Did the Transition to Unilateral Effects Affect Federal Trade Commission Merger Challenges?

Abstract

This paper statistically models whether the staff’s choice between coordinated interaction (collusion) and unilateral effects theories on competitive effects materially affects the Federal Trade Commission’s (FTC) decision to challenge the merger at the end of the investigation. It is a two stage process; first, the staff choose which theory makes the most sense based in the industry facts, and second, the Commissioners choose if the case is sufficient strong to be challenged. The question is particularly interesting, given the rise in the application of formal models that seems to have led to an increase in the application of unilateral effects theories. If the challenge rates are similar under both theories when holding the relevant structural and performance variables constant, then theory choice matters little, and the structural and performance variables are what are most important to the FTC law enforcement decision. If the formal challenge rates are different under the two theories of harm, then theory choice matters to the outcome. We apply a decomposition analysis to evaluate whether the theory choice affects the likelihood that a merger is challenged and follow on with a matching analysis as robustness check. We find that the specific theory used in the investigation has an effect in homogeneous goods markets; pursuing a unilateral theory instead of a collusion (officially known as coordinated interaction) theory reduces the average challenge rate by 12.7 to 17.4 percentage points, and switching from a unilateral theory to a collusion theory would raise the challenge rate by 6.1 to 11 percentage points. The theory choice decision does not seem to matter for differentiated products, as the policy differences are smaller and not significant.

Keywords: Merger Policy, Federal Trade Commission, Antitrust, Unilateral Effects, Collusion, Decompostion

JEL Classification: K21, L40, L88