The Horizontal Merger Efficiency Fallacy

Abstract

The Department of Justice and Federal Trade Commission Merger Guidelines (the “Merger Guidelines”), including the much improved latest revision in 2023 (the “New Merger Guidelines”), have continued to perpetrate what we call in this paper the horizontal merger efficiency fallacy. The fallacy arises because in the Guidelines the term “efficiencies” has become unmoored from its foundations in economic theory and has been reduced to the business school construct of cost savings. We show that cost savings can only be considered universally socially beneficial by acceptance of what is termed “the Consumer Welfare Standard” (antitrust) or “the surplus theory of welfare” (economics), a theory that has been discredited and abandoned by welfare economists. In economic theory, efficiency means Pareto Efficiency. We explore the various attempts to tether the cost savings definition of efficiency to Pareto Efficiency and explain why these attempts have failed. We conclude that there is no sound way to theoretically reconcile cost savings with the economic meaning of efficiencies. We then move beyond the efficiency fallacy and show how modern welfare economics can be used to integrate Congressional antitrust goals into the New Merger Guidelines. This requires abandoning the unsupported “standard deduction” for efficiencies and replacing it with an evidence-based assessment of how a specific merger under review potentially impacts Congressional antitrust goals. This change renders the present efficiency rebuttal section of the New Merger Guidelines superfluous, and we provide specific reasons why this section as currently drafted is flawed and should be jettisoned.

Keywords: Antitrust, Efficiency, Consumer Welfare, Merger Regulation, Merger Guidelines

JEL Classification: D4, D6, L4, L5