive effects.

Acknowledging that any definitive analysis of the efficiency claims would be premature, Chairman Pitofsky offers three interim conclusions about efficiencies under the revised section of the Merger Guidelines. First, he points out that efficiencies will rarely overcome strong proof of likely anticompetitive effects. Second, he observes that efficiency claims are more likely to be persuasive when they are not exaggerated, and that unrealistic efficiency claims may undermine credibility with enforcement officials and judges. Finally, Chairman Pitofsky predicts that defense counsel will become more comfortable and effective over time in addressing efficiency claims to enforcement officials and courts.

Note: Chairman Pitofsky's abstract for the speech that he recently gave at the George Mason University Law School symposium on efficiencies.

JEL Classification: G34

Suggested Citation

Pitofsky, Robert, Efficiencies in Defense of Mergers: 18 Months after. Available at SSRN: https://ssrn.com/abstract=139625

Robert Pitofsky (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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