THE HORIZONTAL MERGER EFFICIENCY FALLACY
57 Pages Posted: 25 Jun 2024
There are 2 versions of this paper
The Horizontal Merger Efficiency Fallacy
Date Written: June 16, 2024
Abstract
The Department of Justice and Federal Trade Commission Merger Guidelines
(the “Merger Guidelines”), including the latest proposed revision in 2023 (the “New
Merger Guidelines”), have continued to perpetrate what we call in this Article 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: mergers, efficiencies, industrial organization, antitrust, merger guidelines
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